Advantages of LLP Over Partnership
Major advantages of LLP over partnership include separate legal entity, limited liability of partners, and the ability to purchase property in its own name.3 min read
2. Advantages of LLP Over Traditional Partnership
3. Advantages of LLP Over Corporations
4. Disadvantages of LLP
5. Disadvantages of LLP Compared to Traditional Partnerships
What are the advantages of LLP over partnership? Major advantages of LLP over partnership include separate legal entity, limited liability of partners, and the ability to purchase property in its own name.
LLP or limited liability partnerships and general or traditional partnerships, both require a minimum of two individuals for their formation. Usually, LLP and general partnerships are quite similar except for the liability protection benefit offered by LLPs.
Features of LLP
- Formation: Every LLP must have a registered office. You must register an LLP with the appropriate state authority by preparing and filing a formation document signed by at least two partners.
- Designated Partners: You must appoint at least two individuals as designated partners.
- Name of LLP: Every LLP must include the words “limited liability partnership” or “LLP” as part of its name.
- Books of Accounts: Every LLP must prepare and file annual accounts in the prescribed form.
Advantages of LLP Over Traditional Partnership
An LLP combines the advantages of a corporation with those of a traditional partnership:
- Separate Legal Entity: Legally, an LLP is a separate entity from its partners. It can own assets, enter into contracts, and can be sued in its own name. Moreover, one partner cannot be held responsible for the act or omission of another partner.
- Limited Liability: The liability of partners in an LLP is limited to the extent of the amount contributed by them. Personal assets of partners cannot be used to pay off the business debts except in some exceptional circumstances like commission of fraud by a partner.
- No Limit on Number of Partners: Any LLP can have any number of partners it wishes to have. LLPs are usually owned and managed by partners unlike corporations where directors are appointed to manage the company.
- Ability to Purchase Property: Since an LLP is a separate entity from its owners, it can purchase and own property in its own name unlike in case of a traditional partnership, where property must be purchased in the name of individual partners.
- Flexible Agreement: The partners of an LLP can draft the partnership agreement based on their mutual understanding and requirements. The agreement should define the rights and duties of the partners.
Advantages of LLP Over Corporations
- Easier to Operate: It's much cheaper and easier to operate an LLP than a full-fledged corporation. There are fewer compliances to meet. One major requirement in most of the states is to file an annual report with the Secretary of State.
- Easier to Wind-up: Just like its formation, an LLP is also much easier to wind-up. You can wind up an LLP in a matter of months, whereas closing down a corporation can take over a year.
Disadvantages of LLP
- Difficulty in VC Funding: In order to contribute to the capital of an LLP, you must be a partner, and being a partner entails certain duties and responsibilities towards the business. Due to this reason, most of the venture capitalists won't be willing to invest in an LLP.
- Rights of Partners: In an LLP, partners can have disproportionate voting rights instead of one vote per share. This can make some partners feel compromised if the business decisions of other partners affect their interests.
- Greater Penalties: Even though the compliances required for an LLP are minimal, failure to comply with the requirements those can result in heavy penalties.
Disadvantages of LLP Compared to Traditional Partnerships
- Formation: Traditional partnerships are quicker and easier to form, especially when you don't need to register them. Forming an LLP, however, takes little longer due to the legal procedure and formalities involved.
- Termination: Just like formation, traditional partnerships can also be terminated easily. However, for closing down an LLP, you need to follow a certain legal procedure which may take a few months.
- Registration: It's not mandatory to register a traditional partnership. However, you must register an LLP although you can do it online.
- Suitability: Traditional partnerships are ideal for very small businesses where you are looking to test the waters. If you are convinced about a business idea and want to pursue it seriously at a larger scale, it's safer to form an LLP.
Both types of partnerships, whether an LLP or a traditional partnership, require a minimum of two partners. Both of them have certain limitations when compared to a corporation. Still, having an LLP is safer than a traditional partnership when it comes to interacting with outsiders like investors and vendors.
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