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What is LLP?
An LLP or Limited Liability Partnership is a business structure where business partners share limited liability, meaning their personal assets are protected in case the business incurs debts or liabilities.
LLPs are commonly used by professionals like lawyers, accountants, and consultants but are increasingly popular among small and medium-sized enterprises (SMEs).
An LLP is an ideal structure for businesses seeking operational flexibility, protection for partners’ personal assets, and minimal compliance requirements. It is particularly attractive for professionals and small enterprises looking for a formal and efficient business framework.
This business structure also allows businesses to make use of the benefits of economies of scale, since LLPs can pool resources, expertise, and capital from multiple partners. By sharing operational responsibilities and costs, LLPs can reduce per-unit expenses, streamline processes, and negotiate better terms with suppliers.
This collaborative approach enables businesses to grow efficiently, expand their market presence, and achieve cost advantages typically associated with larger organizations.
How an LLP works
A Limited Liability Partnership (LLP) is a flexible business structure that operates with a mix of partnership and corporate elements.
The main advantage of an LLP is that it provides limited liability to its partners. This means that, unlike a general partnership, your personal assets (such as your home or car) are typically protected in case of legal action.
In an LLP, if the business faces a lawsuit, the partnership itself becomes the primary target, not the personal property of the individual partners. However, if a partner personally engages in wrongdoing (e.g., fraud), they could still be held liable for their actions.
Consider a scenario where two professionals, Meena and Shalini, decide to start a business offering consulting services in India. They have a shared interest in providing management consulting to small and medium enterprises (SMEs). Initially, they start with a mutual agreement and an informal arrangement. However, as the business grows, they realize the need to formalize the structure to protect themselves from legal and financial risks.
Meena and Shalini choose to form an LLP (Limited Liability Partnership) to safeguard their personal assets from any potential legal liabilities that may arise in the course of business. They register the LLP with the Ministry of Corporate Affairs (MCA) in India, creating an LLP agreement that outlines their responsibilities, profit-sharing ratios, and other operational details.
A few months later, the consulting firm faces a legal dispute due to an issue with one of their clients. The client sues the LLP for professional negligence, claiming that the advice given led to a loss in business.
Since Meena and Shalini have formed an LLP, their personal assets—such as their homes, personal savings, or vehicles—are protected. The lawsuit can only target the assets of the LLP itself, not their personal belongings. However, if it is proven that either Meena or Shalini acted negligently or fraudulently in a personal capacity, that partner could still be held accountable for their individual actions.
Thus, by opting for an LLP, Meena and Shalini have limited their liability while retaining the flexibility of a partnership structure, which helps them manage their business risk while ensuring they are not personally exposed to legal claims beyond the scope of the LLP.
LP vs General Partnership
An LP (Limited Partnership) and a General Partnership are both business structures involving two or more partners, but they differ in terms of liability and management roles.
In an LP, there are two types of partners: general partners and limited partners. General partners have full control over the management of the business and bear unlimited liability, meaning they are personally responsible for the business’s debts and obligations. Limited partners, on the other hand, contribute capital but do not participate in day-to-day management. Their liability is limited to the amount they invest in the business, protecting their personal assets beyond that contribution.
In a General Partnership, all partners share equal responsibility for managing the business and have unlimited liability, meaning they are personally liable for the debts and obligations of the business. There is no distinction between the roles of partners—each partner participates in both the management and the liabilities of the business.
The key difference between the two is the level of liability protection and management involvement. While an LP offers limited liability to some partners (limited partners), a General Partnership places full responsibility on all partners, making it a riskier option for individuals seeking protection from personal liability.
LLP vs LLC
Ownership and structure
LLP refers to Limited Liability Partnership, where two or more partners collaborate to run the business. The partners can be individuals or corporate entities, and the number of partners can vary.
In an LLP, all partners share the management responsibilities and decision-making processes, unless the partnership agreement specifies otherwise. Partners have limited liability, meaning their personal assets are protected from business debts or legal claims.
LLC refers to a Limited Liability Company, which is a separate legal entity that can have one or more owners, known as members. The ownership can be divided among individual or corporate members, and the structure is more flexible than a corporation.
LLCs can be managed either by members (member-managed) or by designated managers (manager-managed). The members are not personally liable for the company’s debts or liabilities, providing them with protection similar to that of an LLP.
Liability protection
Partners in an LLP enjoy limited liability, meaning they are not personally liable for the debts or obligations of the business beyond their contribution to the partnership. However, if a partner engages in fraudulent or wrongful activities, they could still be personally liable for their actions.
LLC members also have limited liability, meaning they are generally not personally responsible for the company’s debts or liabilities. The LLC itself is a separate legal entity, so any financial obligations fall on the company, not the individual members. Similar to an LLP, members are protected unless they personally guarantee a debt or engage in illegal activities.
Decision making and management
In an LLP, all partners typically have a say in the management and operation of the business, unless otherwise specified in the LLP agreement. It is a more flexible structure in terms of decision-making since there is no requirement for a formal management team.
LLCs can be either member-managed or manager-managed. In a member-managed LLC, all members participate in managing the business, while in a manager-managed LLC, the members appoint managers to run the operations. This offers more structure compared to an LLP, especially for larger businesses.
