What Is an LLP (Limited Liability Partnership) and How Does It Work?

Aug 14, 2025
Private Limited Company vs. Limited Liability Partnerships

In today’s dynamic business landscape, the Limited Liability Partnership (LLP) has emerged as a compelling choice for entrepreneurs, startups, and professional service providers. Offering the legal strengths of a company alongside the flexible governance of a partnership, LLPs are gaining remarkable popularity across India.

  • In the financial year 2023-24 alone, the number of LLP registrations soared by a striking 39%, reaching 58,990—a clear reflection of growing confidence in this structure.
  • The upward momentum continued into 2025, with May witnessing a 37% year-on-year jump in new LLP incorporations—outpacing the 29% growth seen in company registrations

These figures underscore a powerful trend: LLPs are fast becoming the go-to vehicle for professionals and small businesses seeking liability protection, compliance ease, and operational flexibility.

Table of Contents

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 (Limited Liability Partnership) Works?

1. Hybrid Business Structure

A Limited Liability Partnership (LLP) is a flexible business structure that operates with a mix of partnership and corporate elements.

2. Limited Liability Advantage

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.

3. Lawsuit and Liability Rules

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.

4. Example: Meena and Shalini’s Case

  • Starting Out: 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.
  • Formalizing the Structure: 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.
  • Facing a Legal Dispute: 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.
  • Outcome of the Lawsuit: 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.

LP (Limited Partnership) 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.

Limited Partnership (LP)

  • 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.

General Partnership

  • In a General Partnership, all partners share equal responsibility for managing the business and have unlimited liability.
  • This means 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.

Key Difference

The key difference between the two is the level of liability protection and management involvement.

  • 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.

Related Read: What is the Difference Between LLP and Partnership?

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

Related Read: LLP Advantages and Disadvantages

Documentation requirements for registering an LLP (2025)

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:

  1. Issue a Designated Partner Identification Number for yourself, which serves as an ID card
  2. File Form 7 and pay the required fees
  3. Register a name for your LLP using Form 1 and pay Rs 200
  4. Incorporate the LLP via Form 2. The LLP agreement must also be made at this stage
  5. 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.

Frequently Asked Questions

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Private Limited Company
(Pvt. Ltd.)

1,499 + Govt. Fee
BEST SUITED FOR
  • Service-based businesses
  • Businesses looking to issue shares
  • Businesses seeking investment through equity-based funding


Limited Liability Partnership
(LLP)

1,499 + Govt. Fee
BEST SUITED FOR
  • Professional services 
  • Firms seeking any capital contribution from Partners
  • Firms sharing resources with limited liability 

One Person Company
(OPC)

1,499 + Govt. Fee
BEST SUITED FOR
  • Freelancers, Small-scale businesses
  • Businesses looking for minimal compliance
  • Businesses looking for single-ownership

Private Limited Company
(Pvt. Ltd.)

1,499 + Govt. Fee
BEST SUITED FOR
  • Service-based businesses
  • Businesses looking to issue shares
  • Businesses seeking investment through equity-based funding


One Person Company
(OPC)

1,499 + Govt. Fee
BEST SUITED FOR
  • Freelancers, Small-scale businesses
  • Businesses looking for minimal compliance
  • Businesses looking for single-ownership

Private Limited Company
(Pvt. Ltd.)

1,499 + Govt. Fee
BEST SUITED FOR
  • Service-based businesses
  • Businesses looking to issue shares
  • Businesses seeking investment through equity-based funding


Limited Liability Partnership
(LLP)

1,499 + Govt. Fee
BEST SUITED FOR
  • Professional services 
  • Firms seeking any capital contribution from Partners
  • Firms sharing resources with limited liability 

Frequently Asked Questions

What should an LLP agreement include?

Typical clauses cover the registered office, business nature, rights and duties of partners, contributions and profit-sharing, voting rights, process for adding or removing partners, transfers, and dispute resolution mechanisms.

Who can become a partner, and what are the rules around it?

