What Is the Difference Between an LLC & an LLP?

An LLC is a limited liability company, sometimes referred to as a limited liability corporation, and an
LLP is a limited liability partnership. Both legal entities are relatively new in the business world, and
both share aspects of a corporation and a partnership. However, there are differences between
these two business types, some of which are particular to the state the company operates in.

Legal Protection
LLCs and LLPs both provide personal asset protection from business debts and liabilities. However,
in an LLC the members are not protected from the liability of another member, but an LLP does give
this protection. For instance, if an LLC member in an engineering practice makes a client error that
is legally actionable, the LLC and all of its members can be held liable. But if a partner in an LLP is
legally liable for something, the other partners cannot be held jointly liable.

Tax Implications
Both LLCs and LLPs can "pass through" earnings from the business entities to the members or
partners to avoid having to file corporate taxes on the earnings and paying personal income taxes
on the same earnings, which is known as "double taxation." The difference is in how an LLC
operates and the number of members it comprises. For instance, a single-member LLC is
considered a sole proprietorship, and the IRS taxes the member as self-employed, at 15.3 percent.
But LLCs can be formed as S or C corporations and have to pay taxes on the same profits twice.
However, LLP's are treated strictly as partnerships, and the partners pay taxes only on the earnings
passed to them though the business.

State Laws
Laws vary by state, but in general LLCs can be formed by any business or persons, while LLPs are
generally restricted to professionally licensed individuals. For instance, some states like Nevada and
California allow only professionals such as attorneys, accountants and architects to form an LLP but
do not allow the same professionals to form an LLC.

Formation and Operation

There are a few differences in the formation of an LLC and LLP. Both are formed through articles of
organization or articles of formation, and each usually is run based on an operating agreement. The
differences are in how the members or partners buy in, sell out and add or remove members or
partners. Another difference is what percentage of control or voting share each member or partner
is given. For example, if a company has two principal members when it forms, each would likely be
given a 50 percent share. But if another principal buys in with an equal share, the two existing
members would sell a total of 33 percent of the firm to the new principal so all have equitable
shares of 33 percent. Or if a principal retires in a three-person company, the existing two members
would buy the shares, or the retiring principal would sell his shares to a new incoming member.

Considerations
While both LLCs and LLPs have distinct tax advantages, only LLPs provide legal protection from the
actions of another partner. A newly forming business should first look at state law to determine
which entity is allowable in the state in which it is headquartered, and at state laws regarding
personal asset protection for each entity.

Difference between Limited Liability Partnerships & Private Limited Company

Since LLP has been introduced in India, apart from incorporating a traditional Limited Liability
Company, it has become an option for entrepreneurs, business owners and investors starting new
ventures to start their business as an LLP. In light of this, it is important to understand the advantage of
each of these formations, the differences between them and consider carefully which ones suits the need
of the business best.

LLP vs LLC

Process of formation of LLP and Private Limited Company

Incorporation of LLP

Incorporation of LLC (Private Limited)

For formation of an LLP , minimum of 2 Partners are required.

There is no limit to the maximum number of Partners. A body
corporate can be a member of an LLP.

The minimum number of shareholder required for a

company is 2 and there can be upto 50 shareholders,
in case of a private limited company.

Steps for Incorporation

Steps for Incorporation

For the formation of LLP, firstly you need to apply for

Designated Partner Identification Number(DPIN) for the 2
designated partners of LLP and obtain Digital Signature for
one of the Partners of the Proposed LLP.

The first step for incorporation of a company is

selection of name for the proposed company. Then
apply for Directors Identification Number and Digital
Signatures.

Application for Name Availability & Obtaining the Name for the
proposed LLP.

Drafting of Memorandum and Articles of Association.

Drafting of LLP Agreement for the LLP and filing of

incorporation document consisting of Form 2, 3 and 4
available on llp.gov.in with the registrar of companies.

Stamping, digitally signing and e-filing of- MoA, AoA, EForm 1, 18 and 32 under Companies Act, 1956, and
other documents if any which has been stated in MoA
with the Registrar.

Obtaining Certificate of Registration of LLP

Obtaining Certificate of Incorporation of LLC

Both LLP and LLC are incorporated under Registrar of Companies and both the entities protect the
partners/ members from the legal risk stemming from the activities of LLP or LLC.
The biggest difference that a business must understand and take into account is the difference in
taxation and compliance requirement.

Difference in Taxation
Unlike countries such as UK, in India LLPs are not pass through structures, but are taxed as entities. A
Limited Liability Partnership is subjected just to income tax and alternate minimum tax. LLC on the
other hand is liable to pay various taxes that are income tax, dividend distribution tax and minimum
alternate tax.

