Legal benefits of forming a Limited Liability Partnership in India

Published on 18 Mar 2016 by Team

Limited Liability Partnership Business Model can be a blessing 

An "LLP" is basically, a hybrid of a limited liability company and a partnership firm (a new structure as envisaged in the Act), is expected to benefit entrepreneurs, professionals and companies immensely. For a long time, a need was felt for a new corporate form that would provide an alternative to the traditional partnership, with unlimited personal liability on the one hand, and, the statute-based governance structure of the limited liability company on the other. This was in order to enable professional expertise and entrepreneurial initiative to combine, organize and operate in an efficient and flexible manner.

Role of LLPs in Corporate Business

The Limited Liability Partnership is incorporated with unique features. It is an alternative corporate business vehicle that provides the benefits of limited liability of a company but allows its members the flexibility of organizing their internal management on the basis of a mutual agreement, as is the case in a partnership firm. This set-up would be quite useful for small and medium enterprises in general and for the enterprises in the services sector in particular.  Internationally, LLPs are the favourite set-up of business particularly for service industry or for activities involving professionals.

LLP shall be a body corporate and a legal entity separate from its partners. It will have perpetual succession. While the LLP will be a separate legal entity, liable to the full extent of its assets, the liability of the partners would be limited to their agreed contribution in the LLP.

Further, no partner would be liable on account of the independent or unauthorized actions of other partners, thus allowing individual partners to be shielded from joint liability created by another partner’s wrongful business decisions or misconduct.

Sole Proprietorship - Partnership - Limited Liability Partnership

When a team of entrepreneurs want to start a business a partnership model had traditionally been the way to go for the ease of drafting a simple partnership deed without the hassle of getting into incorporating a Company per se. The compliances are few, and the partners are free to run their business as they want. Amongst the things that are fixed are the profit sharing ratio between partners and the capital each partner contributes etc.

If one wants to start their own business nothing stops him or her from setting up shop. Literally, one can buy a space, start selling some utilities and get going with a business. This is the most basic model for a business and has a very little scope of organic growth without self –pumped capital into the business.

Both of these models possess risk and unlimited liability for the owner or the entrepreneurs. The LLP model comes to the rescue for startups and business looking to secure themselves from unlimited liability.

Mindless Registration as a Private Limited Company is a modern sin

Incorporation needs funds

A business in the initial phases or a startup has limited funds with many ideas. Hence, in the beginning, it is advisable to spend your money on value addition in the form of acquiring a workspace, hiring talent to have a functional close-knit team etc rather than incurring expenses on company registration. Company registration is a costly affair, further the yearly annual compliances, accounting, stringent penalties only makes it worse.After a steady business model is established, you can opt to convert an unregistered business into an LLP.

One can opt to convert a Private Company to LLP or a Partnership to LLP as well if that seems the safer and more feasible option.

Minimum Viability of the business model needs a gestation period

Any entrepreneurial venture must bear in mind the Minimum Viability of the Product before going all in. Registering as a Private Limited Company involves various compliances and are bound to follow the provisions of the Companies Act, 2013 related to the same. Failing to follow the provisions the Company so formed can land in major legal troubles which can be avoided. Hence a LLP model is suitable for a business model that requires flexibility and needs to escape provisions like taking money out of the company, drawing salary freely without restrictions, borrowing or taking a loan from the company etc.

Click here to understand in detail the costs that need to be incurred for registration of a Private Limited Company

LLP Business Model is a winner in many ways:- 

Minimal Compliances:

  1. Every year, there are about 8 to 10 regulatory formalities and compliances are required to be duly completed and submitted by a Private limited company whereas a Limited Liability Partnership is required to file only two, namely, the Annual Return & Statement of Accounts and Solvency.
  2. No requirement of minimum contribution. A Private Limited Company requires a minimum paid up Capital of Rs 1,00,000 whereas there are no minimum capital requirements for an LLP.
  3. A Company must hold certain types of statutory meetings as pre-fixed by Companies Act, 2013. Annual General Meetings is one such crucial meeting which must be complied with in the prescribed time. However, an LLP has no such requirements.
  4. All limited companies, whether private or public, irrespective of their share capital, are required to get their accounts audited. But in case of LLP, there is no such mandatory requirement. This is perceived to be a significant compliance benefit. A Limited Liability Partnership is required to get the audit done only in the case that:
    1. The contributions of the LLP exceeds Rs. 25 Lakhs or
    2. The annual turnover of the LLP exceeds Rs. 40 Lakhs
  5. The dissolution of a LLP as compared to a Private Limited Company is less procedural.

Lower Registration Cost

Cost of company registration depends on many factors inter alia:-

  • Initial Authorised Share Capital
  • Number of Directors
  • Stamp Duty
  • Professional Fee charged by Chartered Accountant or Company Secretary.

The cost of registering LLP is low as compared to the cost of incorporating a private limited company or a public limited company. LLPs are registered with the Ministry of Corporate Affairs. LLP registration process is similar to that of a Private Limited Company Incorporation process, viz. obtaining Digital Signature Certificate for the Partners, obtaining Designated Partner Identification Number (DPIN) for the Partners, obtaining name approval from MCA, obtaining Incorporation Certificate and filing LLP Agreement. 

Although the processes are ostensibly similar there are certainly other important distinctions. Private limited company registration is executed according to Companies Act, 2013 and is registered with Registrar of Companies. However, LLP registration is done according to the Limited Liability Partnership Act, 2008 and is registered with Registrar of LLP. A DIN (Director Identification Number) is required for the registration of Private Limited Company. However, a DPIN (Designated Partner Identification Number) is required in case of a Limited Liability Partnership. The other rules followed by both the companies are according to their respective Acts also.

Taxation Aspect on LLP

For income tax purpose, LLP is treated on a par with partnership firms. Thus, LLP is liable for payment of income tax and share of its partners in LLP is not liable to tax. Thus no dividend distribution tax is payable. Provision of ‘deemed dividend’ under income tax law, is not applicable to LLP. Section 40(b): Interest to partners, any payment of salary, bonus, commission or remuneration allowed as deduction.

2 to an unlimited number of Partners- valuable for growing startups

An LLP requires a minimum 2 partners while there is no limit on the maximum number of partners; this is in contrast to a private limited company wherein there is a restriction of not having more than 200 members.

Dividend Distribution Tax (DDT) not applicable – Valuable for Startups

Private limited companies are liable to pay tax on the earnings (income) of the company. Then there is a dividend distribution tax and an alternative minimum tax also. Hence in the case of a company, for example, the owners need to withdraw profits from the company, then in this situation, an additional tax liability in the form of DDT @ 15% (plus surcharge & education cess) is payable by the company. However, no such tax is payable in the case of LLP and profits of an LLP can be easily withdrawn by the partners.

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