  • A minimum of two partners is required. If the number drops below two for over six months, the remaining partner can be held personally liable.
  • Partners can be individuals or corporations. Foreign partners must adhere to FDI norms and make contributions through approved banking channels at fair market value.
  • What are the compliance obligations for LLPs?

    Every LLP must file:

    • Form 8 (Statement of Account & Solvency), and
    • Form 11 (Annual Return)
      within 60 days from the end of the financial year (by May 30th for FY ending March 31).

    How is an LLP taxed?

    LLPs are taxed at a flat rate of 30% (plus surcharge and cess). They are exempt from dividend distribution tax, and partners are taxed individually when profits are distributed.

    Can existing businesses convert to an LLP?

    Yes, existing structures like private companies or partnership firms can convert to an LLP by following specific processes laid out in the LLP Act.

    Swagatika Mohapatra

    Swagatika Mohapatra is a storyteller & content strategist. She currently leads content and community at Razorpay Rize, a founder-first initiative that supports early-stage & growth-stage startups in India across tech, D2C, and global export categories.

    Over the last 4+ years, she’s built a stronghold in content strategy, UX writing, and startup storytelling. At Rize, she’s the mind behind everything from founder playbooks and company registration explainers to deep-dive blogs on brand-building, metrics, and product-market fit.

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    Small Company Definition in India - Razorpay Rize

    Small Company Definition in India - Razorpay Rize

    The Ministry of Corporate Affairs (MCA) has revised the definition of a "Small Company" in India through the Companies (Specification of Definitions Details) Amendment Rules, 2022, effective from 15 September 2022. This amendment aims to reduce compliance burdens for small companies and support their growth in India's economic landscape. The updated criteria focus on the paid-up capital and turnover limits, making it easier for businesses to qualify as small companies under the Companies Act 2013.

    Small companies play a vital role in India's economy, generating profits and creating employment opportunities. The revised small company definition is expected to benefit a larger number of businesses, fostering entrepreneurship and innovation across various sectors. By understanding the new criteria and the benefits offered to small companies, entrepreneurs can make informed decisions while setting up or managing their ventures.

    Table of Contents

    What are Small Companies?

    Small companies, as defined by the Companies Act 2013, are private limited businesses with lower annual revenue compared to regular-sized companies. They follow the same registration process as private limited companies but have distinct financial criteria. To be classified as a small company as per the Companies Act, a business must meet the revised thresholds for paid-up capital and turnover.

    The significance of small companies in India's economy cannot be overstated. They contribute to profit generation and job creation, making them essential drivers of economic growth. By providing goods and services to local communities and niche markets, small companies help foster inclusive development across the country.

    The New Definition of Small Company

    A small company is now defined as a non-public entity as per the Companies (Specification of Definition details) Amendment Rules, 2022, effective from 15 September 2022, if it meets the following conditions:

    • Small company paid-up capital should not exceed ₹4 Crores, or such higher amount specified, which should not exceed ₹10 Crores.
    • Small company turnover limit should not exceed ₹40 Crores, or such higher amount specified, which should not exceed ₹100 Crores.

    It is important to note that certain companies are excluded from being classified as small companies, even if they meet the above criteria. These include:

    • Public companies
    • Holding companies
    • Subsidiary companies
    • Companies registered under Section 8 (non-profit companies)
    • Companies governed by any special act

    The 2022 amendment significantly broadened the scope for small companies, enhancing their eligibility for benefits and simplifying compliance requirements, thus fostering growth in the small business sector in India.

