Thursday, January 18, 2007

Limited Liability Partnership

If you want to start a company you have two choices: start a Limited Company or a partnership/proprietorship.

A partnership or proprietorship has been a loosely held entity where the ownership and responsibility of the company is defined in a registered agreement. If one partner decides to take a loan and run away, the liability is transferred to all other entities in the partnership. Given such issues, most companies are loath to recognise partnerships as proper suppliers or customers. (Exceptions are professional organisations like Auditors, lawyer firms or architects, which by definition cannot be private limited companies) Again, no one will passively invest in a partnership because of the unlimited liability it exposes.

A Limited company provides for limited liability - i.e. you, as an owner, are only liable to the extent of your shareholding in the company. Currently, limited liability companies have a whole lot of statutory requirements to follow - having strict board meeting regulations, annual general meetings, rigid documentation etc. Not a very easy thing for a startup, and the costs, as you can imagine, are much higher. Plus, given that closing a company can take years in India, the cost of regulation can be high for a failed company.

Enter the Limited Liability Partnership (LLP). A new bill proposed in the Rajya Sabha in December, creates the potential for a new entity - the LLP - which will have the benefit of limited liability and the statutory relief of a partnership. (Read the bill in toto)

If this bill is approved, it may be an interesting vehicle for entrepreneurs to use. Plus, you can convert from it to a limited company anytime. An option has also been provided to convert a limited company into an LLP, which will give a lot of relief to owners of now-bust-companies.

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