Difference Between Sole Proprietorship Vs LLP in India
Sole Proprietorship

Difference Between Sole Proprietorship Vs LLP in India – In Depth Analysis

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Unorganized or unstructured business sector in India is defined as those enterprises that operate with no registered concern either under the registration act, any regulatory control or adherence to recognized norms. This range of enterprises in India is so wide, including from small family-owned businesses to street sellers, casual laborers, and informal service providers.

Sole Proprietorship: An Introduction

The top choice among the unincorporated businesses in India is a sole proprietorship. It is the most basic and easy type of business because it is established by one person alone who exercises control over managing the business. A sole proprietorship will be suitable for small businesses with minimal investments that are basically self-employed, freelancers, consultants, etc. The sole proprietor is the owner-person who possesses and runs the business, and this is regulated by the Shops and Establishments Act of the state. This is an elementary and most common form of business organization where one person is supposed to hold, run, and manage all aspects of the business.

In this form of business, the owner and the business are not distinguishable, and the owner remains personally liable for everything in the business, including finances and debts. This business is very easy to establish; it has limited regulatory requirements and completely retains control over the owners. It is often used for businesses with minimal capital needs, low risk, and owners who want to be strictly in control of their decisions. This is the most basic business structure in the sense that it provides a single owner with full control and flexibility and is an uncomplicated but affordable one. It’s suitable for small businesses, freelancers, and entrepreneurs who want to start a business with little administrative hassle. Even so, its main drawbacks are unlimited liability, limited availability of external funding, and lack of continuity, which made it less conducive for companies that want to expand or with conditions in very risky environments.

Sole Proprietorship: Requisites For Formation

Setting up a sole proprietorship is a simple and cost-effective process, requiring minimal formalities. What is majorly important for a business to form, operate and function smoothly is discussed below:

  1. Business Name: There should be a valid and suitable name for the business and the owner is free to choose any name, provided it does not infringe on existing trademarks or intellectual property rights. The name can be used only to market the business, although it will not be treated as a registered legal entity.
  2. Business Registration (Optional): Though there is no formal requirement for sole proprietorship registration, some businesses may choose to register depending upon the nature of the business under the Shop and Establishment Act of the particular state.
  3. Tax Registration: Proprietors need to register for tax identification numbers based on their business activity and sales revenue. For example, if the annual turnover achieved from trading of goods and services exceeds the prescribed threshold limit, then it must register under the Goods and Services Tax (GST) law. Similarly, obtaining a Permanent Account Number and Tax Deduction and Collection Account Number (TAN) (if applicable) for tax purposes is essential.
  4. Other Licenses and Permits: Depending on the type of business, specific licenses and permits may be required from local authorities (e.g., food licenses, health permits, trade licenses).

Limited Liability Partnership: An Introduction

A crossover commerce structure called Limited Liability Partnership (LLP) in India, combines the best elements of a traditional organization with the constrained risk features of a company. Developments have been under the Limited Liability Partnership Act, 2008 where it works to provide partners with the flexibility of managing the commerce while limiting their liability for losses to the extent of their contributions only.

The LLP, also known as Restricted Risk Organisation, has emerged as a flexible and efficient form of business that caters to the needs of advanced commerce needs by advertising the excellence of both worlds: partnership structure and corporate structures. It equalises the need for adaptable administration, constrained risk security, and operational effortlessness, making it an attractive option for a wide run of businesses, from proficient firms to new companies to SMEs. Its needs fall within the reduced compliance burden, charging benefits, and robust legal framework that protects partners, therefore offering them both operational convenience and mental peace. A Limited Liability Partnership could be a sophisticated trade structure that combines the attributes of an organization with the limited liability of a firm.

In India, LLPs are regulated by the Limited Liability Partnership Act 2008, enacted to enable businesses to embrace a more flexible and less complex form of trade entity. The business model of LLP allows the partners to have operational opportunities while ensuring the safety of their personal resources. It has become one of the most well-known forms of commerce due to the fact that it offers flexibility in management, reduces regulatory burdens compared to corporate businesses, and provides individual liability protection for its members.

Limited Liability Partnership:  Requisites For Formation

The following have to be mandatorily present to create an LLP. Forming an LLP in India involves the following process:

  1. Digital Signature Certificate: All partners require a DSC for signing electronic documents during filing of forms for incorporation and registration.
  2. Director Identification Number: Two designated partners must apply in the prescribed manner for a DIN, which is used as an identification number for purposive compliance
  3. Name Reservation: The proposed name for the LLP should be reserved in the MCA. The name applied for should not resemble or be identical to any existing company or LLP.
  4. LLP Agreement: The core of an LLP is the LLP Agreement, which states the duties and rights of partners in the LLP. This agreement needs to be filed with the ROC within 30 days from the date of incorporation.
  5. Incorporation process: The LLP is constituted by filing an incorporation form along with necessary documents with the Registrar of Companies (ROC). On RoC approving it, a Certificate of Incorporation is issued to the LLP.

Sole Proprietorship Vs LLP (Limited Liability Partnership)

A sole proprietorship and a limited liability partnership (LLP) are two separate business arrangements, each with its own set of benefits and drawbacks. Below is a full comparison of the two, with a focus on legal structure, liability, compliance, taxation, management, and suitability.

1. Governing law and definition

A sole proprietorship is a business organisation owned, managed and controlled by a single person. There is no act of law that is specially enforced to govern sole proprietorships but they are covered under the Shops and Establishments Act of the state in which the sole proprietor has his place of business.

The Limited Liability Partnership Act, 2008 governs and regulates a limited liability partnership and is defined as a partnership formed and registered under this Act. An LLP is a legal entity formed by way of partnership and is separate from its partners.

