Concept of Limited Liability

Limited liability means that the personal financial liability of an investor in a business limited to the extent of a fixed amount that one has agreed to invest in a company or a limited liability partnership. In other words, the investor is not personally liable for the business debts and liabilities of the Limited Company or Limited Liability Partnership. In the unfortunate event of winding up of the business, the investor's liability is limited to the unpaid amount of agreed contribution by shares or otherwise.

On the contrary, the liability of sole proprietors and partners in general partnership are unlimited and even their personal assets are exposed to pay off the business debts and other business liabilities.

The Directors run the day to day business of a Company and are liable to comply with the various requirements specified under law. In the case of an LLP, Designated Partner is responsible for the legal compliances of an LLP. In case of any non-compliance, Directors and Designated Partners are held responsible personally.

Usually in a Company, the shareholders are the Directors and in an LLP, the Partners become designated partners. In their role as a Director or Designated Partner, their liability is unlimited, as they are exposed to penal provisions under the law for the non-compliance of respective regulations.

Selection of Suitable Business

Selecting correct business structure is very important for the success of any business. This is based on many parameters including your present plan and future plan, number of partners, investment required, foreign investment, area of operation, ability to take risk etc. below are the some of the points which helps you to select business form.

  • Business Risk and Personal Assets:

    The possibility that a business will have lower than anticipated profits, or that it will experience a loss rather than a profit. Business risk is influenced by numerous factors, including sales volume, per-unit price, input costs, competition, overall economic climate and government regulations. If someone do business as partnership or proprietorship and if he/she incurs loss or business create some liability, then creditor can recover from the assets of business owners. But in case of Company or LLP, the liability is limited to the extent of their investment and no one can claim more than the committed amount. So, in case of businesses with more risk, LLP or Company would be ideal.

  • Acceptance:

    Incorporated businesses like LLP and Company have more acceptance than partnership or proprietorship. This is because, all information regarding the partners, directors etc are available in the public domain. This give more acceptance to LLP and Company compared to Partnership or Proprietorship

  • Investors:

    If your business has foreign investors, the best option is Company. It is also possible to have foreign investors in LLP subject to central government approvals.

  • Tax:

    Proprietorship is taxed as individual income of the proprietor. In partnership and LLP, tax is at 30.9% after partner's salary which is taxed as personal income of partners. No tax payable on Profit after tax in partnership and LLP. In Company, 30.9% is the tax rate plus surcharges and profit distribution also attract tax at 16% plus surcharges.

  • Business Succession:

    In LLP and Company, business will continue irrespective of changes in the owners.

Selection of Best Business Structure

You can select any business organization based on your requirements. Usually people go for Company or LLP as both are organized business structures and hence enjoy better acceptance among corporate, government, bank and the public at large.

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