How LLP is Different from LLC, General and Limited Partnership Company?
Have you ever come across terms like this – ‘Tom & Harry LLP’? Of course, you have unless you have been living under a rock so far. LLP or Limited Liability Partnership is one of the most popular company types as it comes loaded with numerous benefits. Now, before we start discussing about the advantages and disadvantages of forming an LLP company in the UK or any other parts of the world for that matter, you need to have a better understanding of LLP, what is stands for and how LLP is different from other common forms of partnerships.
So, let’s start with understanding what a General Partnership company looks like. Here we are looking at two or more people getting involved to form an agency to make some money or run a business to be precise. General Partnership companies are very information in nature and that means, there will be fewer paper works involved in the company formation process. The main ingredients of a General Partnership company are –
- Mutual Understanding among partners
- Signing a written contract
So far so good right? You might even feel tempted to abandon the idea of forming an LLP company. Of course, we can’t blame you. Forming a General Partnership company is as easy as pie. But there are some downsides as well. Legal liability is one such downside. If the General Partnership company fails or gets involved in some ugly law suits, all the partners and their personal assets can come under scrutiny. You and your friends can be sued by court for any damaged either financial or physicals done by the general partnership company. This is a serious issue and therefore, you should not ignore this major downside of general partnership company.
What About LLC Then?
General partnership companies can be transformed into a formal agency by getting it mutated into a Limited Liability Company. LLC, as the name suggests, keep your personal assets from harms away. You or your partners will not be dragged into a law suit in case your LLC gets into some sort of problem.
What is LLP then?
Well, LLP or Limited Liability Partnership Company is basically a more formal approach to the concept of LLC. Unlike LLC, LLP companies tend to have some set of rules and structures in place that endows it with more formal business entity. Based on your area’s local legal jurisdictions, forming an LLP requires a written partnership agreement. Annual reporting needs to be done too to setup a Limited Liability Partnership company.
How LLP Is Different from Limited Partnership Company?
That is a very good question indeed. Most people tend to confuse Limited Partnership company with Limited Liability Partnership Company but they are vastly different. In a Limited Partnership company, the decision-making power is invested on a single partner. Basically, Limited Partnership company is a one-man show where one partner wields all the power and other partners are just sitting ducks. Of course, all the partners of a Limited Partnership Company enjoy financial gains.
Now, let’s take a look at LLP. Unlike in Limited Partnership Company, in LLP all partners enjoy equal power and are treated equally when it comes to making a business decision. The liability is also get shared equally by all the partners.
What is LLP By The Way?
So far, we have been discussing the difference between LLP and other forms of partnership companies, now we have got the chance to discuss in details what LLP is all about. Basically, in simple English, LLP is a private limited company with a formal and legal entity.
There are few things that we must know about LLP –
- LLP company needs to be registered with the local authority and it needs to be have at least two partners who will be responsible for making all kinds of financial and business administrative related decisions.
- We need to clarify one point here and that is – there is no upper limit on the number of partners a Limited Liability Partnership Company can have. A Partner can be a member or a Limited Company.
- Members of the LLP can be sued. Legal claims or lawsuits can be made against the LLP company but the members remain largely insulated from such legal issues.
- Under no circumstances, personal assets of the individual members can be seized or appropriated to settle any debts incurred by the LLP.
So, now we all have a fair idea of how LLP Company, we can discuss the advantages and disadvantages of forming an LLP company –
- The main advantage of forming LLP is that it gets treated as a Legal Entity and that means, it can get into a business contract without requiring signatures from every single partner. Imagine calling all your company’s partners to sign a contract. That would be total disaster and can slow down a business. LLP can help you in that. It can get into a contract with its own name. Sounds great right?
- Structure of LLP company is far from being rigid. There is no definite structure to be followed while forming a Limited Liability Company. It all depends on the terms that are included in the agreement. So, take your time while forming an LLP. The structure can be as flexible as you want but it has to be laid out in the agreement paper.
- There are numerous tax benefits of forming an LLP company. Since we are not accountants, it is better you talk to an account to get to know the tax benefits that you and your partners will be enjoying after setting up the LLP company.
- Since all the members of the LLP company are actively involved in the wellbeing of the agency, LLP companies tend to register solid growth. It can be an exciting place with different people and their different skillsets.
- Even if a member of the LLP resigns or files of bankruptcy or dies, the LLP does not end there.
- Even if the LLP company owes a lot of debt from the market or from the banks, the personal assets of the individual members can’t be seized to settle the debts. LLP offers a kind of legal protection from such financial calamities.
And The Disadvantages
- Compared to a general partnership company, forming a Limited Liability Partnership company is complex. There are way too many steps involved and the members have to do a lot of paper work before the company can be legally incorporated.
- There are a lot of reporting and accounting tasks need to be done to run a Limited Liability Partnership company smoothly. More paper works means more spending. If you are running low on budget, probably LLP is not the right choice for you.
- It mandatory for all LLP companies to submit audited accounts to legal authority and that means, there will be no privacy when it comes to your company’s financial position and its holdings.