Differences Between Partnership And Limited Liability Partnership (LLP)

Governing Statutes

Question:

Write a report on points of differences between an employee and an independent contractor?

A Partnership or a Limited Liability Partnership (LLP) involves the coming together of two or more persons for any lawful cause in order to carry on a business with the objective of making profit. A partnership firm and a LLP have many similarities as the structure of LLP is half derived from a partnership (unincorporated). The other half is derived from the structure of an incorporated form or organization. Thus, a LLP is often considered to a hybrid of a partnership and a company form of organization (Bromberg, 2009).

LLP form of an entity has all the advantages of both partnership and a company. It has a nature of partnership which gives it flexibility from the compliance point of view and the limited liability concept of an incorporated company which provides the members of a LLP with limited liability towards its assets in the event of winding up of the LLP (Hurt, n.d.). The most striking features of a LLP are:

The liability of the partners are limited as regards to their contributions towards the assets of the LLP in the event of winding up of the LLP, and

The demarcation of management and ownership. The members may be the managers, but the existence of management and ownership are separate.

Thus, the management and ownership of a LLP is separate just like in a company and the liabilities of its partners are limited unlike in a partnership where the liability of partners is unlimited (Ingle, n.d.).

To decide viability and profitability between a partnership and a LLP we should have a clear idea about the points of differences between the two. The table below illustrates the points of differences:

Points of Difference	Partnership	LLP
Governing Statute	Partnership Act, 1890	LLP Act, 2000
Organizational Status	Unincorporated	Incorporated
Registration	Optional	Should be registered under the said act.
Relationship of Partners	Governed by the Laws of Agency. Partners are agents of each other.	Fiduciary. Partners are agent of the LLP.
Liability of Partners	Unlimited or as agreed upon	Limited to the extent provided in the Document of Incorporation.
Designated Partners	No such designation in a partnership.	At least two designated partners required who will be responsible for compliance of the applicable regulations and disclosure of information to the Registrar.
Constitutional Document	Deed of Partnership	Document of Incorporation.
Commencement of Business	Business can be commenced after the execution of the partnership deed.	Business can commence only after obtaining a Certificate of Incorporation from the Registrar.
Legal Entity	A partnership firm does not have a separate legal entity.	A LLP is a separate legal entity independent of its members.
Management & Ownership	Management & ownership are same.	Management & ownership are separate.
Membership Requirements	Minimum 2 and maximum 20.	Minimum 2 and there is no upper limit.
Registration of Member changes	Can be done internally without involving any registration requirement.	Changes in the composition of membership should be registered with the registrar.
Audit requirement and filing of documents.	No such requirement.	Required under LLP Regulations 2001 and GAAP.
Rights & Taxation	Profits are distributed among the partners according to their contribution who pay individual income tax for their income.	Profits are distributed equally and the members pay individual income tax.
Applicability of Companies Act	Not applicable.	Certain provisions are applicable.
Perpetual Succession	No.	A LLP has a perpetual succession as it is independent of its members.
Dissolution	A partnership can be dissolved when the deed expires of by simply termination the deed.	Proper provisions of the LLP Regulations, Companies Act has to be followed for voluntary winding up or suo moto winding up by the Registrar.
Registration for VAT	Not applicable.	As a LLP is formed as a body corporate, it can register itself for VAT.
Binding effect of acts of the Members	Acts of members and of the partnership are binding on the other members. Personal liabilities of members arising of acts of any member are distributed jointly and/or severally.	Acts of members are binding on the LLP even if a member acts outside his authority provided in the member’s agreement. There is no personal liability of the members arising for contracts or debts of a LLP and of other members.
Applicability of Stamp Duty	Stamp Duty is applicable on transfer of land, shares or any other interest in a partnership firm.	Stamp Duty is not chargeable on any instrument evidencing a conveyance for a period of one year in respect of a person transferring any property in connection with the incorporation of the LLP.

