What is the difference between LLP and sole proprietorship?
Introduction
Picking up the right business structure is one of the most important decisions you’ll make as a business owner. Business structures vary in numbers, but the most used extensively structures are: Limited Liability Partnership(LLP) and Sole Proprietorship. This article compares these for you to make a better informed selection among the two.
What is a Limited Liability Partnership(LLP)?
The Limited Liability Partnership (LLP) came into light after the LLP Act of 2008. It is a modern form of partnership where two or more partners can start a business with limited liability. It has a separate legal identity, meaning partners are not personally liable for the firm’s debts.
An LLP combines features of both partnerships and companies and is registered online through the Ministry of Corporate Affairs.
What is a Sole Proprietorship?
A sole proprietorship is a business owned and managed by one person. This means the owner has full control over the business and is responsible for everything, including decisions, profits, and risks. They handle all operations, take on all the challenges, and enjoy all the rewards.
This type of business is popular among small business owners operating on a smaller scale.
LLP vs Sole Proprietorship
These are the factors that make them perform distinctively from each other :
| Criteria |
LLP Incorporation |
Sole Proprietorship |
| Legal Structure |
Separate legal entity |
Not a separate entity |
| Liability |
Limited for partners |
Unlimited personal liability |
| Formation |
Requires ROC registration |
No formal registration needed |
| Ownership |
Managed by partners |
Owned by an individual |
| Agreement |
Mandatory |
Optional but advisable |
| Decision-making |
Shared by partners |
Sole discretion of the owner |
| Taxation |
Taxed as a partnership |
Personal income tax |
| Ownership Transfer |
Possible with consent |
No formal transfer process |
| Continuity |
Infinite existence |
Ends with the owner’s demise |
| Compliance |
Annual filings required |
Minimal compliance |
Benefits of Limited Liability Partnership
- Incorporating an LLP is simple with minimal legal requirements.
- LLPs offer transparency and flexibility, with profit distribution outlined in a contract.
- Owners are protected by limited liability, protecting them from company obligations.
- LLPs can have any number of partners, making them popular among professionals like CAs and lawyers.
- No mandatory audits are required for LLPs.
- There’s no fixed capital requirement; partners decide the capital to contribute.
Benefits of Sole Proprietorship
- The owner has full responsibility and control over the business.
- Setting up a sole proprietorship is quick and affordable.
- No separate corporate taxes are required for the owner.
- Can be established by a single person without partners or shareholders.
- The owner can combine personal and business assets freely.
- Offers flexibility in how the business is run.
Registration Process for LLPs
Follow these steps to register your Company:
- Pick a name for your LLP.
- Create a partnership agreement.
- Register your LLP with the Registrar of Companies.
- Get a Certificate of Incorporation.
- Apply for a PAN and TAN.
- Open a bank account for the LLP.
- Obtain any required licenses or permits.
Registration Process for Sole Proprietorship
Step by step process for Sole Proprietorship registration:
- Choose a name for your business.
- Check if you need any licenses or permits.
- Register a “Doing Business As” (DBA) name if using a different name.
- Open a business bank account.
- Get any required licenses or permits.
- Define your ownership and management structure.
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Documents required for Limited Liability Partnership
For LLP Registration, you’ll need the following documents:
- PAN cards of the directors
- Passport-sized photos of the directors
- Identity proof of directors (Aadhar, Voter ID)
- Office address proof (rental agreement, property papers)
- Utility bill
- Latest bank statements
- NOC from the landlord (for rented property)
- Passport copy (for foreign nationals)
- Incorporation Certificate (if applicable)
Documents required for Sole Proprietorship
To set up a sole proprietorship, you’ll need these documents:
- Bank KYC documents
- Owner’s identity proof (e.g., Aadhar, Voter ID)
- Owner’s PAN card
- Office address proof (e.g., utility bill)
- Income tax returns
- Proof of office address (e.g., rent agreement)
- NOC from landlord (if rented)
- Shop and Establishment License
- Service Tax Certificate (for service businesses)
- Chartered Accountant Certification (if needed)
- CST/VAT certificate (if applicable)
Conclusion
Choosing between an LLP and a sole proprietorship depends on your business needs. An LLP offers more protection, funding options, and growth potential. On the other hand, a sole proprietorship is easier to start and manage with fewer rules. Consider what matters most to you and your business goals for the future.
For more help, feel free to contact our EbizFiling experts!
Suggested Read :
Purpose Form 8 LLP
Advantages of LLP Company
LLP Strike-off vs Winding up
Process to Change the LLP Agreement
LLP agreement vs Partnership deed
1. Can a single individual own and operate both an LLP and a Sole Proprietorship jointly?
Yes, an individual can own and run both an LLP and a Sole Proprietorship at the same time. On the condition that each business’s responsibilities and requirements are met timely.
2. Do sole proprietorships provide liability protection?
No, sole proprietorships do not provide liability protection. The owner is personally accountable for all business debts and liabilities.
3. Which is better, an LLP or a sole proprietorship in India?
LLPs offer more flexibility than sole proprietorships. In an LLP, you can easily add or remove partners and adjust the partnership agreement as needed. Sole proprietorships, however, have more limitations when it comes to making changes or expanding.
4. Can a single person start an LLP?
No, at least two people are required to form an LLP. There is no limit on the maximum number of partners, but a minimum of two designated partners is necessary.
5. Which bank is best for LLP?
HDFC Bank is a great option for LLPs. It offers various products and services that can help manage LLP registration fees and other expenses.
6. Why Ebizfiling for LLP and Sole Proprietorships?
EbizFiling provides fast, affordable, and expert advice and services for easy LLP and Sole Proprietorship registration.
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