    Earlier Definition of Small Companies 2021

    Prior to the 2022 amendment, the definition of small companies underwent changes in 2021. The thresholds for paid-up capital and turnover were revised as follows:

    Criteria Threshold
    Paid-up capital Maximum: ₹2 crores
    Turnover Maximum: ₹20 crores

    Comparing Small Company New Definition with Old Definitions

    The Companies (Specification of Definition details) Amendment Rules, 2022, have further expanded the scope of small companies by increasing the limits for paid-up share capital and turnover. Here's a comparison of the key changes between the old and new definitions:

    H3 - Criteria H3 - Old Definition (before 2021) H3 - Old Definition (2021) H3 - New Definition (2022)
    Paid-up share capital Maximum: ₹50 lakhs Maximum: ₹2 crores Maximum: ₹4 crores
    Turnover Maximum: ₹2 crores Maximum: ₹20 crores Maximum: ₹40 crores

    The increased thresholds allow more firms to be classified as small companies and avail of the benefits provided under the Companies Act 2013. This expansion is expected to reduce compliance burdens and facilitate ease of doing business for a larger number of small businesses in India.

    Benefits of Revised Small Company Definition

    Exemption from Preparing Cash Flow Statements

    Small companies are not required to include cash flow statements in their financial reports, simplifying their accounting processes.

    Simplified Annual Filings

    They can prepare and file an abridged annual return, reducing administrative workload.

    Fewer Board Meeting Requirements: 

    Small companies are mandated to hold only two board meetings per year instead of four, which lessens operational demands.

    Impact on Audit Processes

    1. Auditors are not required to report on the adequacy of internal financial controls.
    2. There is no compulsory rotation of auditors, which can reduce costs and administrative burdens.

    Compliance Ease 

    A director can sign annual returns in the absence of a company secretary, further streamlining operations.

    Reduced Penalties for Non-Compliance: 

    This encourages small companies to focus on growth rather than worrying excessively about penalties.

    These exemptions and relaxations aim to ease the compliance burden on small companies, allowing them to focus on their core business activities and growth strategies.

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    Characteristics of a Small Company in India

    Small companies in India have distinct characteristics that set them apart from larger enterprises. Some of the key traits include:

    Ownership Structure 

    Typically, small companies are privately owned entities, often structured as private limited companies, partnerships, or sole proprietorships. This ownership model allows for greater control and flexibility in decision-making but limits access to larger capital investments.

    Simplified Compliance 

    One of the key advantages of being classified as a small company is the reduced compliance burden. They benefit from exemptions, such as not needing to prepare cash flow statements, simplified annual filings, and fewer requirements for board meetings—only two are mandated per year. These measures significantly alleviate administrative pressures, allowing owners to focus on core business activities.

    Auditing Requirements 

    Small companies face less stringent auditing requirements. For instance, they are not obligated to rotate auditors or report on the adequacy of internal financial controls, which reduces costs and simplifies financial oversight.

    Limited Resources and Workforce

    Small companies generally operate with limited resources and a smaller workforce. They often employ fewer staff members, sometimes relying on a single individual or a small team to manage operations. This can lead to agility in decision-making but may also pose challenges in scaling operations or managing increased demand.

    Restricted Market Reach

    The market reach of small companies is typically confined to local or regional areas. They often serve niche markets or specific community needs, such as convenience stores in rural areas. This limitation can hinder growth opportunities compared to larger firms with broader market access.

    How to Register a Small Company as per the Companies Act 2013?

    To register a business online as a small company under the Companies Act 2013, follow these steps:

    1. Obtain Digital Signature Certificates (DSCs) for all proposed directors and subscribers
    2. Reserve the company name by submitting Part-A of the SPICe+ form
    3. File Part-B of the SPICe+ form along with required documents (Memorandum of Association (MOA), Articles of Association (AOA), Professional Declaration, Affidavits, Identity and Address Proofs, and Correspondence Address)
    4. Pay prescribed fees and stamp duty for the SPICe+ form, MOA, and AOA
    5. Obtain the Certificate of Incorporation from the Registrar of Companies (ROC) upon successful review of submitted documents

    Matters to be included in the Board's Report for small companies:

    • The web address for the Annual Return (if available)
    • Number of Board meetings held during the year
    • Directors' Responsibility Statement as per Section 134(5)
    • Details of any frauds reported by the auditor under Section 143(12), except those reportable to the Central Government
    • Explanations or comments on any qualifications, reservations, or adverse remarks in the auditor's report
    • Summary of the company's current affairs and business overview
    • Financial summary or highlights
    • Material changes in the nature of the business after the financial year-end and their impact on the company's financial position
    • Changes in directorship during the year
    • Significant legal or regulatory orders affecting the company's going concern status or future operations