The above table gives us a fair idea about the main points of differences between a partnership and a LLP. Overall, the advantages offered by a LLP puts them in a preferable position when entrepreneurs are floating new businesses (Legislation.gov.uk, 2015). Thus, we can outline some major advantages of LLP’s as below:

Flexibility: As mentioned earlier, LLP’s combine the advantages of a partnership and a company which gives them a strategic advantage in the business field. Setting up a LLP is the easiest and involves negligible cost as compared to formation of a partnership and a company. It contains the flexibility of a partnership and the limited liability concept of a company (Legislation.gov.uk, 2015).

Separate Legal Entity: LLP has a separate legal entity just as an incorporated form of organization. It has perpetual succession and is an independent legal person in the eyes of the law (Legislation.gov.uk, 2015).

Less Expensive: It is comparatively less expensive while setting up a LLP.

Transparent: As a LLP is regulated by a number of legislations, its activities are much more transparent than a normal partnership. It has to file its returns and has regulated disclosure requirements (Legislation.gov.uk, 2015).

Ease of Doing Business: A LLP has equal proportions of capital and profits which helps it to do business without any complex calculations relating to admission and retirement of partners, dissolution etc (Legislation.gov.uk, 2015).

Organizational Status

Reconstruction: Restructuring methods such as mergers and amalgamations are applicable to a LLP which is not available to a partnership firm. Thus, in need a LLP can undertake corporate restructuring in times of need (Mawrey and Riley-Smith, 2012).

Acceptance of Public Deposits: This is a grey area as far as the legislations go in the case of LLP’s. Generally, acceptance of deposits in the UK are governed by a number of legislations such as the Companies Act, 2006 and section 5 of the Financial Services and Markets Act, 2000 (Regulated Activities) Order 2001. In case of LLP’s, The LLP Act and LLP Regulations also come into play (Moore, 2013).

A LLP is incorporated as a separate legal entity or as a body corporate, just as a company limited by shares. Public limited companies are allowed to accept deposits from the public at large under the authority of the above mentioned acts. But, the legislations applicable to a LLP, does not provide any restrictive provisions regarding acceptance of deposits in the case of a LLP. Thus, this provides an opportunity for the LLP’s to accept deposits from the public. Due care should be taken while doing so by complying with all the necessary disclosure requirement and proper approvals should be applied for.

Conclusion

Thus, in short, LLP’s provide ample of opportunities with a sense of flexibility to carry on business. It provides a proper organizational structure with a separate legal entity which gives transparency. With the ability to undertake corporate restructuring and the option of conversion to a limited liability company, LLP’s are definitely way ahead in the race. Therefore, it is my recommendation to go for a LLP which is a corporate form of enterprise.

In the above mentioned question we have to differentiate between an employee and an independent contractor for a business associate who has taken over as the operation’s manager of a small business. To understand the difference we need to have a clear idea of who an employee and an independent contractor is from the viewpoint of an organization? The demarcation should be clear as the nature of liability of the organization and the business relationship between them depends largely on this clear demarcation. Such demarcation of the nature of business relationship is from a legal point of view and from the taxation point of view (Johnstone, 2010).

Employee is a person who employment is governed by an employment contract. An employee may hold different status under employment rules and tax rules. An employee has specific employment rights and responsibilities with a different set of obligations towards an employer which are different from an independent contractor (Hammond and Hammond, 1919).

An employee has the status of a worker in a company buy he enjoys certain benefits and obligations out of his employment towards his employer which are different from non-employees (English, 2006). An employee provides services on a continuous basis. The following are the rights and obligations that an employee has:

Employment contract includes the “Offer Letter” and the “Appointment Letter”.

Registration

The “principal” is known as “employer” and the contracted person is known as “employee” (Frank, 2010).

Compensation is termed as salary which is their source of income for tax purposes.

An employee is a part of the organization.

The services of an employee are exclusive for his employer (Anon, 2015).

Statutory sick leave is granted to an employee along with other leaves such as parental leave and shared parental leave which are treated as paid leaves (Quinlan, 1992).

