The two most popular and flexible forms of business organisation are LLC and LLP. As these two combine the features of a general partnership and company, most of the people assume that they are one and the same thing. However, there exist a fine line of differences between these two business forms, which lies in their obligations, formation, legal liabilities and so on.
Further, the jurisdiction we are talking about has a great role to play in distinguishing the two entities because there are many countries where either of the two exists. So, here in this article, we are going to discuss the basic difference between LLC and LLP.
Content: LLC Vs LLP
|Basis for Comparison||LLC||LLP|
|Meaning||An LLC is a business vehicle that is closely held and combines the elements of company and partnership.||An LLP is a kind of partnership, wherein the liability of partners are limited to the capital contributed by them.|
|Charter document||Memorandum and Articles of Association||Limited Liability Partnership Agreement|
|Minimum members||One or more||Two or more|
|Suffix||'LLC' is added at the end of the entity's name.||'LLP' is added at the end of the entity's name.|
|Books of accounts||Maintained on accrual basis||Can choose to maintain their accounts on cash or accrual basis.|
|Life||Usually have a limited life.||Perpetual succession.|
Definition of LLC
Limited Liability Company or otherwise known as LLC, is a form of business organisation, that is privately held. It is a hybrid arrangement, in the sense that it integrates the features of a general partnership and a body corporate. It is the most common business structures in the United States, United Arab Emirates, Poland, Japan, Brazil and so on, which exist with different names in different countries.
The business vehicle is equipped with the characteristic of limited liability, which implies that the members of the LLC will not be personally liable for the acts or debts of the company. In this way, the personal property of the members cannot be used by the creditors to recover their dues.
Further, the flow-through taxation removes the cascading effect and the profits are taxed only once and that too in the hands of the members. The business profits or losses are declared by the owners through their individual tax returns.
To set up a limited liability company it requires a single member, and there is no ceiling on the maximum number of members. There are two types of LLC’s – single member LLC and multi-member LLC. Its life is limited, as when a member leaves the organisation, the business is wound up. The rest of the partners can then decide, whether they want to continue, with a new LLC or part ways. The owners of an LLC can decide mutually, the ratio for distribution of profit.
Definition of LLP
LLP stands for limited liability partnership, as its name signifies, it is a form of partnership, in which the liability of some or all the partners are limited. It can be found in countries like India, China, Canada, Japan, Kazakhstan, Singapore, United Kingdom, etc. These are often called with different names in different jurisdictions.
It is a business structure; that possess the merit of limited liability, i.e. the partners are not personally liable, for the debts of the firm plus they are not bound by the acts performed by other partners. Moreover, on the basis of their mutual agreement, the flexibility of establishing the business vehicle as a partnership, is also conferred to the partners.
To set up a limited liability partnership, two or more persons should join, to undertake a lawful business with an intent of making the profit, from that business and subscribe their names to the registration document and submit it to the relevant authority of the state.
Key Differences Between LLC and LLP
The difference between LLC and LLP can be drawn clearly on the following grounds:
- A business vehicle that is privately held and unites the elements of company and partnership is called LLC. A kind of partnership, wherein the liability of partners is limited to the capital contributed by them, is called LLP.
- The owners of LLC are known as members, whereas the LLP is owned by the partners.
- Memorandum and Articles of Association are the two documents which consist of all the details regarding LLC. On the contrary, the limited liability partnership agreement is the document, that contains the basic details of LLP.
- There should be at least one member required to start an LLC. Conversely, a minimum of two members is needed to start an LLP.
- A limited liability company must add “LLC” at the end of its name. Likewise, the limited liability partnership is required to add “LLP” at the end of its name.
- A limited liability company maintains its books of accounts on an accrual basis. Unlike an LLP, which can choose to maintain their accounts either on cash or accrual basis.
- The life of an LLC is limited, in the sense that, if any of the members dies or leaves the organisation, the business goes to dissolution. As against this, an LLP has a perpetual succession.
- Pass through taxation
- Formed to provide protection to personal assets of the owners.
- Limited liability
- Contractual Capacity
- Separate legal entity, distinct from its owners.
- Combines the elements of a traditional partnership and body corporate.
Since last decade, LLC’s and LLP’s are in vogue, as they provide a number of benefits to the members. Due to the flexibility in the structure and operation, these two business vehicles, are appropriate for small and medium companies. These are also famous among start-up founders, professionals and service providers, as the two forms of organisation perfectly suit their business requirements.