While startups that have a single founder are not uncommon, most startups generally have more than one person at the helm. A startup typically requires people with expertise in more than one field, which is why two or more people get together and bring in their special skillsets to launch a company.
Getting together as a team and launching a company with someone who will help you in a specific area that you know little about is a good idea, but more than one head running a business can also mean differences of opinions and conflicts of interest. This is one thing you don’t want, especially when your company is in the nascent stage.
You obviously cannot be clairvoyant about things going wrong, but it is best to stay prepared for any complexities that may arise in the future. This is why, if you’re launching a company with partners, you should opt to register your startup as a Limited Liability Partnership (LLP).
The basic advantage of a limited liability partnership is that it allows the partners to be protected from any negative issues that arise because of the actions of their other partners. In an LLP, each partner holds limited liability towards the company–to only as much is their capital contribution to the company. This means that if negative issues arise, the effect of it on the startup will not be as harsh as it would be if it was a partnership firm.
A startup with more than one founder can of course be started as a partnership firm as well, but an LLP would registration would come with additional benefits in terms of audit not being required as long as the annual turnover of the startup does not exceed ₹40 lakh. Registering an LLP also takes a maximum of only 2 weeks and doesn’t cost a bomb. An LLP attracts tax at the flat rate of 30% AMT.
The following table concisely explains why an LLP is a better option than a general partnership.
|Criteria||General Partnership||Limited Liability Partnership|
|Liability||Partners are personally liable. Even their personal property may be used to settle the startup’s debts||Liability only up to the amount of each partner’s capital contribution|
|Immunity against wrongdoing of other partners||No immunity||Full immunity|
As the table clearly shows, a limited liability partnership is a smart choice for freelancers or founders who wish to give their bootstrapping business a proper company structure from a legal perspective. An LLP will work as long as you and your partners don’t require external funding.
To come back to the question asked in this article’s title–Can your startup exist as a partnership–the answer is one that cannot be generalized. A startup’s survival, existence and success is dependent on a lot of factors, of which the partners running the business is only one. Registering the company as a limited liability partnership does not guarantee success, but it does insulate the startup from issues caused by any one of the partners and allows the company the chance to stay in existence.
This article was published in Money Control on 23 November 2016.