The Start-up Dilemma: LLP or Private Limited Company?

Limited liability partnership (LLP) is a business structure that encompasses a hybrid characteristic of incorporating the good points of partnership and company. In LLP, one partner is not responsible nor liable for another partner’s misconduct or negligence. This difference unlike an unlimited partnership curtails the liability of the business partners should there be any debts that arise from running the business.  However, it is essential in some countries for LLP to appoint at least one general partner with unlimited liability.

Merits of Private Limited Company

Having greater applicability is one of the preferred reasons for entrepreneurs to choose a private limited business entity over LLP. Another common inclination towards a private limited company is due to the distinction between shareholders and directors. This makes it possible to raise funding and attract talent by offering an employee stock ownership plan (ESOPs). Should the start-up be looking at either of the two in the near term, a private limited business structure may be a better option. However, as an entrepreneur that is starting a web development shop or running a small business online, an LLP structure may be more appropriate. In fact, even if as a new entrant looking to raise funding, but not for a couple of years, you should strongly consider an LLP over a private limited company.

Other than fundraising, private limited entity tends to gain more trustworthiness among the clients as it conveys a more professional commitment. For new entrepreneurs, credibility in business is an essential building block and a critical part of the foundation of the start-up brand and business. This credibility motivates product or service referrals which is important for a new company – to grow a wider client base.  

Some countries consider a private limited company a tax resident, thus allowing the business to be eligible for local tax exemptions and incentives. In some instances, newly incorporated companies are entitled to special tax incentives and exemptions. Profits are taxed at corporate tax rates and dividends are tax-free in the hands of shareholders.

Merits of LLP

A low-cost setup with limited liability protection is one of LLP’s salient features as compared to private limited. As a start-up with a limited or a minimal amount of capital, set up costs should be kept low so that resources can be diverted to improve other critical functions of the business.

In addition, when it comes to taxes, LLPs are less susceptible to double taxation that some types of corporations are subject to. In a partnership, the profits are taxed solely on the partners’ personal tax returns. In some other types of business formations, the profits are taxed first as corporate income tax and then the shareholders’ dividends are taxed on their personal tax returns. LLPs do, however, sometimes need to pay state franchise taxes.

In terms of suitable business structure, LLPs are especially attractive to certain types of businesses. Those that are at a higher risk of being prosecuted and want protection from attorneys, doctors, and accountants. Companies that currently or in the past were prohibited from forming a Limited Liability Company (LLC) may also find the LLP structure appealing.

Operations wise, it is comparatively hassle-free in the day to day operations, has significantly lower arduous compliance requirements and costs, and therefore many see it as advantageous to begin their organisation in this manner.

Choosing the Right Business Structure

The choice of a business entity defines some of the most important factors such as taxes, liability, and obligations to the government bodies. Should there be a miscalculation, there would be legal, financial, and operational implications in the future when the start-up expands. Hence, before determining an apt entity type, entrepreneurs should consider some of the following factors:

  1. Industry
  2. Personal liability
  3. Business goals and marketing plans

Need for Expert’s Opinion

Even in different countries, there are minor regulation differences for the LLPs. Thus, it is imperative to obtain an expert’s opinion to determine the best-suited country or jurisdiction to begin your start-up. This will ensure the company goes in the right direction in the course of time. With more than a decade of experience in company formation, Desfran continuously stays on top of trends and movements in the industry to help your business grow by identifying, maximising your business potential while providing comprehensive customised solutions.

As a partner who grows with your business, Desfran also provides a suite of business solutions which include new market entry consultancy services, new market requirements like forex licenses, business registration, bank account opening, marketing services, and regulatory compliance, all of which can all be fulfilled through Desfran’s bespoke solutions.  

Contact Desfran today.

 

 

Scroll to Top