    Synopsis of MCA Notification on Companies (Specification of Definition details) Amendment Rules 2022

    The MCA has issued the Companies (Specification of Definition details) Amendment Rules, 2022, effective from 15 September 2022. The key amendments include:

    1. Rule 2 has been amended by substituting a new clause 2(1)(t), which specifies the revised definition of small companies.
    2. The thresholds for paid-up capital and turnover have been increased in the definition of a small company under the Companies Act 2013.

    These amendments aim to provide relief to a larger number of businesses by classifying them as small companies and offering them various benefits and exemptions under the Companies Act 2013.

    Frequently Asked Questions

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    Register your business
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    Register your Business starting at just 1,499 + Govt. Fee

    Register your business
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    Register your Limited Liability Partnership in just 1,499 + Govt. Fee

    Register your business

    Private Limited Company
    (Pvt. Ltd.)

    1,499 + Govt. Fee
    BEST SUITED FOR
    • Service-based businesses
    • Businesses looking to issue shares
    • Businesses seeking investment through equity-based funding


    Limited Liability Partnership
    (LLP)

    1,499 + Govt. Fee
    BEST SUITED FOR
    • Professional services 
    • Firms seeking any capital contribution from Partners
    • Firms sharing resources with limited liability 

    One Person Company
    (OPC)

    1,499 + Govt. Fee
    BEST SUITED FOR
    • Freelancers, Small-scale businesses
    • Businesses looking for minimal compliance
    • Businesses looking for single-ownership

    Private Limited Company
    (Pvt. Ltd.)

    1,499 + Govt. Fee
    BEST SUITED FOR
    • Service-based businesses
    • Businesses looking to issue shares
    • Businesses seeking investment through equity-based funding


    One Person Company
    (OPC)

    1,499 + Govt. Fee
    BEST SUITED FOR
    • Freelancers, Small-scale businesses
    • Businesses looking for minimal compliance
    • Businesses looking for single-ownership

    Private Limited Company
    (Pvt. Ltd.)

    1,499 + Govt. Fee
    BEST SUITED FOR
    • Service-based businesses
    • Businesses looking to issue shares
    • Businesses seeking investment through equity-based funding


    Limited Liability Partnership
    (LLP)

    1,499 + Govt. Fee
    BEST SUITED FOR
    • Professional services 
    • Firms seeking any capital contribution from Partners
    • Firms sharing resources with limited liability 

    Frequently Asked Questions

    What is a small company as per the Companies Act, 2013?

    A small company, as per the Companies Act, 2013, is a private limited company that meets the revised criteria for paid-up capital (not exceeding ₹4 crores) and turnover (not exceeding ₹40 crores) as specified in the Companies (Specification of Definition details) Amendment Rules, 2022.

    What is a small company's limit?

    The small company limit, as per the latest amendment, is a paid-up capital not exceeding ₹4 crores and a turnover not exceeding ₹40 crores.

    What are the small companies in India?

    Small companies in India are private limited businesses that meet the revised criteria for paid-up capital and turnover as specified in the Companies Act 2013. They play a crucial role in the country's economic growth by generating profits, creating jobs, and fostering entrepreneurship.

    What is the definition of a small company, as per SEBI?

    The Securities and Exchange Board of India (SEBI) defines a small company based on market capitalisation. Specifically, a small-cap company has a market capitalisation below ₹5,000 crores. This classification is distinct from the definition of a small company under the Companies Act 2013, which focuses on paid-up capital and turnover thresholds.

    What is the size of a small-cap company?

    As per SEBI's definition, a small-cap company has a market capitalisation below ₹5,000 crores. This classification is based on the company's market value and is different from the definition of a small company under the Companies Act 2013.

