LLP and LLC might seem identical as they are both limited liability enterprises. Additionally, they share the characteristics of a partnership and a corporation but despite these facts, the two small business enterprises vary on many accounts. In this article, we will be highlighting all such differences that exists in LLP and LLC. You will get to know how these two deviate in terms of registration process, management structures, limited liability protection and tax benefits. We will also be discussing LLP vs LLC vs Pvt Ltd. Before we move onto the differences, let us understand What is LLC and What is LLP?
What is LLC?
The full form of LLC is Limited Liability Company. An LLC is a business structure that has the combined qualities of a corporation (limited liability) and the pass-through-income tax benefits of a partnership. The owner(s) of an LLC are called members and it may comprise individuals, corporations, Foreign entities, other LLPs etc. It is well-suited for a single owner or smaller business entities.
What is LLP?
The full form of LLP is Limited Liability Partnership. It is a company or a business structure that is formed by two or more members called partners. The number of partners that an LLP can have is unlimited. These partners have separate liabilities (legal responsibilities) than those of their company’s. A partner in an LLP cannot be hold accountable for another one’s legal misconduct. When the company is suffering from loss, the personal assets of the partners remain untouched. Thus, the partners are said to have limited or minimum liabilities. Similar to LLC, LLP is also a combination of both a corporation and partnership. The Limited liability partnership (LLP) Act states that one of the partners in the LLP must be of Indian origin.
LLP vs LLC Registration Process
For a LLC, you require to propose names for your company. Next you need to submit a form for acquiring DIN (Director Identification Number) and DSC (Digital Signature Certificate).
For LLP, you first need to preserve your LLP name. Next, you must acquire DSC followed by submitting application for LLP and issuance of COI. The final step is the most important out of all which is the drafting and filling out of the LLP Agreement. You must also register for Designated Partner Identification Number (DPIN) for two partners. Moreover, you need to have a Digital Signature Certificate Registration for one partner.
Difference between LLP and LLC in Management Structures
An individual needs to be appointed to handle the managerial position of an LLP. He/she becomes liable for the actions that the company carries out. The managerial position in an LLP doesn’t receive legal protection unlike silent partners and investors. Although, a team is appointed for management, the managerial duties are equally divided among partners. All the partners must provide consent about how the business decisions should go.
Regarding LLC, they may either function as the management team or decide to hire one in place. This managerial team is referred to as the manager management or Board of Directors (BOD). The BOD is appointed by the shareholders. Only those under the manager team handles the managerial decisions and the other members do not intervene in the process.
Difference between LLP and LLC in Limited Liability Protection
In an LLC, a member will not be held legally responsible for the company’s claims and debts. One cannot sue a member of an LLC because of the company’s debts. The members may lose the sum that was invested. However, if the act is legally actionable, both the company and the members may be held accountable.
In an LLP, partners are liable only for their negligence. In an LLC, the only risk of the members is the capital investment they made in the company.
LLP vs LLC Tax Benefits
As long as the LLC doesn’t file a corporate return, it will be considered a partnership. LLCs can avoid double taxation by serving as a partnership. There are some LLCs that need to be filed as a corporation under certain tax laws.
In LLC, the partners have their business earnings and report on the profits and losses made by each one of them on their federal income tax returns.
If it’s a one member LLC, then it can be termed as a sole proprietorship where the member must be filing self-employment taxes.
Other Differences between LLC and LLP
- LLC stands for Limited Liability Company whereas LLP stands for Limited Liability Partnership.
- The owners of LLC are called directors or members while the owners of LLP are called partners. There must be minimum 2 directors for a private LLC company and minimum 3 for a public LLC.
- The liability of LLP partners will be based on the agreed liability amount mentioned in the agreement except in instances of willful fraud. The liability of LLC is limited to the unpaid share amount.
- The minimum partner for an LLP is two and the maximum is unlimited. The partners maybe individual or corporate through the nominees. In case of LLC, the minimum number of members for a private firm is 2 and the maximum is 200. For an LLC public firm, the minimum number of members is 7 and the maximum is unlimited. Government organizations, trust, individuals and other government forms can be members of an LLC.
- The suffix LLP should be attached to your LLP company whereas for an LLC, public or private should be a part of the company name.
- A member in a LLC is responsible for the unpaid investment returns that is based on the number of shares they own. On the other hand, a LLP partner’s responsibility is limited to the contributions they make.
- The internal governance structure of an LLP is based on an agreement that needs to be followed whereas the governance structure is based on statute (for eg- Companies Act, 2013) which needs to be adhered in an LLC.
- The documents prepared during the formation and registration of a LLC company are Memorandum of Association and Article of Association. On the other hand, the document that is prepared for LLP is LLP Partnership Agreement.
- Entrepreneurs get the permission to form LLC companies. The banking sector and insurance companies are typically not allowed to form an LLC. Oher professionals who might be prohibited include accountants, architects, physicians, attorneys etc. Professions that have licensed like CAs, lawyers, engineers can form their LLP companies.
- The quitting of the office by directors do not affect the LLC. On the other hand, when one or more of the partners leave the partnership, the LLP maybe severely affected.
- The audit for LLC is mandatory whereas for LLP, audit is a must if the annual turnover (sales) exceeds Rs 40 lakh or the capital exceeds Rs 25 lakh.
- For LLC, the tax on returns is 25% whereas for LLP, the tax on returns is 30%.
LLP vs LLC vs Pvt Ltd
- LLC is a Private Limited Company but not all LLC’s are Private Limited Companies.
- In a private limited company in India, the initial income tax applied is 15-22% but it carries the disadvantage of double taxation whereas in case of LLP the initial income tax is 30% but there no other income tax needs to paid for dividends. For LLC, the income tax on dividends is 30% with no extra income tax charges.
- Unlike an LLP, the death of a member of the Private Limited Company doesn’t affect the enterprise.
- The law application under LLP is Limited Liability Partnership Act, 2008 while that of the Private Limited Company is Companies Act 2013.
- Unlike an LLC, the members of a Private Limited Company have limited liabilities which is dependent on the amount they have invested.
LLC and LLP can seem to be a little confusing. Understanding the differences in LLP and LLC will provide you a better insight about these two varieties of business structures. Before starting with a company, select your business type as according to your needs, tax returns and legal compliances. Also, it is wise to have a good check of the statutes state wise if you want your business to operate in multiple regions. One state may allow specific groups to operate in an LLP or LLC whereas the other may not.
Can you spot any other differences in LLP and LLC? Share with us in the comment section below.