If you’re considering starting a business, one of the decisions you’ll need to make is the type of business structure that will best suit your needs. One option to consider is the Limited Liability Partnership, or LLP.
In this article, we’ll discuss all about LLP.
What is LLP(Limited Liability Partnership)?
LLP or Limited liability partnership is a type of business that allows the partners to administer their internal management on the basis of a mutually arrived agreement just as in the case of a partnership firm. But in an LLP no partner is liable on account of the independent or unauthorized actions of other partners, thus protecting the personal assets of individual partners.
A minimum of two partners are required to form an LLP whereas there is no maximum limit for the number of partners.
The concept of LLP was introduced in 2008 through the Limited Liability Partnership(LLP) Act.
|• LLP is an alternative corporate business form that gives the benefits of the limited liability of a company and the flexibility of a partnership.|
In the eyes of the law, LLP is treated as a separate legal entity. It is a hybrid between a company and a partnership firm as it incorporates properties of both structures.
All partners of limited liability partnerships share the profits of business just as partners of regular firms. They are, however, free to decide the ratio in which they will share profits.
Features of LLP
A Limited Liability Partnership (LLP) is a type of business structure that combines the flexibility of a partnership with the limited liability protection of a corporation. Here are some of the key features of LLPs:
- Limited Liability Protection: One of the primary advantages of an LLP is that it provides limited liability protection to its partners. This means that the personal assets of the partners are protected from any business debts or legal liabilities incurred by the LLP.
- Separate Legal Entity: An LLP is considered a separate legal entity from its partners, which means that it can enter into contracts, sue and be sued in its own name.
- Flexibility: LLPs offer a great deal of flexibility in terms of management and ownership. Partners can participate in the management of the business, or they can appoint a designated partner to handle day-to-day operations.
- Taxation: LLPs are taxed like partnerships, which means that the business itself does not pay income tax. Instead, the profits and losses of the LLP are allocated to the partners, who then report them on their personal tax returns.
- Perpetual Succession: Unlike a partnership, an LLP has perpetual succession, which means that it can continue to exist even if one or more partners leave or pass away.
- Minimal Compliance Requirements: LLPs have fewer compliance requirements than corporations, making them a popular choice for small businesses and professional services firms.
A partnership is a relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.
The Partnership is governed by the Partnership Act of 1932.
All partners enter into a partnership deed which is the charter document of a partnership firm.
Every partner is liable, jointly with all the other partners for all acts of the firm while he is a partner. The maximum number of partners in a partnership firm is limited to 100 partners.
And the profits incurred will be shared between the partners in an agreed ratio.
What is Liability?
In simpler terms, Liability is something a company or an individual owes, usually a sum of money.
If you’ve promised to pay someone a sum of money in the future and haven’t paid them yet, that’s a liability.
Basically, an unsettled debt.
Let’s consider this example:
Case 1: Meet Rahul and Vikram
They have partnered together to run a coffee shop. But they are unable to pay their loan due to a few bad months. This means both Rahul and Vikram are liable to pay off the loan not only from assets of the partnership business but from their personal assets as well in cases required.
This is a General Partnership.
Case 2: Meet Rahul and Vikram
They have partnered together to run a coffee shop. But they are unable to pay their loan due to a few bad months. This means both Rahul and Vikram are not liable to pay off the loan from their personal assets. Their liability is limited to their contribution to the LLP.
This is a Limited Liability Partnership(LLP)
Difference between LLP & General Partnership
|Partner’s liability||Limited to the extent of their capital contribution to the LLP.||Partners are completely liable for the firm|
|Authority||All partners present in the team have sole authority||The authority is distributed between the partners as per the partnership deed|
|Audit of accounts||LLPs need to get accounts audited and file the annual return with Income tax and Registrar of companies both||All partnership firms must get their accounts audited as per the provisions of the Income Tax Act.|
|Annual Filing||The LLP files its annual statement of accounts and solvency and annual return with the Registrar of Companies every year.||A partnership firm need not file any annual returns with the Registrar of Firms.|
|Ownership of Assets||The LLP has the ownership of assets that are independent of the partners. No partner owns the assets of the LLP.||Partnership firms can own the assets. However, on dissolution, it will be distributed in the ratio of capital as per the partnership deed|
|Dissolution||An LLP can be dissolved voluntarily or by order of the National Company Law Tribunal (NCLT)||A partnership firm can be dissolved by an agreement between partners, court order, mutual consent of partners, insolvency of partners, etc|
|Perpetual succession||An LLP is not affected when a partner joins or leaves||A partnership firm depends upon the will of its partners|
Advantages of LLP
- Less compliance and low cost
The cost of forming an LLP is lesser in comparison to other business structures. Compliance to be followed by LLP is also low. Annual Returns and a Statement of Accounts and Solvency are the only two statements that the LLP needs to file annually.