    Partnership Firm Tax Rate and Tax Return Filing Explained

    Partnership Firm Tax Rate and Tax Return Filing Explained

    A partnership firm is a business structure where two or more individuals come together to form a business entity. Each individual in the firm is referred to as a "partner." There are two types of partnership firms: registered and unregistered. A registered partnership firm obtains a registration certificate from the Registrar of Companies, while an unregistered firm does not have one.

    Partnership firm e-filing involves submitting tax returns electronically using the Income Tax Department portal. In this article, we will focus on taxation for partnership firms, including partnership firm tax rate, deductions, ITR filing requirements, and the e-filing process. Whether you're a new partnership firm or an established one, this article will provide you with the essential information to navigate the partnership firm tax rate landscape with ease.

    Table of Contents

    Partnership Firm Tax Rate Explained

    The income tax on partnership firms in India is levied at a flat rate of 30% on the total income earned by the firm. This rate applies irrespective of the quantum of income generated. Additionally, a surcharge of 12% is applicable if the total income exceeds ₹1 crore, effectively increasing the tax rate to 33.6%. Furthermore, a health and education cess of 4% is levied on the income tax (including surcharge, if applicable).

    It's important to note that there is no basic exemption limit for partnership firms, unlike individual taxpayers. Moreover, partnership firms are not subject to Minimum Alternate Tax (MAT), which is applicable to companies.

    Let's compare the tax rates for partnership firms with other business structures:

    • LLP Registration: Limited Liability Partnerships (LLPs) have the same base tax rate of 30% as partnership firms. However, the surcharge for LLPs kicks in only when the total income exceeds ₹1 crore, at a rate of 12%.
    • Companies: Companies have a flat base tax rate of 30% (25% for those with a turnover of up to ₹400 crore). However, companies are also subject to MAT.
    • Individuals: The peak tax rate for individuals earning over ₹15 lakhs annually is 30%, which is the same as the flat rate for partnership firms.

    Here's a simple partnership firm income tax calculation example to illustrate:

    • Total income of partnership firm: ₹10,00,000
    • Base tax rate: 30%
    • Tax amount: ₹3,00,000 (30% of ₹10,00,000)
    • Education cess: ₹36,000 (12% of ₹3,00,000)
    • Health cess: ₹12,000 (4% of ₹3,00,000)
    • Total tax payable: ₹3,48,000 (₹3,00,000 + ₹36,000 + ₹12,000)

    It's important to note that the share of profit received by partners from the firm is exempt from tax and excluded from their total income. However, partners have to pay tax on remuneration and interest income received from the firm.

    Tax Deductions Allowed for Partnership Firms

    Understanding deductions is crucial for reducing income tax liability for partnership firms. Deductions are allowed for specific firm expenses, such as:

    • Remuneration (salaries, bonuses, or commissions) paid to partners, subject to limits
    • Interest paid to partners on capital, subject to a maximum rate of 12% p.a.

    For remuneration, the allowable deduction limit is:

    Book Profit Deduction Limit
    On first ₹3,00,000 90% of book profit or ₹1,50,000 (whichever is higher)
    On balance book profit 60%

    Any remuneration or interest paid to partners in excess of these limits is not tax-deductible for the firm. It's important to note that tax deductions will not apply to payments made to partners that are not in accordance with the partnership deed or for transactions made before the partnership deed is executed.

    How to File Your Tax Return for a Partnership Firm Online?

    A partnership firm must file its income tax return using Form ITR-5 on the Income Tax Department’s e-filing portal. Here’s a step-by-step guide:

    1. Access the Income Tax Department's e-filing portal

    • Visit www.incometax.gov.in and log in using the firm’s PAN and password.

    2. Gather Required Financial Information

    • Keep financial records ready, including:
      • Profit & Loss Account
      • Balance Sheet
      • Tax computation statements
      • GST and TDS details (if applicable)

    3. Fill and Submit Form ITR-5

    • Select Form ITR-5 under the “Income Tax Return” section.
    • Enter income details, deductions, and tax payments.
    • Cross-check the information before submitting, as no attachments are required.

