As our world is transitioning into a global village, the territorial boundaries for conducting business are now becoming blurry. Not only that, to untangle the complications, we have come up with various types of business organizations. But as the number of types spikes, so does our confusion. The business organizations that are most often than not confused with one another are LLC and LLP.
LLC vs LLP
The difference between LLC and LLP is that while both happen to be two types of business organizations, while the former is more akin to a way a company functions and also has a Board of Directors, the latter is akin to a partnership and just like that it too, has partners who are in charge of managing the affairs.
LLC (it is an acronym for Limited Liability Company) is, as the name suggests, somewhat akin to a properly functioning company with a set of subtle differences. This form of business organization is characterized by its Board of Directors, who are the rein-bearers of the organization’s affairs. Those in India might not be well versed with its concept as it is not incorporated in India.
LLP (an acronym for Limited Liability Partnership) is quite similar to the above-mentioned but with subtle differences. The key difference is that the owners here are termed as partners and not members. Furthermore, it is regulated by a completely different statute. This is a business type that is quite common in Asian countries and the United Kingdom but mostly goes by different names.
Comparison Table Between LLC and LLP
|Parameters of Comparison||LLC||LLP|
|Full Forms||Limited Liability Company||Limited Liability Partnership|
|Decision-making Heads||The members of the LLC||The partners of the LLP|
|Extent of Liability||The members’ liability is to the extent of the unpaid amount on the shares held by them.||The partners’ liability is to the extent of their contribution to the LLP|
|Governing Agreement||The Memorandum of Association and the Articles of Association||The LLP Agreement|
|Books of Account||It is mandatory to maintain it on an accrual basis||The partners can choose whether to maintain it on a cash basis or accrual|
What is LLC?
As has been mentioned already, it is the acronym for Limited Liability Company. There are various types of business organizations that have been created to ease the manner of doing business- LLC happens to be one such type.
In this kind of business type, the features are hybrid. That is, it incorporates the features of a corporation and a partnership. This kind of arrangement is quite common in the United States and Japan. They also exist in other countries but go by different names.
What makes this type of organization popular is the fact that the members have limited liability. In other words, the important decisions are taken by the members of the organization, and each one of them has a liability that is limited to the extent of the shares held by them in the company. Therefore, the members cannot be held personally liable in the event of the company incurring losses or going into debts, or having committed certain acts.
To constitute this business type, there must be at least one member. However, there is no cap on the maximum number of people who can become members. Furthermore, the members are taxed for the profits earned, and consequently, the profits or losses that the business makes come to the forefront through the tax returns of the members.
What is LLP?
Similar to an LLC, this too is a type of business organization. It is an acronym for Limited Liability Partnership, a business type almost everyone is adept at within India. This type of business structure is quite common in Asian countries such as India, China, and Japan, and also in the UK. However, it is a sure possibility that this business type does not go by the name LLP in all these countries.
In this business structure, the affairs of the organization are managed by partners who have limited liability. To elaborate, the partners of the organization are never personally liable for any debts that the organization has or any activity that has been performed by other partners of the organization. The partners’ liability is to the extent of their contribution to the LLP.
To constitute this type of business organization, there has to be a minimum of two people. In other words, two or more two people can come together to earn profits by conducting business lawfully to constitute this business structure. However, the LLP agreement that binds them should conform to the laws of the land governing this business structure, and the partners must “subscribe” their names in the registration document before submitting the said document to the designated authority.
Main Differences Between LLC and LLP
- While the LLC happens to be the acronym for the business type otherwise known as Limited Liability Company, LLP is the acronym for Limited Liability Partnership.
- Where the decision-making heads in an LLC are known as “members”, the decision-making heads in an LLP are called “partners”.
- The agreements that constitute the heart and soul of an LLC are- the Memorandum of Association and the Articles of Association. On the other hand, the agreement that governs an LLP is the LLP Agreement.
- There should be a minimum of one person to constitute an LLC. However, there should be a minimum of two people to form an LLP.
- The life of an LLC is tied to the life of its members. In a sense, that it exists as long as the member stays in the organization and after he leaves, the company winds up. In contrast, LLP features perpetual succession.
As new types of business organizations are mushrooming with an expansion of trade, the level of confusion is spiking as well. The business organizations that are most often than not confused with one another are LLC and LLP. While both happen to be two types of business organizations, while the former is more akin to a way a company functions and also has a Board of Directors, the latter is akin to a partnership, and just like that, it too has partners who are in charge of managing the organization.
Both these business types are famous for the number of benefits that they shower upon their members or partners. Their hybrid features make them rather appealing for people who are willing to engage in business actives but ranging from a small to a medium-scale. They embody the aspects of a traditional corporation with variations best suited for the needs of those who constitute them.