- Limited liability of partners
The liability of the partners is limited to the contributions made by them. This means are not personally liable for any loss in the business and are liable to pay the number of contributions made by them. Only the LLP assets are liable for paying off its debts if the LLP decides on winding up.
- No minimum capital contribution is required
The LLP can be formed without any requirement of a minimum capital contribution by partners.
- Separate Legal entity
Limited liability partnerships are treated as separate legal entities. This means that LLPs can own assets and incur liabilities in their own names. They can also enter into contracts and sue and be sued in their own names.
Disadvantages of LLP
- No Equity Investment
The concept of equity or shareholding like a company is not present in an LLP. Hence, angel investors, venture capital and private equity funds cannot invest in an LLP as shareholders. Hence most LLPs would have to rely on funding from promoters and debt funding.
- High-Income Tax Rate
The income tax rate for a company with a turnover of up to Rs.250 crores is 25%. However, LLPs are taxed at a 30% rate irrespective of the turnover.
- Penalty for non-compliance
Even if an LLP is dormant, it is required to file an income tax return and MCA annual return each year. In case an LLP fails to file Form 8 or Form 11( LLP annual filing), a penalty of Rs.100 per day, per form is applicable.
Process of Registration of Limited Liability Partnership (LLP)
The process for registration of an LLP is as follows:
- Obtain Digital Signature Certificate (DSC)
To register an LLP the first step is that the Designated Partners will apply for Digital signature as all the documents are filed online and are required to be signed digitally.
- Apply for Director Identification Number (DIN)
The next step is to obtain the Director Identification number of all the directors in the LLP.
- Name Approval
Two proposed names for LLP can be filed after login to the MCA official website for name approval of the LLP. This will be processed by Central Registration Certificate.
- Incorporation of LLP
For the Incorporation of LLP following documents shall be annexed:
- PAN card and AAdhar card of partners and designated partners
- Proof of registered office: The rent agreement/Sale deed can be attached
- Electricity/Telephone bill
- NOC of the owner if the premises are rental
- Details of LLP
- File LLP Agreement
Documents Required for LLP Registration In India
To register an LLP in India, the following documents are typically required:
- Identity Proof of Partners:
- PAN Card (Permanent Account Number)
- Passport (in case of foreign nationals)
- Aadhaar Card or Voter ID Card
- Address Proof of Partners:
- Driving License
- Aadhaar Card
- Voter ID Card
- Bank Statements or Utility Bills (not older than 2 months)
- Registered Office Proof:
- Rental Agreement or Lease Deed (in case the office is rented)
- Sale Deed or Property Deed (in case the office is owned)
- No Objection Certificate (NOC) from the property owner
- Utility Bill (not older than 2 months)
- LLP Agreement:
- LLP Agreement signed by all partners, including details of their contributions, profit sharing ratio, rights, and obligations.
- Designated Partner Identification Number (DPIN):
- DPIN for all partners. DPIN can be obtained by applying to the Ministry of Corporate Affairs (MCA).
- Digital Signature Certificate (DSC):
- DSC for all partners. DSC is required for online filing and signing of documents.
LLP and partnership have similar business structures but differ in their method of dissolution, individual liability on partners, perpetual succession etc. Knowing the above-mentioned differences is essential, especially as a founder. This will help you choose a business type mindfully.
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Frequently Asked Questions
What is LLP(Limited Liability Partnership)?
LLP is an alternative corporate business form that gives the benefits of the limited liability of a company and the flexibility of a partnership.
What is a General partnership?
A general partnership is a business arrangement by which two or more individuals agree to share in all assets, profits, and financial and legal liabilities of a jointly-owned business.