    4. Verify the Return

    Verification is mandatory and can be done using:

    • Digital Signature Certificate (DSC) – Class 3: Required for all partners if the firm is subject to audit.
    • Electronic Verification Code (EVC): OTP-based verification via Aadhaar, net banking, or Demat account.

    5. Audit Applicability

    • If the firm’s turnover exceeds ₹1 crore (₹50 lakh for professional firms), a tax audit is mandatory.
    • The audit report must be e-filed before submitting ITR-5, and DSC is required.

    6. Submission and Record-Keeping

    • Once submitted, download and keep the ITR-V acknowledgment for records.
    • Maintain supporting documents, including books of accounts, tax payments, and financial statements, for future reference.

    Following this process will ensure smooth filing of your itr for partnership firm.

    What are the Deadlines for Filing a Partnership Firm Tax Return?

    The income tax return filing deadlines for partnership firms in India are based on audit requirements:

    • Firms not requiring an audit must file returns by 31st July
    • Firms requiring an audit must file by 31st October
      If the partnership firm fails to file the return by the due date, the following consequences may arise:
      • A late filing fee of ₹5,000 is applicable if the return is filed after the due date but before December 31st.
      • The late filing fee increases to ₹10,000 if the return is filed after December 31st.
      • Interest under Section 234A will be levied for the delay in filing the return.
      • Penalties under Section 271F may be imposed for non-filing of the return.

    It's crucial to meet these deadlines to ensure compliance and avoid penalties. Keep in mind that deadlines may change, so it's advisable to check the official website or consult Razorpay for updates and timely filing.

    Common Errors While Filing Tax Returns & How to Avoid Them

    Some common mistakes made while filing partnership firm tax returns include:

    1. Not obtaining a Digital Signature Certificate (DSC) for e-filing
    2. Missing the filing deadline
    3. Incorrect or incomplete details of partners
    4. Mismatch in income and expenditure as per books vs. ITR
    5. Not reporting all income sources
    6. Errors in deductions and exemptions claimed
    7. Improper verification

    To avoid these errors:

    • Ensure all partners obtain a valid DSC well in advance
    • Ensure you file your return by the applicable due date to avoid penalties.
    • Maintain accurate books of accounts and reconcile with ITR figures
    • Report all income from business, investments, capital gains, etc.
    • Claim only allowable deductions and exemptions as per limits
    • Cross-check all details before submitting the return
    • Ensure that all partners participate in the verification process using DSC or EVC.

    Conclusion

    Understanding the partnership firm tax rate and the filing process is essential for every partnership firm in India. E-filing tax returns for a partnership firm ensures a quick, efficient, and hassle-free process. Understanding firm types, taxation rules, eligible deductions, and filing procedures helps in accurate reporting and compliance. By staying informed about the applicable tax rates, deductions, and deadlines, you can ensure timely compliance and avoid penalties. Remember to maintain accurate records, file your ITR for partnership firm using ITR-5, and verify the return with the participation of all partners. With this comprehensive guide, you are now equipped with the knowledge to navigate the partnership firm income tax landscape confidently.

    Frequently Asked Questions

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    Frequently Asked Questions

    How to file an income tax return for a partnership firm?

    Partnership firms must file their income tax return using Form ITR-5. The return has to be filed electronically using a Digital Signature Certificate (DSC). Detailed income and expense statements, along with partner details, have to be provided in the return.

    Can we file ITR-5 for a partnership firm?

    Yes, ITR-5 is the designated form for filing income tax returns for partnership firms. It is specifically designed to capture the income details and tax computation of firms.

    Is ITR-4 applicable for partnership firms?

    No, ITR-4 is not applicable for partnership firms. ITR-4 is meant for individuals and Hindu Undivided Families (HUFs) having income from business or profession. Partnership firms must use ITR-5 for filing their tax returns.

    Can a partnership firm file ITR-3?

    No, a partnership firm cannot file ITR-3. ITR-3 is applicable for individuals and HUFs having income from business or profession. Partnership firms must file their return using ITR-5 only.