1. Taxes levied on a Limited Liability Company

Firstly, a company is liable to pay tax on the income of the corporate. Income tax on a limited liability
company is levied at the rate of 30%.
A company is subjected to dividend distribution tax when it pays dividend. Under the Income Tax Act,
Dividend distribution tax is charged at the rate of 16%.
Third kind of tax applicable on a company is Minimum Alternate Tax. Many companies charge
depreciation in their books on straight line method. Thus, the profit shown is higher in the accounts
maintained for company law purposes and they can declare dividend. However, for income tax
purposes, they charge depreciation on written down value which is higher. Thus, for income tax
purposes, they may show low profit or even loss. These companies are known as zero tax company.
However, as said earlier such companies show higher profits in their balance sheets. Such profit is
known as book profit.
A company has to pay MAT on its book profit if the income tax payable on the total income as calculated
under the Act is less then the minimum. From April 2011, MAT will be accessed at the rate of 18%
according to the latest Finance Act.

2. Taxes levied on a Limited Liability Partnership

Taxation structure for LLP is simpler. LLP is subjected only to Income tax and Alternate Minimum Tax.
Dividend Distribution is not applicable on LLP. Once profit is declared and tax is paid by LLP, the
distributed income is tax free in the hands of the partners. Tax is levied on the firm at the rate of 30%.
From the assessment year 2012-13, LLP will be subjected to Alternate Minimum Tax. The purpose
behind implementation of this tax is to rationalize taxation of LLPs with companies. As in order to avail
tax benefits many companies converted to LLPs, hence, Union Budget 2011 introduced a new Chapter
XII-BA under the Income Tax Act 1961 which provided for Alternate Minimum Tax (AMT) at the rate of
18.5% on the adjusted total income of Limited Liability Partnerships. According to the new rule, when
the regular income tax payable by a LLP for a particular financial year is less than the corresponding
alternate minimum tax computed at the rate of 18.5% on its adjusted total income; such alternate
minimum tax shall be deemed to be the income tax liability of such LLP.

In spite being subjected to AMT, LLP offers lesser tax liability in comparison to LLC. Hence, it is
preferable for a freelancer and sometimes a startup to set up the business in form of LLP rather than
LLC.

Compliance requirement
The yearly cost of compliance in case of LLC can be substantial. Under the Companies Act, 1956 and the
Rules made thereunder, a limited liability company is required to consider balance sheet, profit and loss
account, hold meetings, directors report and auditors report; make a declaration with regard to
dividend and appoint auditors, while annual compliance in case of LLP consists of presentation of
statement of account and solvency along with annual report under Section 34(2) and 35(1) respectively
of LLP Act. Practically, the effort and cost of compliance in case of LLPs is a fraction of what is required
in case of a private limited company.

Private Limited Company is preferred by Venture Capitalists over Limited Liability

Partnerships
In India, VCs are not yet comfortable with LLPs, and insist that the startups they will consider should
be in the form of Private limited Company. VCs are risk averse and generally have proven to be slow
adopters despite significant benefits of the LLP form in case of many business models as far as India is
concerned. This is surprising given that several VC funds were quick in forming LLPs instead of private
trusts in order to administer and manage their funds. If you are planning to raise venture capital in the
near future, private limited company is the way to go.

Feature Comparison
In order to help you decide on which legal form to choose, heres a feature comparison between
the LLP and a Company:
Features

Company

LLP

Registration

Compulsory registration required with the

ROC. Certificate of Incorporation is
conclusive evidence.

Compulsory registration required with the ROC

Name

Name of a public company to end with

the word limited and a private company
with the words private limited

Name to end with LLP Limited Liability

Partnership

Capital contribution

Private company should have a minimum

paid up capital of Rs. 1 lakh and Rs.5
lakhs for a public company.

Not specified.

Legal entity status

Is a separate legal entity.

Is a separate legal entity.

Liability of
shareholders/ LLP
partners

Limited to the extent of the unpaid

capital.

Limited to the extent of the contribution to the LLP.

No. of shareholders /
Partners

Minimum of 2. In a private company,

maximum of 50 shareholders

Minimum of 2. No maximum.

Foreign Nationals as

Foreign nationals can be shareholders.

Foreign nationals can be partners.

shareholder / Partner
Taxability

The income of domestic companies is

taxed at 30% + surcharge+cess.

Income tax is levied at the rate of 30%+

surcharge+cess.

Meetings

Quarterly Board of Directors meeting,

annual shareholding meeting is
mandatory.

Not required.

Annual Return

Annual Accounts and Annual Return to

be filed with ROC.

Annual statement of accounts and solvency &

Annual Return has to be filed with ROC.

