LLP Registration Fees: How much does an LLP cost in India?

What is a Limited Liability Partnership?

A Limited Liability Partnership (LLP) is a hybrid business structure that incorporates elements of both partnerships and corporations. It is a separate legal entity, distinct from its partners, and offers limited liability protection to its members. In an LLP, the partners are shielded from personal liability for the debts and obligations of the partnership, provided they have not engaged in any wrongful or negligent acts.

In India, LLPs are governed by the Limited Liability Partnership Act, 2008. This act provides a comprehensive framework for the formation, operation, and dissolution of LLPs, ensuring transparency and ease of doing business.

Features of LLP

Before diving into the advantages and disadvantages of an LLP, let's explore its key features:

1. Separate Legal Entity: An LLP is a distinct legal entity, separate from its partners. It can enter into contracts, own assets, and sue or be sued in its own name.
   
2. Limited Liability: The liability of partners in an LLP is limited to their agreed contribution to the partnership. Personal assets of the partners are protected, unlike in a general partnership where partners have unlimited liability.
   
3. Perpetual Succession: The existence of an LLP is not affected by the entry or exit of partners. It has perpetual succession, meaning it can continue to operate even if the partners change over time.
   
4. Flexibility in Management: The rights and duties of partners in an LLP are governed by the LLP agreement. This allows for flexibility in management structure and decision-making processes.
   
5. Minimal Compliance Requirements: LLPs have fewer compliance requirements compared to companies. Small LLPs are not subject to mandatory audits, reducing the administrative burden.
   
6. Ease of Ownership Transfer: Ownership in an LLP can be easily transferred through the amendment of the LLP agreement, without the need for extensive legal formalities.
   

LLP Advantages

Now, let's explore the key LLP benefits that make this structure an attractive choice for businesses:

No Requirement of Minimum Contribution

One of the significant advantages of Limited Liability Partnership is that there is no mandatory minimum capital contribution required from partners. This makes it an ideal option for startups and small businesses that may have limited funds to invest initially. Partners can decide on their capital contributions based on their mutual agreement and business requirements.

No Limit on Owners of the Business

Unlike private limited companies, which have a cap on the number of shareholders, an LLP allows for an unlimited number of partners. This flexibility is particularly beneficial for businesses looking to scale or bring in multiple partners with diverse expertise. The absence of ownership restrictions enables LLPs to accommodate growth and expansion plans effectively.

Lower Registration Cost

Compared to incorporating a private limited company, LLP registration is more cost-effective. The registration process involves fewer formalities and documentation, resulting in lower professional fees and statutory charges. This cost advantage is especially valuable for startups and small businesses operating on tight budgets.

No Requirement of Compulsory Audit

Small LLPs, with a turnover below a specified threshold or contribution below a certain limit, are exempt from mandatory audits. This exemption reduces the compliance burden and saves on audit-related expenses. However, LLPs can still choose to conduct voluntary audits to maintain financial transparency and integrity.

Taxation Aspect on LLP

LLPs enjoy several tax benefits that make them an attractive choice from a taxation perspective. Unlike companies, LLPs are not subject to Dividend Distribution Tax (DDT) when distributing profits to partners. This exemption eliminates the double taxation of profits, making LLPs more tax-efficient.

Furthermore, LLPs are taxed at a lower rate compared to corporations. The income of an LLP is taxed at a flat rate of 30%, along with applicable surcharges and cess. This lower tax burden can result in significant savings for the business.

Dividend Distribution Tax (DDT) Not Applicable

As mentioned earlier, one of the significant LLP benefits is the exemption from Dividend Distribution Tax (DDT). In contrast, companies are required to pay DDT when distributing profits to shareholders. The absence of DDT in LLPs allows for more efficient profit distribution and enhances the overall financial attractiveness of the structure.

LLP Disadvantages

While LLPs offer numerous advantages, it's essential to consider the potential drawbacks as well. Let's explore the key disadvantages of an LLP:

Penalty for Non-Compliance

LLPs are required to comply with annual filing requirements, even if there is no business activity. Failure to file the necessary forms, such as Form 8 or Form 11, results in a daily penalty of Rs.100 per form, with no upper limit. This penalty can accumulate significantly over time, leading to substantial financial liabilities.