    How much TDS is deducted on a partnership firm?

    TDS (Tax Deducted at Source) rates for partnership firms are as follows:

    1. 10% on interest paid by banks and co-operative societies
    2. 10% on rental income exceeding ₹2,40,000 per annum
    3. 2% on payments to contractors exceeding ₹30,000 (1% if the contractor is an individual or HUF)
    4. 10% on commission or brokerage exceeding ₹15,000 per annum

    Is partnership firm taxable income?

    Yes, the income of a partnership firm is taxable. The firm is taxed as a separate entity at a flat base rate of 30% plus applicable cess. The share of profit received by partners is exempt, but they have to pay tax on remuneration and interest received from the firm.

    Form 11 LLP Annual Return: Filing, Due Date, Penalties & FAQs

    Form 11 LLP Annual Return: Filing, Due Date, Penalties & FAQs

    If you’re running a Limited Liability Partnership (LLP), compliance might not be the most exciting part of your business. However, it’s essential for keeping your operations smooth and hassle-free. One key requirement is filing Form 11, an annual return that keeps the government updated about your LLP's structure and partners.

    In this blog, we’ll cover everything you need to know about Form 11 LLP, from filing procedures to penalties for non-compliance.

    Table of Contents

    What is Form 11 and How to File It? 

    Form 11 is an Annual Return of LLP. Every LLP in India must file with the Registrar of Companies (RoC) under the Limited Liability Partnership Act, 2008. It serves as a comprehensive summary of the LLP's management and structure for the financial year.

    Here’s what Form 11 LLP typically includes:

    1. General Information:
      • LLP Name.
      • LLP Identification Number (LLPIN).
      • Date of Incorporation.
    2. Partner Information:
      • Names and details of designated and other partners.
      • Changes in partnership during the financial year, such as additions, resignations, or reassignments.
    3. Contribution Details:
      • The total contribution received by the LLP from partners.
      • Contributions made by individual partners during the year.
    4. Declaration of Compliance:
      • A confirmation that the LLP has met its statutory obligations during the year.

    Steps to File Form 11

    Filing Form 11 is a straightforward process. Follow these steps to ensure compliance:

    1. Download Form 11:

    Visit the Ministry of Corporate Affairs (MCA) portal and download the latest version of Form 11.

    1. Fill in Basic Details

    Provide the LLP’s basic details, including:

    • LLPIN.
    • Date of Incorporation.
    • Business activities during the financial year.
    1. Enter Partner Information:
      • List all designated and non-designated partners.
      • Include details of any changes in partnership, such as additions or removals.
    2. Attach Supporting Documents:

    Upload any supporting documentation, including agreements or resolutions, if applicable.

    1. Certify the Form:

    Ensure the form is digitally signed by one of the designated partners using a Digital Signature Certificate (DSC).

    1. Submit on MCA Portal:

    Upload the completed form and pay the prescribed filing fee. Fees depend on the LLP’s total contribution as per the LLP Agreement.

    Due Date for Filing Annual Return (Form 11)

    The due date for filing Form 11 is May 30 every year, covering the financial year ending on March 31.

    Important Note:

    • Filing Form 11 is mandatory regardless of whether the LLP has started its business. Even dormant LLPs are required to submit their annual return.

    If you don’t file before Form 11 LLP’s due date, you can be penalised, so it's crucial to adhere to the timeline.

    Additional Fee (Penalty) for Belated Filing of Annual Return (Form 11)

    Failure to file Form 11 on or before May 30 can lead to significant financial penalties and legal complications. 

    • A penalty of LLP form 11 late fee of ₹100 per day is imposed for each day the filing is delayed.
    • The penalty has no upper limit, which means prolonged delays can result in substantial fines.

    Continued non-compliance may lead to the LLP being marked as inactive by the RoC. While the designated partners may face disqualification from holding similar roles in other companies or LLPs.

    What Are The Prerequisites?

