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What is the main difference between an LLP and a Partnership?
The main difference is that an LLP offers limited liability protection to partners, while a Partnership does not. In an LLP, personal assets are shielded from business debts.
How are profits divided between a LLP and a Partnership?
In an LLP, profit-sharing is flexible and determined by the LLP agreement. In a Partnership, it's typically based on the terms outlined in the partnership agreement.
an an LLP have a sole proprietor?
No, an LLP must have at least two partners. It cannot be operated as a sole proprietorship.
Are partnerships subject to pass-through taxation?
Yes, both partnerships and LLPs are subject to pass-through taxation, where profits and losses are passed on to individual partners' tax returns.
Can partners in a Partnership have limited liability?
In a general partnership, partners have unlimited personal liability. To have limited liability, partners should consider forming an LLP or an LLC.
Difference Between LLP and Partnership
LLP and partnership firms are two forms of company in which partners may conduct their operations. Read this blog to get more about LLP and partnership firms.
Izhar Ahmad18 Sept, 2024
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Understanding the difference between an LLP and a partnership is crucial for entrepreneurs looking to start a new venture or modify the structure of an existing one.
The Limited Liability Partnership (LLP) Act of 2008 established the idea of LLP. On the other hand, partnerships have been created in India under the Indian Partnership Act since 1932. Although an
LLP and a partnership firm
need a partnership between two parties to be formed, there are significant distinctions.
LLP and Partnership Meaning
A
Limited Liability Partnership
(LLP) is a type of business structure that combines the advantages of a partnership and a corporation. In an LLP, individuals or companies come together to form a partnership while enjoying limited liability, which means that their personal assets are protected in case the LLP incurs debts or faces legal issues.
A partnership is a business arrangement in which two or more individuals or entities collaborate to run a company together. In this type of business structure, the partners pool their resources, expertise, and efforts to achieve common business goals.
Features of LLP and Partnership
LLP and Partnership offer distinct characteristics that differentiate them from other business structures. Here are the key features of LLP and Partnership:
Features of LLP
Hybrid Structure:
An LLP combines features of both a partnership and a corporation. This unique blend allows for shared management and limited liability.
Limited Personal Liability:
One of the primary advantages of an LLP is that partners have limited personal liability. This means that their personal assets are protected in case the LLP faces debts or legal issues, shielding their individual finances from the business's obligations.
Shared Management:
Partners in an LLP typically participate in the management and decision-making processes of the business, allowing for collaborative control over operations.
Flexible Profit Sharing:
LLPs provide flexibility in
profit-sharing arrangements
. Partners can agree on how profits and losses will be distributed, giving them autonomy in structuring the financial aspects of the partnership.
Legal Framework:
LLPs are governed by specific legal regulations and requirements that ensure transparency and accountability in their operations.
Professional Services:
LLPs are often favored by professionals such as lawyers, accountants, and consultants who wish to work together while enjoying the benefits of limited liability.
Features of Partnership
Collaborative Ownership:
Partnerships involve two or more individuals or entities collaborating to establish and manage a business collectively.
Profit Sharing:
In a partnership, profits generated by the business are shared among the partners in accordance with the terms outlined in a partnership agreement. This agreement governs how profits and losses are divided.
Participatory Management:
Partners have a say in the management and decision-making processes of the business. The degree of involvement varies based on the terms set forth in the partnership agreement.
Unlimited Personal Liability (in General Partnerships):
In a general partnership, partners have unlimited personal liability for the business's debts and legal obligations. Their personal assets may be at risk to cover business-related liabilities.
Flexibility:
Partnerships are known for their flexibility and adaptability to different business needs and objectives. They are a common choice for small businesses, professional firms, and family enterprises.
Different Types of Business Structures
We have explained below the different types of business structures including the LLP and Partnership:
Sole Proprietorship:
A sole proprietorship is a business that is owned and run by a single person. Although the proprietor has complete authority, he or she is personally accountable for any company obligations.
Partnership:
Partnerships involve two or more individuals or entities collaborating to run a business. Profits and duties are split between partners.
Limited Liability Partnership (LLP):
An LLP combines partnership attributes with limited liability protection for partners. Personal assets are protected against commercial liability.
Corporation:
A corporation is a separate legal entity from its proprietors. Shareholders own the company and enjoy limited liability, but the business has complex regulations.
Limited Liability Company (LLC):
An LLC blends the features of a partnership and a corporation. It offers limited liability to members while allowing flexible management.
Cooperative:
Cooperatives are owned and managed by their members, often for mutual benefit. Profit distribution and decision-making are typically democratic.
Nonprofit Organization:
Nonprofits aim to serve a social or charitable purpose rather than generate profits. They have tax-exempt status and are governed by specific regulations.
Franchise:
In a franchise, individuals or entities buy the rights to operate a business under an established brand. They follow the franchisor's business model and pay royalties.
S Corporation:
An S Corporation is a tax designation that allows small businesses to avoid double taxation. It combines features of corporations and partnerships.
Professional Corporation (PC):
A PC is a corporation formed by professionals like doctors or lawyers to limit personal liability while practicing their professions.
LLP and Partnership Differences
LLP and Partnership are both business structures that involve collaboration among individuals or entities. However, they differ in terms of liability protection and certain legal requirements. Below is a tabular comparison of LLP and Partnership:
Aspect
LLP (Limited Liability Partnership)
Partnership
Liability
Limited personal liability.
Unlimited personal liability.
Registration
Typically requires formal registration.
May not require formal registration but benefits from a partnership agreement.
Minimum Number of Partners
Must have at least two partners.
Can be operated with just one partner or more.
Taxation
Subject to pass-through taxation.
Subject to pass-through taxation.
Profit Sharing
Flexible profit-sharing arrangements are defined in the LLP agreement.
Profit-sharing is based on partnership agreement terms.
Formal Compliance
May have stricter compliance and reporting requirements.
Generally has fewer formal compliance obligations.
Conversion
Can be converted into a Partnership and vice versa with legal formalities.
Can be converted into an LLP and vice versa with legal formalities.
Business Continuation
May continue with ease upon the departure of a partner.
May dissolve or require changes upon the departure of a partner, depending on the partnership agreement.
