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Introduction
Are you planning to start a business in India? If yes, it raises a major question- which business structure would you choose? Selecting the right business structure is crucial for every entrepreneur in India. For small business owners and startups, the options are mainly confined to Sole Proprietorship and a Limited Liability Partnership (LLP). Both are widely known for their easy management and simplicity, yet they do differ in terms of liability, legal implications, ownership, benefits, and tax responsibilities.
In this blog, let us understand the differences, benefits, and tax compliance of Limited Liability Partnership vs Sole Proprietorship. Additionally, this will help you gain a clear understanding of both the business structure. And, assist you in choosing the one that best aligns with your business goals and objectives.
Sole Proprietorship- Overview
A Sole Proprietorship is the oldest form of business ownership in India for ages. In this business structure, a single individual takes charge of the entire business, i.e., from ownership to management.
The individual starts working independently with no investors or partners, it’s just their skills and clients. Get registered as a Sole Proprietorship, a current bank account, and give a kick start to your entrepreneurial journey.
Sole Proprietorship is preferred by small business owners, home-based businesses, consultants, and freelancers.
Key features:
- No separate legal identity
- Simple process to start
- Streamlined business operations
- Owned by a single individual
- Negligible regulatory compliance
Limited Liability Partnership- Overview
Limited Liability Partnership (LLP) was introduced in India, under the LLP Act, 2008. It is a hybrid business structure that merges traditional partnership’s flexibility and the limited liability of the company. Moreover, it provides limited liability protection to entrepreneurs in a more defined way while maintaining its flexibility.
Limited Liability Partnership is widely chosen by:
- Professional service firms (CA, lawyers, accountants, and consultants)
- Small business that wants to limit personal risks
- SMEs and startups
- Scalable business
- Business seeking higher credibility
Key features
- Limited liability
- Separate legal entity
- Minimum of 2 business partners
- Governed by an agreement
- MCA (Ministry of Corporate Affairs) registration
Limited Liability Partnership vs Sole Proprietorship -Key Differences
Understanding the major differences between Partnership and Proprietorship is crucial to make informed decisions regarding the selection of a business structure.
The table below highlights the major differences:
| Differentiation Criteria | LLP | Sole Proprietorship |
| Legal Entity | Owns a separate legal entity | No separate legal entity |
| Ownership | Managed by at least 2 business partners | Owned and managed by a single person |
| Company Formation | Requires MCA registration | Doesn’t require any formal registration |
| Liability |
|
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| Decision making | Partners decisions must be considered | Sole decision of the business owner |
| Credibility | Higher credibility with banks/investors and clients, for their business transparency and legal structure | Lower credibility and limited scope for external funding |
| Compliance | RoC compliance and annual filings required | Minimal compliance- ITR filings and GST filings (If applicable) |
| Continuity | Continuity ends with the death of the owners or the decision to close the organization | Perpetual succession |
| Transfer of ownership | Ownership can be transferred with consent | Not applicable |
| Taxation | Taxes applicable as partnership | Taxes applicable as individual income |
Benefits of Sole Proprietorships
1. Easiest way to start a business
Starting a new Sole Proprietorship is quite easy and inexpensive compared to other business structures. There is minimal paperwork with the local authorities. Due to which, you do not have to wait longer to start your business.
2. Complete Management Control
All the aspects of the business, including sales, marketing, finance, etc are handled and controlled by a sole proprietorship. This level of freedom in business is attractive to many entrepreneurs. And, they must be capable enough to handle various aspects of business.
3. Quick Decision Making
Any major decisions of the business can be made quickly, as the sole proprietor doesn’t need to take permission from the board of members.
4. Fulfilment
A Sole Proprietorship is accountable for both rewards and risks in the business. Even a small success gives a greater sense of pride and satisfaction.
5. Profit Sharing
A Sole Proprietor holds the complete share of the profit generated from the business. And, they do not need to share it with anyone else.
Benefits of Limited Liability Partnerships (LLP)
1. Separate Legal Entity
An LLP business structure functions as a separate legal entity. It can enter into any legal proceedings in its name.
2. Limited Liability Protection
The partners of an LLP business structure are not liable for the obligations and debts of the partnership. Their personal assets are safeguarded in case the business gets stuck in financial trouble.
3. No Minimum Capital
To start a business as an LLP, it doesn’t require a minimum capital contribution, which in turn provides greater flexibility to partners.
4. Improved Credibility
LLP is witnessed as a more credible business structure, which further helps to attract customers and investors.
5. Flexibility
LLP business partnerships provide greater flexibility in terms of business ownership structure and management.
How to Choose between LLP and Sole Proprietorship?
Choosing between LLP and Sole Proprietorship entirely depends on your business goals.
Choose Sole Proprietorship, if:
- You prefer a quick business setup
- Having limited budget
- Minimal risk is involved
- Looking for single owner business venture
Choose LLP, if:
- Planning business expansion
- Having multiple business partners
- Higher risk is involved
- Looking for liability protection
Conclusion
Limited Liability Partnerships (LLP) and Sole Proprietorships have their unique benefits and differences. LLP is suitable for businesses seeking legal protection, higher growth, and credibility, whereas sole proprietorships are favourable for small businesses.
So, assess your business compliance capability, risk level, future goals and objectives, and size, prior to choosing the right business structure.