Ownership transfer
Ownership in an LLP is typically not as easily transferable as in an LLC. Partners usually need to approve the admission of new partners or the transfer of ownership. This limits the liquidity and transferability of ownership interests.
Ownership in an LLC can be transferred more easily than in an LLP, depending on the terms of the operating agreement. LLCs can issue membership interests that can be bought or sold, making it easier to bring in new investors or transfer ownership.
LLP vs LP
An LP refers to a Limited Partnership, which is different from an LLP.
An LLP (Limited Liability Partnership) and an LP (Limited Partnership) are both business structures that involve multiple partners but differ in terms of liability and management.
In an LLP, all partners share equal responsibility for managing the business and enjoy limited liability, meaning their personal assets are protected from business debts. However, all partners are involved in decision-making unless specified otherwise in the agreement.
In contrast, an LPconsists of general partners and limited partners. General partners manage the business and have unlimited liability, while limited partners are only liable up to the amount of their investment and do not participate in the day-to-day operations.
The key difference lies in the roles and liabilities of the partners. In an LLP, all partners have equal liability protection and management control, whereas, in an LP, the general partners hold the management responsibility and are personally liable, while limited partners have liability protection but no management involvement.
The choice between the two structures depends on the desired level of involvement in business operations and the type of liability protection needed.
What are the advantages of LLP?
Wondering why you should choose LLP over other business registrations? Have a look:
- Easy & quick to build: Building an LLP is a simple process. It does not have complicated steps and requirements and neither does it take months of waiting time. The minimum amount of fees for incorporating an LLP is INR 500 and the maximum that can be spent is INR 5,600
- Continuity in succession: The life of the LLP is not affected by the death or retirement of any of the partners. If one of the partners withdraws because of any reasons, it does not mean that the LLP gets wound up. An LLP can only be shut down on the basis of the provisions of the Limited Liability Protection Act of 2008
- Limited liability: All the partners of the LLP have limited liability, which means that the partners are not liable to pay the debts of the company from their personal assets. No partner is responsible for any other partner’s misbehaviour or misconduct
- Streamlines management: All the major decisions and management activities in an LLP are taken care of by the board of directors hence the shareholders receive very less power in making decisions
- Hassle-free transfers: There are no restrictions on joining and leaving an LLP. One can easily admit as a partner and transfer the ownership to others
- Taxation benefits: An LLP is exempt from various taxes such as dividend distribution tax and minimum alternative tax. Also, the rate of tax is less when compared to other business types
- No compulsory audit requirements: There is no mandatory audit requirement for an LLP until the company exceeds the annual turnover of INR 40 lakhs
What are the disadvantages of LLP?
- Not covered in all States: In India, there are certain variations in tax benefits from State to State. There are also cases when States restrict the formation of LLP. This is one of the major disadvantages of an LLP
- Less credibility: An LLP has many benefits but the fact is that people do not consider LLPs to be a credible business. People still trust companies or partnerships over LLPs
- Differences amongst partners: Since each partner is responsible for their own part, there are cases when partners do not consult each other before proceeding with a decision or agreement
- Transfer of interest: Though interest and ownership can be transferred, it usually is a long procedure. Various formalities are required to comply with the provisions of the Limited Liability Partnership Act
Also Read The Holy Grail of Sole Proprietorship is Here
Documentation requirements for registering LLP
Before you start with the procedure of registering an LLP or make changes in an existing LLP, have a look at the list of documents you might need:
- Form 7 is required to obtain a Designated Partner Identification Number (DIN) while registering your LLP. It may be sought from the MCA website. Along with the duly completed form, a registration fee of INR 100 must also be paid
- Form 1/ RUN-LLP is required to register a name for the LLP and reserve it. It may be used to christen an LLP or to alter the present name. The fee for submitting this form is Rs 10,000
- A request must also be filed by the partners for their DSC to be registered if it hasn’t already been done before
- Form 2/FiLLiP is required for incorporating a registered LLP. This form must be sent to and acknowledged by the concerned State’s Registrar
- An LLP agreement must be made, which outlines the duties of each partner involved. This requires the filling and submitting of Form 3
- In the case of changing, altering, adding or removing partners, the partners must submit Form 4
- Form 11 must be used to file the IT returns of the LLP
- If the office address of the LLP is to be changed, then Form 15 must be filed
How to form a Limited Liability Proprietorship
As mentioned earlier, forming an LLP is easy and quick. Before you get started, obtain a DSC or Digital Signature Certificate as the following steps will require it. File for one if you don’t already have one. Further, here are the steps involved in forming an LLP. You can visit mca.gov.in and follow the steps listed below:
- Issue a Designated Partner Identification Number for yourself, which serves as an ID card
- File Form 7 and pay the required fees
- Register a name for your LLP using Form 1 and pay Rs 200
- Incorporate the LLP via Form 2. The LLP agreement must also be made at this stage
- File the LLP Agreement as per Section 2(o) of the LLP Act, 2008 using Form 3
With the above-mentioned steps, you are all set to start an LLP of your own.
