LLC vs. LLP: What Are The Main Differences?

difference between llc and llp

LLC (Limited Liability Company) and LLP (Limited Liability Partnerships) are two of the most legal entities for company formation. These two types of companies seem to be the same; however, there are differences in the structures and functions of an LLC and LLP. Most people often get confused between these two company structures. It should be the duty of the management to figure out the LLP vs LLC difference and which structure will be more suitable for the business.

Read the blog to find out more differences between Limited Liability Company vs Limited Liability Partnership, which might help you determine one for your business.  

What is LLC Registration?

LLC is a separate legal entity that provides legal protection to the company. Business creditors cannot claim the owner's assets and thus creating a barricade between the owner and the company. This company structure acts as a protector for the company with less paperwork and fees. LLC is one of the most commonly used company structures in the United States, United Arab Emirates, Brazil, Poland, etc.  

What is LLP Registration?

LLP is a legal entity that provides protection from partnership liability. This type of company is prevalent among licensed professionals such as architects, accountants, attorneys, etc. These professionals cannot do their business in some jurisdictions. Therefore, if they cannot start their business as an LLP, they tend to form an LLC in those places. An LLP must have at least two partners, each responsible for their misconduct.  

The Difference between LLC and LLP

  • An LLC is a legal entity comprising the characteristics of both corporations and partnerships. Whereas an LLP is a legal entity where the partnership's liability is limited to the money they invested in the business. LLC partners or directors are not liable for others' misconduct, and on the other hand, in an LLP, the partners' liability is restricted to the capital they are investing. 
  • Another difference between LLC and LLP is that the directors are considered the owners of an LLC, whereas the partners are the owners of an LLP. An LLC can either be member-managed or manager-managed. The roles and responsibilities of the members of an LLC are drafted in the operating agreement. The roles of the partners of an LLP are described in the partnership agreement.
  • There are various company structures for an LLC regarding tax purposes, such as Sole Propeteirship, C Corporation, S Corporation, and Partnership. On the other hand, the tax slabs are determined in an LLP according to the partners' personal income tax returns. The company is not payable for any sort of tax to the government.
  • The documents required for an LLC are the MOA (Memorandum of Association) and AOA (Articles of Association). The limited liability partnership agreement is the only document needed for an LLP incorporation. This is why entrepreneurs prefer to form an LLC, and licensed professionals mostly like to incorporate an LLP.
  • An audit requirement is necessary for an LLC, and on the other hand, if an LLP's turnover exceeds forty lakhs or the capital exceeds 25 lakhs, then the audit is mandatory for the company. The cost of annual compliance is high in an LLC, which is not the case in comparison to an LLP. 
  • An LLC is more flexible and sorted in its tax regimes, and a business management structure is more sorted in an LLP. An LLC may continue even after the directors leave, but if any partner dies, the LLP may cease to exist. 
  • The incorporation process is also different for an LLC and LLP. You must finalize a trade name and then apply for the director Identification Number and Digital Signature Certificates. On the other hand, you have to obtain the Designated Partner Identification Number (DIN) for the partners in an LLP. 

Choosing an LLP or LLC is a very important decision from the perspective of the management and can help shape the future of the business. It is very important to make such decisions at the start of the business and this is the reason it is crucial to understand LLC versus LLP company structure.

How Can We Help?

LLC vs. LLP is a long and complicated debate when it comes to the company incorporation process. If you are still confused as to what is the difference between LLC and LLP, it is advisable that you consult with any business expert before starting one. Business Setup Worldwide is one such business consultancy where we have a team of legal experts who can make you understand the basic difference between LLC and LLP and can assist you in forming one anywhere in the globe. So contact us for any further information.

FAQs

What are the advantages of forming an LLC?

Some advantages of forming an LLC include limited liability protection, pass-through taxation, flexibility in management structure, ease of formation and maintenance, and potential tax benefits.

What are the advantages of forming an LLP?

The advantages of forming an LLP include limited liability protection, pass-through taxation, flexibility in management and decision-making, and the ability for partners to participate in the business while maintaining limited personal liability actively.

Can an LLC or LLP have multiple owners?

Yes, both LLCs and LLPs can have multiple owners. 

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