Audit

Compulsory, irrespective of share capital

and turnover.

Required, if the contribution is above Rs.25 lakhs

or if annual turnover is above Rs. 40 lakhs.

Bankers perception of
creditworthiness of the
entity

High creditworthiness, due to stringent

compliances and disclosures required.

Creditworthiness is higher compared to that of a

partnership but lesser than a company.

No such provision.

Protection provided to employees and partners

who provide useful information during the
investigation process.

Dissolution

Very procedural. Voluntary or by Order of

National Company Law Tribunal.

Less procedural compared to company. Voluntary

or by Order of National Company Law Tribunal.

Foreign Investment

Foreign investment allowed on automatic

or approval basis on various sectors in
accordance with FDI policy. There are
percentage restrictions, and performance
linked conditions, such as minimum
capitalization in various sectors. For
details, refer to latest FDI Circular.

Foreign investment in LLPs has been allowed on

May 11, 2011, but it is restricted to only those
sectors where 100% foreign investment for
companies is permitted, and which do not have
any performance linked conditions. All foreign
investment in LLP on approval basis.

Whistle blowing

Private Limited Company vs LLP vs OPC

Selection of the correct form of business entity is the most important decision taken by
an entrepreneur. To make choices simpler and assist you in taking a well informed
decision, here is a basic comparison chart of the three most common yet credible
forms of business in todays time.
Private Limited Company The most successful business type.
In a private company, the business owners hold all shares of the company privately.
Shareholders may operate the business themselves, or hire directors to manage the
company on their behalf. Registering a private limited company results in protection of
personal assets, access to more resources, financial assistance and greater credibility.
Limited Liability Partnership (LLP) A corporate form of Partnership
It exhibits elements of both partnership and corporation. In LLP, one partner is not
responsible or liable for another partners misconduct or negligence unlike a traditional
partnership in which each partner has joint and several liability.
All these three forms of business have the feature if Limited Liability and Separate
Legal Entity, ie, the members or partners have no personal liability. Yet, they are
different from each other in various aspects.
One Person Company (OPC) A corporate form of Proprietorship.

One Person Company (OPC) has been recently introduced in India to promote business
enterprises that are owned and managed by a single Entrepreneur. OPC allows for a
single individual to own and manage the business. One Person Company is therefore a
viable option for those looking to start an unregistered Proprietorship.
The Comparison chart will give you a clear distinction between all the three forms of
business.

Factors of
Comparison

Private
Limited
Company

One Person
Company (OPC)

Limited Liability
Partnership (LLP)

Minimum
Requirement

Members 2
Directors 2

Member 1
Director 1
Nominee of Sole
Member 1

Minimum
Capital

No minimum
requirement

No minimum
requirement

No minimum
requirement

Regulator

Registrar of
Companies

Registrar of
Companies

Registrar of
Companies

Compliance
Requirements

Annual Return
Filing
Board Meetings
& General
Meetings

Annual Return
Filing
No Board
Meetings, if only
one director
No General
Meetings

Annual Return Filing

Taxation

Taxed at 30%

Taxed at 30%

Taxed at 30%

Credibility

High

Medium

Medium

Investor
Preference

High

Low

Medium

Statutory Audit

Compulsory

Compulsory

If Contribution > Rs
25lacs or, Turnover
> Rs. 40lacs

Conversion

Can be
converted into
LLP

Cannot be
converted before 2
years

Cannot be
converted into a
Company

Time Taken for

Registration

15 20 Days

15 20 Days

10 15 Days

Procedure

Obtain DSC

Obtain DSC (Digital

Obtain DSC (Digital

Designated Partners
2

Factors of
Comparison

Private
Limited
Company

One Person
Company (OPC)

Limited Liability
Partnership (LLP)

(Digital Signature
Certificate)
Obtain DIN
(Directors
Identification
Number)
Name Approval
Filing for
Incorporation

Signature
Certificate)
Obtain DIN
(Directors
Identification
Number)
Name Approval
Filing for
Incorporation
File Nominee details

Signature Certificate)
Obtain DPIN
(Designated Partner
Identification Number)
Name Approval
Filing for Incorporation
File LLP Agreement

Conclusion:
Private Limited Company is the most popular type of corporate entity in India.
Therefore its post incorporation compliances are easier. Click here for Private
Limited Company Registration.
Non convertibility of Limited Liability Partnerships into a Company makes it a
less interesting option.
One Person Company has been recently introduced in India. Therefore, there
may be difficulties in obtaining certain licenses or registration after incorporation
of a One Person Company.
- See more at: http://ventureasy.com/blog/private-limited-company-llp-opc/#sthash.EqfAcpoq.dpuf