There are varied formal and informal business structures in India. Choosing the most appropriate business structure from all the options available is one of the most important decisions that a business owner needs to take before starting a new venture. The one form of business that has been gaining extreme popularity in the last few days is a limited liability partnership. This article gives a detailed comparison of limited liability partnerships with a sole proprietorship firm. So, before you choose to register a LLP, go through this blog to understand what’s best for your venture!
What are the business structures in India?
In India, the most popular business structures include the following:
- Sole proprietorship firms;
- Partnership Firm;
- One-person company;
- LLPs and
- Private Limited Companies.
First, let’s take a detailed look at the unique features of an LLP!
What is a Limited Liability Partnership?
An LLP is a hybrid form of business. This means, it has features of both, a private limited company and a partnership firm. An LLP in India is registered on the MCA portal after following the entire process of registering a limited liability partnership. All LLPs in India are statutory bodies governed on the basis of the norms of the LLP Act 2008.
What is a sole proprietorship?
It is an informal business type. This is one of the simplest forms of business and is the best suitable for small-scale, homegrown brands. There is no separate governing authority or registration process for sole proprietorship firms. However, a person wanting to function as a sole proprietor can opt for other basic registrations such as shop and establishment, GST, IEC, etc.
LLPs v/s Sole Proprietorship
The comparison between an LLP and a sole proprietorship firm is as follows:
Number of Owners
A sole proprietorship firm has only one owner and member. However, to register an LLP, there must be at least two partners.
The most advantageous part of having an LLP is that the liability of all partners is limited. However, in a sole proprietorship, the sole owner is responsible for all business liabilities, even if it means that they have to put their personal assets at stake.
Separate legal entity
Since an LLP is governed by the Ministry of Corporate Affairs, after registration, it becomes entitled to a separate legal existence which allows the LLP to own property and sue in its own name. However, considering the fact that a sole proprietorship firm is an informal business structure, it cannot have a separate legal existence.
The profit earned in an LLP is divided amongst all the partners in the ratio decided by them on a prior basis. However, in a sole proprietorship firm, the owner has the right over all the profit earned.
A limited liability partnership firm has the right to raise capital by way of making the investors their partners. However, no such option is available to the owner of a sole proprietorship firm. The only way they can raise capital is by taking loans and advances.
As a result of being a separate legal entity, LLPs have perpetual succession. This means that the LLP will continue operating even after the death of one or more of its partners. However, this is impossible in a sole proprietorship firm. Here, if the owner dies, the firm ceases to exist.
LLPs follow a different system of taxation. Here, the LLP as a whole is not subjected, yet, the income of partners is taxed separately. Whereas, for sole proprietorship firms, the owner is solely responsible for payment of all income taxes.
All LLPs registered in the last 10 years, and working for innovative ideas are eligible to get DPIIT recognition. This denotes that they can be recognized as Startups. However, the option of startup India recognition is not available to sole proprietor firms. The reason is that firms are usually small-scale. Whereas, LLPs seem to have scalable business models as compared to proprietor firms.
Something that has a governmental registration instantly becomes more credible. When an LLP is registered, it shows the verification through the government. However, no such verification is applicable to proprietorship firms. Further, the fact that LLPs are owned and managed by multiple people, has more credibility than other forms of business.
Growth and Development
It is a known fact that out of a sole proprietorship and a limited liability partnership, an LLP has more growth and development opportunities. The reason behind this is multi-factored. Having more owners and limited liability allows business owners to actually work on the process of growing their business. Whereas, in a firm, when everything is within the ambit of just one person, it becomes very difficult to maintain focus.
If you are looking to start a small business venture that you want whole and sole control of, then a sole proprietorship firm registration is the best option for you. However, if you are working towards building a business that grows and turns into an empire, and even still, want to limit your liabilities, LLP registration in India is the best way to move ahead!