One of the most important issues that a person who wants to open a business faces is the choice of the legal form of a business model that will need to be registered with government bodies. Many have heard about the LLP, but are not familiar with the decoding of the abbreviation, and, especially, with the differences of this legal form from others.
What to choose from
In the general case, you can choose between a partnership, a limited liability partnership, a limited liability company and a joint-stock company (corporation), if such forms of entrepreneurship are allowed in this jurisdiction. They all have their pros and cons. The right choice largely depends on the situation of the future businessman, state laws and taste for risk.
LLP companies (LLC in English-speaking countries) allow you to use liability protection with many structural and tax advantages of the partnership. Most states offer both limited liability companies and limited partnerships. Although they have some common features, there are some very significant differences between them. Especially with regard to the responsibility of the founders.
If responsibility scares
A limited liability partnership (abbreviation - LLP) is a combination of a partnership and a corporation. It combines the features of both of these forms. As the name implies, partners have limited liability in the company. This means that the personal assets of partners are not used to pay off company debts. For partnership debts, partners are only liable for the assets of the LLP. It is easy to guess that such contributions include the contribution of the founders.
In the event of bankruptcy and insufficient assets to pay off debts to creditors, the collection of personal property of the founder can be applied only if the down payment is not paid. In practice, this almost never happens.
Founder Contribution
In some jurisdictions, the partners ’contribution to the partnership is not required; in others, it is called share capital. As a rule, the size of the contribution for the establishment of an LLP is such that, compared with other forms of doing business, it can be considered scanty. In almost all countries, the legislation allows various assets as an initial contribution if partners do not want to form an initial capital in cash contributions. Licenses, know-how, land plots and other real estate objects, various equipment and hardware, software and other assets may be a constituent contribution to the LLP.
Currently, LLP has become a very popular form. What is so special about this legal form? In the UK, Australia, and Kazakhstan, most small businesses run it in the form of a limited partnership. In English-speaking countries, such companies are designated LLC. Limited liability company - interpretation of the acronym LLP in English.
All limited partnerships are governed by national laws.
Registration of limited liability partnership
Limited liability partnerships are legal entities, subject to mandatory state and tax registration in the country of residence. The basis for registration is the constituent contract of partners and the charter of the LLP.
The constituent agreement must indicate the data of all founders and shares proportional to the contribution of each.Gains and losses from the operating activities of the partnership in the future will be distributed in shares to each participant. By the same principle, additional contributions are paid if the founders decide to increase the capital of the LLP. Indeed, at the initial stage, everyone registers a company with a minimum capital established by law.
The charter shall indicate the name, composition of the founders, the rights and obligations of participants, the procedure for the formation and distribution of powers between management bodies, the distribution of income, the size of the authorized capital and property, the procedure for reorganization and liquidation.
Allowed number of participants
Depending on the country of registration of the partnership and its laws, there are a number of differences in the requirements for the number of founders of the LLP. If, for example, in Kazakhstan one person or one partnership can become a founder of another, then in some countries it is not allowed to establish such a form as a single individual. Also, in some jurisdictions it is considered that such an LLP cannot have a legal entity as a founder.
An important distinction of a limited liability partnership is its "closeness." This is typical for small family-owned European firms, where the secret of baking or winemaking has been passed down from generation to generation for centuries and has been carefully guarded from "outsiders." This practice has brought into the legislation of many countries the requirement to sell its share to an unauthorized person only if other founders refuse to buy it back.
Tax regime of limited liability partnership
In almost all jurisdictions, limited liability partnerships have a milder tax regime than joint stock companies or corporations. In India, they are exempt from dividend distribution tax and minimum alternative tax.
In Kazakhstan, the LLP has the right to choose the applicable tax regime: generally established or special: according to a simplified scheme for small businesses or for agricultural producers.
The LLP is generally exempted from VAT at an annual turnover of less than 30,000 times the minimum calculated indicator for the subsequent 12 months. For 2019, the non-taxable turnover, if the LLP was not a VAT payer in 2018, is approximately 200,000 US dollars.
Net profit distribution
A joint-stock company is obliged to act in the interests of its shareholders and investors. The corporation conducts its business practice in order to get the maximum possible profit for these groups. For this, shareholders elect members of the board of directors. And pay for their work.
To attract additional financing, the JSC issues and sells shares on the open market. This is a complex and lengthy process, as a result of which new shareholders also become owners, to whom the company will pay dividends in the future.
The company's net profit for the reporting period is used to pay dividends to shareholders. The decision on the percentage of payments shall be made by their general meeting.
The LLP can attract finance both by re-registering with an increase in the contributions of the founders, and by attracting other private investors, but they do not receive a percentage of ownership in the company and cannot actively influence business decisions.
The decision on the distribution of profit of the reporting period in a limited liability partnership is made by the meeting of the founders.
Reorganization and liquidation of limited liability partnership
The process of reorganization by selling, joining or spinning off a business model for this legal form is also less complicated and laborious than for a joint stock company, and usually occurs without tax audits.
The decision is made at the meeting of the founders of the company, the further procedure is carried out in a manner generally established for legal entities.
LLP (in the decoding - a limited liability partnership) is ideal for taking the first steps in business.
In the Russian Federation, conducting business in the form of an LLP is not provided for by law.