Understanding LLP in India: Advantages, Disadvantages, and Key Features
Table of Contents
Introduction
The Limited Liabilities Partnership Act of 2008 introduced the limited liability partnership (LLP) form of entity in India. This type of organization combines the characteristics of limited liability companies and conventional partnership organizations.
A partnership created and registered by the Limited Liabilities Partnership Act of 2008 is called a Limited Liabilities Partnership. An LLP is a corporate body with perpetual succession and a distinct legal entity.
Any change in the partners does not affect the partnership’s existence, rights, or obligations. The Limited Liability Partnership (LLP) entity type is considered appropriate for professional firms and small—to medium-sized corporations.
Evolution of LLP
Early in the 1990s, the U.S. introduced the idea of limited liability companies (LLPs), which quickly expanded to other countries, including India. The restrictions of traditional partnership structures, wherein individual members were individually liable for the debts and responsibilities of the business, necessitated a hybrid entity.
Limited Liability Partnerships (LLPs) were designed to mitigate this disadvantage by providing partners with limited liability while maintaining the organizational flexibility that characterizes traditional partnerships.
By providing a company structure that combines the advantages of corporations and partnerships, limited liability companies (LLPs) were introduced to promote professional services, innovation, and entrepreneurship.
This change in the corporate environment was an attempt to meet the changing demands of contemporary companies, especially those in knowledge-intensive fields like technology, accounting, law, and consulting, where professional cooperation is crucial.
Salient Features of LLP under the LLP Act of 2008
The LLP has the following crucial characteristics:
- The Limited Liabilities Partnership Act of 2008 governs LLP forms of organization; the Indian Partnership Act of 1932 does not apply to LLPs.
- Because LLP is a corporate body, its legal entity is distinct from its partners.
- The succession of LLP is unending. Stated differently, LLP remains unaffected by death, bankruptcy, insanity, or membership changes.
- Partners of an LLP have direct control over business affairs, in contrast to company shareholders. Put another way, there isn’t a distinction between ownership and management in an LLP.
- The amount of LLP’s assets is the extent of its liabilities. The partners are liable to the extent that they have agreed to contribute to the LLP.
- One partner is not liable for the wrongdoing or carelessness of another partner.
- There is no upper limit and a minimum of two partners.
- There must be at least two individual authorized partners, at least one of whom must be an Indian resident.
- An LLP can be formed from a private or unlisted public company or firm.
- The High Court may wind up an LLP voluntarily or otherwise.
Benefits of LLP
The benefits of establishing an LLP in India include the following:
No minimum contribution need
LLPs do not have a minimum capital requirement, unlike companies. You can form an LLP for the least amount of money possible. In addition, a partner’s contribution may take the form of tangible, moveable, immovable, intangible, or other benefits to the limited liability partnership.
However, a limited business needs capital of Rs. 5 lakhs, while a private limited company needs a minimum capital contribution of Rs. 1 lakh.
No cap on business owners
An LLP can have as few as two partners at a minimum but no upper restriction on the total number of partners. In contrast, a private limited company is restricted to having no more than 200 members.
Registration costs
The cost of registering an LLP is lower than that of incorporating a private limited or public limited business. However, in recent times, the price differential between registering a Private Limited Company and an LLP has decreased.
There is no requirement for a mandatory audit
All businesses, public or private, regardless of share capital, must have an audit of their financial statements. However, there is no such necessity in the case of LLP. This is thought to provide a significant benefit for compliance.
To have a tax audit completed, a Limited Liability Partnership is only necessary in the following situations:
- The LLP has contributed more than Rs. 25 lakhs, or
- The LLP generates more than Rs. 40 lakhs in revenue annually.
Tax Aspect of LLP
LLPs are handled similarly to partnership firms for income tax purposes. As a result, the LLP is responsible for paying income taxes, while its partners’ shares are not. Consequently, there is no dividend distribution tax due.
The income tax laws’ “deemed dividend” provision does not cover LLPs. Section 40(b) allows for deducting interest paid to partners and any salary, bonus, commission, or other compensation.
Dividend Distribution Tax (DDT) is not applicable: If a firm’s owners withdraw their profits, the corporation will be responsible for paying an additional tax duty of 15% DDT (plus a surcharge and an education cess).
However, no such tax is due in the case of an LLP, and partners can freely remove LLP profits. Limited liability shields the member’s personal assets from the business’s obligations. LLPs have their own legal identity apart from their members.
Flexibility
A formal agreement between the members governs the partnership’s operations and profit sharing, which can make the company’s management more flexible.
It is assumed that the LLP is a legal entity. It can purchase, rent, lease, own real estate, hire employees, sign contracts, and, if needed, be held legally responsible.
Corporate ownership
LLPs have the authority to designate two businesses as members. At least one director in an LTD business needs to be a natural person.
Designate and non-designate members
Various membership categories allow an individual to run an LLP.
Preserving the partnership name
You can stop another partnership or company from registering the same name by registering the LLP with Companies House.
Disadvantages of LLP
In addition, an LLC has the following drawbacks over a private limited company:
Higher Penalty for Non-Compliance
An LLP must file an income tax return and an annual MCA return, even in the event of non-activity. If an LLP neglects to submit Forms 8 or 11 (LLP Annual Filing), there will be a penalty of Rs. 100 per day for each form.
If an LLP has not filed its annual return for a few years, there is no upper limit to the penalty, which might reach lakhs.If a corporation fails to file its annual return for up to 270 days, it would be subject to a penalty of up to Rs. 4,800.
However, the fine for failing to file a company’s annual return will go up and be equal to that of an LLP. A proprietorship or partnership is exempt from filing an annual return. Therefore, the Income Tax Act’s penalty would be the only one that applies.
Inability to Have Equity Investment
Unlike companies, limited liability partnerships do not have the idea of equity or shareholding. As a result, HNIs, venture capital, private equity funds, and angel investors are not permitted to invest as shareholders in an LLP. Thus, promoter and debt finance would be the primary funding sources for most LLPs.
Higher Income Tax Rate
A corporation that generates up to Rs. 250 crores in revenue is subject to a 25% income tax rate. LLPs, however, are subject to 30% taxation regardless of sales.
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