What is the difference between LLP and sole proprietorship?
Introduction
Selecting the right business structure is one of the most important decisions you’ll make as a business owner. It can affect your tax planning, your administrative burden, and your personal liability. There are a few popular business structures, but two of the most common are a limited liability partnership (LLP) or a sole proprietorship (Sole Proprietorship). In this article, we’ll compare the advantages and disadvantages of both types of business structures, as well as provide the necessary documents for LLP registration.
What is an LLP (Limited Liability Partnership)?
A Limited Liability Partnership is one in which all or some of the partners have limited liability. As a result, it can highlight the strengths of businesses and partnerships. In an LLP, no partner is liable for the wrongdoing or carelessness of another partner.
An LLP (Limited Liability Partnership) is regarded by the law as a separate legal entity and is responsible for all of its assets. A partner’s obligation is just for the amount they contributed to the LLP. The partners of an LLP are each solely accountable for their own conduct.
What is a Sole Proprietorship Firm?
A sole proprietorship firm is a business structure in which a single individual owns and operates a business. It is the simplest form of business organization and is commonly chosen by small businesses and self-employed individuals due to its ease of setup and minimal legal formalities. In sole proprietorship, the business and the owner are considered the same in the eyes of the law. This means that the owner has complete control over all aspects of the business and is solely responsible for its operations, profits, and liabilities. The owner makes all the decisions, bears all the risks, and enjoys all the benefits of the business.
What is the Difference Between LLP vs Sole Proprietorship?
The main differences between LLP vs Sole Proprietorship are:
Criteria | LLP Incorporation | Sole Proprietorship |
Legal Structure | Separate legal entity | Not a separate legal entity |
Liability Protection | Limited liability for partners | Unlimited personal liability |
Formation | Requires registration with ROC | No formal registration is required |
Ownership | Managed by partners | Owned and operated by an individual |
LLP Agreement | Mandatory | Not mandatory, but advisable. |
Decision-making | Collective decisions by partners | Sole discretion of the proprietor |
Taxation | Taxed at the partnership level | Personal income tax for the proprietor |
Transfer of Ownership | Possible with partner’s consent | There is no formal process for transfer |
Continuity | Perpetual, unaffected by partner changes | Ceases with the proprietor’s demise |
Compliance Requirements | Annual filing of the LLP agreement and returns | Limited compliance requirements |
What are the documents required for LLP registration?
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Proof of Address of the Registered Office
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Proof of Identity and Address of Partners
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Digital Signature Certificate of Partners
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LLP Agreement
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No-Objection Certificate (NOC) from the property owner (if the business operates in a rented place)
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Photocopy of the electricity bill, telephone bill, or latest bank statement
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Rental agreement (if the business operates in a rented place)
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Aadhar Card, PAN Card, and Passport Size Photo of partners
Conclusion
Selecting the right business structure is one of the most important decisions you’ll make as an entrepreneur. It’s a decision that depends on a number of factors, including tax planning, the administrative burden, and your personal liability. There are a number of popular business structures, such as Limited Liability Liability Company (LLC) and Sole Property Ownership Company (Sole Proprietorship). Each of these structures has its own pros and cons. LLC provides limited liability protection as well as perpetual existence for your business. Sole Property Ownership offers simplicity of formation as well as tax simplicity. Before deciding on your business structure, it’s a good idea to consult with a legal and accounting professional.
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