Minimum notice period requirements before resigning.

Legislative protection against unfair termination of employment.

An employee can be discharged from employment which is the evidence of the amount of control that the management of a company can exercise (Fenwick et al., n.d.).

An employee has the right to terminate his employment relationship with the company or the employer without incurring any extra liability.

The employee is never in a position to make any profits or loss in the course of his services rendered (Dyer, 2010).

Flexible working request right.

Time off in case of emergencies.

Redundancy pay under statute.

Required to work on a continuous basis until the commencement of a leave.

Fixed working hours of work.

Has to follow a proper organizational structure and hierarchy.

Employees cannot be substituted by someone else.

Applicable deductions of tax and National Insurance Contributions from their salary.

Employee policies and rules of the company are applicable.

The employer provides them with all the necessary material resources required to do their respective jobs.

An independent contractor is a self employed person who does not have a separate principal other than himself. An independent contractor runs his business himself and is solely responsible for the profits and losses he makes. This is the major reason why they are not included in employment laws of the UK. Independent contractors are generally hired for a particular job required to be done by a professional on a contractual basis. Their employment ceases on the completion of the work or by terminating the contract (either mutually or if the contract is rescinded by any party to the contract) (Gov.uk, 2015).

Although, independent contractors are not covered by the applicable employment laws, they still do have a few rights while under a contract of employment. Following are the rights and obligations of an independent contractor or a self employed person:

The job contract is an agreement between the contractor and the company employing the professional.

The binding agreement is generally the “contract for employment”.

The compensation is in the nature of contract price payable by the company.

The relationship of employer and employee does not exist.

He does not form a part of the organization.

The services of an independent contractor are not exclusive and are available to anyone who wants to employ them.

The agreement is governed by the Contract Act and is available for remedies under the said act.

He is not entitled to statutory leaves from employment such as parental leaves.

He is not under “Pay As You Earn” (PAYE) scheme and no deductions are done from the contract price (Gov.uk, 2015).

Relationship of Partners

An independent contractor cannot be fired by the management of the company employing his services as the relationship of employer and employee is absent in this case.

Casual termination of the contract on the whims and fancies of the contractor cannot be done as this will attract extra liability on part of the independent contractor.

They do have a few protections for their health and safety while working in the premises of the contractor.

There is no requirement of working for fixed hours. It is mainly concerned by the amount of work done and its completion.

No requirements of registration under HMRC.

Income is in the nature of business income and is assessed differently under the tax laws.

No requirements as to notice period.

Engagement can be terminated for any breach of contract or on completion of work.

An independent contractor generally makes profit or loss on the successful execution of the job contract as it is a business transaction on part of the contracting parties and is largely due to the fact that the contract price is generally negotiated by the parties to the contract.

Has no liability to follow the prevailing organizational structure and hierarchy.

All the material and resources required to complete the job are to be brought in by the person contracted to do the job.

Arbitration option available in the event of any dispute that arises in the course of work which results in interruption in executing the contract.

An independent contractor is not provided any training by the company engaging his services to perform the job.

The principal is not concerned about the person who the contractor employs or uses to do the job.

Conclusion

Thus, the above mentioned points makes it abundantly clear about the points of differences between an employee and an independent contractor. It is utmost necessary to establish a proper nature of relationship between the contracting parties because the nature and extent of liability in each is different. Hiring an employee attracts much more legislative and statutory requirements to be followed by the employer. On the other hand, engaging an independent contractor gives the employer much flexibility and ease as it attracts less legal requirements on part of the employer. The most striking requirement is the registration requirements for the purpose of tax deduction and deduction of National Insurance which are applicable only to the employees of an organization.

It is therefore, evident that the people engaged as an employee in an organization enjoy much more rights than an independent contractor. But it is also true that the employees get a fixed amount as salary, but on the other hand an independent contractor may charge a much greater price for rendering his services. Sometimes it becomes necessary for an organization to engage professional people in specialized matters or to do a particular kind of job which is not possible for an ordinary employee.

References

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