In contrast, proprietorships and partnership firms do not face such strict filing requirements and penalties for non-compliance. It is crucial for LLPs to maintain timely compliance to avoid incurring hefty penalties.

Inability to Have Equity Investment

Unlike private limited companies, LLPs cannot raise equity investment by issuing shares. This limitation can be a significant drawback for businesses seeking external funding to fuel growth and expansion. Venture capitalists and investors typically prefer equity-based investment models, which are not available in the LLP structure.

The inability to have equity investment can restrict the growth potential of LLPs, especially those requiring substantial capital infusion. LLPs may have to rely on alternative funding sources, such as loans or partner contributions, which may not always be sufficient or readily available.

Higher Income Tax Rate

While LLPs enjoy a lower tax rate compared to corporations, it is still higher than the tax rates applicable to certain private limited companies. LLPs are taxed at a flat rate of 30% on their profits, along with applicable surcharges and cess. This higher tax rate can be a disadvantage for businesses looking to minimise their tax liability.

Moreover, LLPs are not eligible for certain tax benefits available to startups and small businesses. For instance, startups registered as private limited companies can avail of tax exemptions and incentives under various government schemes. LLPs, however, do not qualify for such benefits, which can impact their overall tax efficiency.

Conclusion

The Limited Liability Partnership (LLP) structure offers a unique blend of LLP benefits, combining the limited liability protection of a company with the flexibility of a partnership. It provides entrepreneurs and professionals with an attractive option to structure their business, especially for startups, small businesses, and professional services firms.

However, it is crucial to weigh the advantages and disadvantages of an LLP carefully before making a decision. While LLPs offer lower registration costs, exemption from mandatory audits, and tax advantages, they also come with potential drawbacks such as penalties for non-compliance, inability to have equity investment, and higher income tax rates compared to certain private limited companies.

Ultimately, the suitability of an LLP depends on the specific needs, goals, and nature of your business. It is advisable to consult with legal and financial experts to assess whether an LLP aligns with your business objectives and to ensure compliance with the relevant regulations.

By understanding the advantages and disadvantages of an LLP, you can make an informed decision and structure your business in a way that maximizes its potential for growth and success.

Frequently Asked Questions

Eligibility

• New and existing Micro and Small Enterprises engaged in manufacturing, service, or retail activity, excluding Educational Institutions, Agriculture, Self Help Groups (SHGs), Training Institutions, etc.
• All service sector enterprises under the MSMED Act are eligible for coverage.
• Must be a “First-generation” entrepreneur.

Application procedure for Startups

• Go to https://www.cgtmse.in/Home.
• The homepage will open.
• Click on the “Register” option seen on the homepage.
• Enter your details and click on “Get OTP.”
• After typing in the OTP, the registration will be completed.
• “Login” to the page again. You will have to fill in the required information such as GST details, Bank Account details, and ITR.
• Click on “Submit” to avail the benefits under this scheme.
• Download the financial report, calculate the guarantee, etc, if needed.

Benefits of the Scheme

• The guarantee cover available under the scheme is to the extent of 75 percent of the sanctioned amount of the credit facility.
• Credit or loans in the northeast region, UT of J&K, and UT of Ladakh for credit facilities up to Rs 50 lakh, are covered by an 80 percent guarantee.
• For micro and small businesses operated or owned by women, as well as SC/ST individuals, the guarantee cover stands at 85%.
• For up to 5 lakh micro-enterprise loans, the guarantee cover stands at 85%.
• The credit is without any collateral or third-party guarantees.

The guarantee will commence from the e-date of payment of the guarantee fee. It will run for the agreed term credit tenure in the event of term loans / composite loans and for a period of 5 years in the case of working capital facilities only granted to borrowers or for such period as the Guarantee Trust may specify in this regard.

Frequently Asked Questions

Format of a Partnership Deed

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The format of a partnership deed may vary based on the specific requirements of the partners and the nature of the business. However, a typical partnership deed includes the following essential elements:

• