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Features of Limited Liability Partnership
The LLP is meant for professional and advisory firms with no need for equity funding. If this applies to your business, pick the LLP; it’s been gaining in popularity since 2008 because it combines some of the better aspects of partnership firm and private limited company.
For Non-Scalable Businesses
If you’re running a business that’s unlikely to require equity funding, you may want to register an LLP as it combines several benefits of the private limited company and general partnership. It has limited liability, like a private limited company, and has a simpler structure, like a general partnership.
Fewer Compliances
The MCA has made given some concessions to the LLP. For example, an audit needs to be performed only if your turnover is greater than Rs. 40 lakh or paid-up capital is more than Rs. 25 lakh. Furthermore, whereas all structural changes need to be communicated to the RoC in the case of private limited companies, the requirement is minimal for LLPs.
Tax Advantages
Particularly if your business is earning over Rs. 1 crore in profits, the LLP offers tax benefits. The tax surcharge that applies on companies with profits over Rs. 1 crore doesn’t apply to LLPs, nor does Dividend Distribution Tax. Loans to partners are also not taxable as income.
Number of Partners
There is no limit to the number of partners there may be in an LLP. So if you’re building a large advertising agency, for example, you needn’t worry about any cap on the number of partners.
Start-up Cost
Much cheaper than starting a private limited company, with government fees of Rs. 5000, no paid-up capital and low compliance costs.
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Features of Partnership Firm
You should consider this legal structure only if you’re running a small business that will have no debts or liabilities, which is very unlikely. The simple reason for this is unlimited liability.
Unlimited Liability
On account of unlimited liability, the partners in the business are liable for all of its debts. This means that if, for whatever reason, you’re unable to repay a bank loan or are liable to pay a fine, this can be recovered from your personal possessions. So the bank, institution or supplier would have right to your jewellery, house or car. Furthermore, aside from ease of set-up and minimal compliance, the partnership offers no benefits over the LLP. If you opt to register it, which is optional, it may not even be cheaper. Therefore, unless you’re running a very tiny business (let’s say you offer a lunch dabba service in your area and would like to set a profit ratio with your partner), you should not opt for a partnership.
Easy to Start
If you choose not to register your partnership firm, all you need to get started is a partnership deed. This you can have ready in just two to four days. Even registration, for that matter, can be completed in a day, once you have the appointment with the registrar. As compared with a private limited company or LLP, therefore, the procedure for starting-up is much simpler.
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Features of Sole Proprietorship
Only small traders and merchants should consider this. The simple reason for this, just as in the case of the partnership firm, is unlimited liability.
Unlimited Liability
Just as a partnership, a sole proprietorship has no separate existence. Therefore, all debts can only be recovered from the sole proprietor. This means the owner has unlimited liability with regard to all the debts. This should heavily discourage any risk-taking, which means that it’s suited to only tiny businesses. If you plan on running a business that requires a loan or may end up paying penalties or fines or compensation, it’s best you look into registering an OPC.
Easy to Start
Although many people say they want a sole proprietorship registration, there is no such thing. There is no separate registration procedure for proprietorships. All you need is a government registration relevant to your business. So if you’re selling goods online, a proprietor would only need a sales tax registration. Therefore, starting up as a sole proprietor is relatively easy.