2. Incorporation and documentation

In case of a sole proprietorship, there is an ease of incorporation as there is no formal cost of set up or it is almost nil or nominal and the documentation is also minimal. The legal structure is simple and can be formed very easily with very less formalities and low expenses.

On the other hand, the procedure of incorporation of an LLP is lengthy as there are many formalities involved as compared to that of a sole proprietorship. The cost of formation of an LLP is higher than a sole proprietorship but less than a company as it involves legal expenses, drafting and registering LLP agreement, stamp duty payment, etc.

3. Members

There is only one person in a sole proprietorship who owns, manages and controls the business operations. Only one person is required to form a proprietorship firm but it may employ persons as employees in the business.

There is a minimum requirement of two partners to form a limited liability partnership and there is no maximum limit. Two or more partners that agree to form the partnership look over the business activities of the firm.

4. Legal status

A sole proprietorship does not hold any legal status in the eyes of law and as such it is not a separate lawful entity from its owner or the proprietor. The owner and his business are taken as one in case of a proprietary concern.

On the contrary, in case of a limited liability partnership, the entity is distinct from its partners and has a separate legal status as per law.

5. Registration

Although there is no formal requirement of a registration for a sole proprietorship, it is always recommended to obtain one due to the several benefits offered to a registered entity.

An LLP is mandatorily required to obtain a registration and to register the LLP agreement as well.

6. Liability

A sole proprietor has unlimited liability since the proprietorship business is not a separate entity and has no legal status. This makes him personally liable for the debts and losses of the business and in case of insolvency, his personal assets might also be at risk.

In case of an LLP, as the name suggests, the liability of the partners is limited only to the extent of the unpaid amount of their share in the capital. Partners are not personally liable as the firm and partners are two different entities having separate legal status. This makes it a safer choice.

7. Perpetual succession

The sole proprietorship and the proprietor are treated as one and the same before law and therefore the proprietorship ends with the death of the proprietor. In case of death or incapacity of the owner, the business shall cease to exist and the proprietorship shall come to an end.

However, such is not the case for an LLP. An LLP enjoys perpetual succession, just as a company does. It is an ongoing concern and continues to exist irrespective of the incompetence or incapacity or death of its partners with the remaining partners.

8. Business name

For a proprietorship concern, usually the name of the proprietor is taken as the name of his business and is marketed as the same. There is no need for a prefix or suffix to be added in the business name, unlike in the case of other business forms.

But for an LLP, the firm name is different from that of its partners and business is carried out and marketed under the firm name and not the partners’ names. It is necessary for an LLP to add ‘and LLP’ or ‘& LLP’ after its name at all times.

9. Raising capital or investment

A sole proprietor has only limited options to increase funds as he cannot invite investment or raise his capital by issuing shares to the public. He can either take out personal loans or use his savings to finance his business. Banks may hesitate to extend large loans as the business lacks a limited liability protection, making it a riskier choice of business.

On the other side, it is easier for LLPs to raise finances as there are multiple partners to contribute, and the firm may also enter into agreements with external parties for investment. Banks and other financial institutions also find LLPs to be more credible in lending loans due to their limited liability feature.

10. Transferability

Transfer of ownership is not easy as the entire business is owned by a single individual in case of a sole proprietorship concern.

While, in case of an LLP, transfer of rights and interests is easier, as it is governed by the LLP agreement.

11. Legal and tax burden

A sole proprietorship hardly has any legal expenses to bear, and its tax burden is much lower than that of other businesses. The income of the firm is taken as the personal income of the proprietor and, therefore, is taxable under personal income tax and not as income from the business. There are also certain tax benefits available to sole proprietors.

An LLP has to bear expenses related to incorporation, stamp duty, registration and other legal expenses. From the tax point of view, LLPs are taxed as partnership firms and are liable to a flat rate of 30% on their income. The share of a partner’s profits is exempt from taxation, but any salary, commission, or bonus paid to him shall be liable for taxation.

12. Ownership, Management and Control

The sole owner has complete control over the management and decision making process in the proprietorship. There is no separation between ownership and management and is taken care of by a single person who is the proprietor.

The LLP is managed by the designated partners, as specified in the LLP agreement. While flexibility in management is allowed, decisions must be made collectively or as per the agreement.

13. Dissolution

A sole proprietorship can be dissolved easily at the owner’s discretion without any legal complications.

However, an LLP is required to follow the legal process of winding up through the Registrar of Companies (ROC) as prescribed by the Ministry of Corporate Affairs (MCA). This involves filing specific documents and settling any outstanding liabilities.

14. Suitability

A proprietary firm kind of business is suitable for businesses where the owner prefers a high level of autonomy and does not need to share control. It is best suited for small-scale businesses with low capital requirements and lower risk and is typically chosen by freelancers, small retailers, individual service providers, or home-based businesses.

An LLP is a good option for businesses where partners bring different skill sets and want shared responsibility in managing the business. It is suitable for businesses that require flexibility, want to limit personal liability and foresee growth in terms of partners or scale. It is a popular choice among professional services firms (like law firms and consultancy), startups, and growing businesses.

Conclusion

Proprietorship is ideal for single-owner businesses with low-risk and small-scale operations, where simplicity and autonomy are the key priorities. However, it carries the risk of unlimited liability and limited growth potential.

LLP, on the other hand, provides the advantage of limited liability, flexibility in operations, and a more professional image. It is well-suited for growing businesses, professional firms, and those seeking external capital and shared responsibility while balancing regulatory compliance.

Choosing between the two depends on factors such as the scale of operations, risk appetite, need for capital, and long-term business vision.

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I am a qualified Company Secretary with a Bachelors in Law as well as Commerce. With my 5 years of experience in Legal & Secretarial. Have a knack for reading, writing and telling stories. I am creative and I love cooking. Travel is my go-to for peace and happiness.
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