    Before filing, ensure that you’re fulfilling certain Form 11 LLp requirements:

    1. The LLP is registered and has an active status on the MCA portal.
    2. A valid DPIN of the Partner.
    3. A Digital Signature Certificate (DSC) is available for at least one designated partner.
    4. All pending compliance forms, such as Form 3 (LLP Agreement), have been filed.

    What Are the Documents to be Submitted Along with Form 11?

    Depending on the changes or updates during the year, the following documents are required for Form 11 LLP submission:

    1. List of Partners:

    A detailed list of designated and other partners, including their roles and contributions.

    1. Contribution Proof:

    Evidence of the capital contributed by each partner during the financial year.

    1. Supporting Agreements:

    Copies of resolutions or amendments to the LLP Agreement, if applicable.

    1. Additional Documents:

    Any other documents as required by the MCA portal based on the LLP’s activities.

    {{llp-cta}}

    Important Aspects to Note While Filing Annual Return for LLP

    While LLP annual filling might seem straightforward, there are key details and considerations that can make a big difference. Overlooking these aspects could lead to errors, delays, or unnecessary penalties. To help you navigate this process smoothly, here are some important points to remember while filing your LLP’s annual return.

    1. Accuracy of Partner Details:

    Ensure the names, roles, and contributions of all partners are correctly listed, as discrepancies can lead to rejections or penalties.

    1. Difference Between Forms:

    Do not confuse Form 11 for LLP with Form 8, which deals with the financial health and solvency of the LLP. Both must be filed annually.

    1. Digital Signature Validity:

    Verify the validity of the Digital Signature Certificate (DSC) before submission to avoid technical issues.

    Certification in Annual Return (Form 11)

    Certification plays a crucial role in the filing of Form 11 (Annual Return) for an LLP. It ensures that the information provided is accurate and compliant with the statutory requirements. 

    While the form can be filed by the designated partner(s), certain conditions require additional certification by a practising professional, such as a Company Secretary.

    When is Certification Required?

    For LLPs meeting certain financial thresholds, certification of Form 11 by a professional ( Company Secretary) is mandatory:

    • If the LLP’s contribution exceeds ₹50 lakhs, or
    • If its turnover exceeds ₹5 crores,

    Frequently Asked Questions

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    Frequently Asked Questions

    What is the turnover limit for LLP Form 11?

    The turnover limit for LLP Form 11 certification is ₹5 crores. If the LLP’s turnover exceeds this threshold during the financial year, the annual return must be certified by a practising Company Secretary.

    What are the requirements for Form 11 certification?

    Form 11 LLP requires certification from a practising Company Secretary if:

    1. The total contribution by the partners exceeds ₹50 lakhs, or
    2. The LLP’s turnover is more than ₹5 crores.

    What happens if Form 11 is not submitted?

    Failure to submit before Form 11 LLP’s due date results in penalties, which include:

    • A late filing fee of ₹100 per day until the form is submitted.
    • Additional compliance risks, including potential legal action or a change in the LLP’s status to “defaulting.”

    What is Form 11 used for?

    Form 11 is the Annual Return filed by LLPs to report the following details to the Registrar of Companies (RoC):

    • Information about the LLP's partners, including designated partners.
    • Changes in the structure or details of the LLP.

    Summary of contributions made by the partners during the financial year.It ensures that the LLP remains compliant with the regulatory requirements under the LLP Act.

    What does Section 11 provide under LLP?

    Section 11 of the Limited Liability Partnership Act, 2008 outlines the procedural requirements for the incorporation of an LLP. It specifies the need to submit an incorporation document to the Registrar, along with necessary details like the name, address, and partner information of the LLP. 

    Akash Goel

    Akash Goel is an experienced Company Secretary specializing in startup compliance and advisory across India. He has worked with numerous early and growth-stage startups, supporting them through critical funding rounds involving top VCs like Matrix Partners, India Quotient, Shunwei, KStart, VH Capital, SAIF Partners, and Pravega Ventures.

    His expertise spans Secretarial compliance, IPR, FEMA, valuation, and due diligence, helping founders understand how startups operate and the complexities of legal regulations.

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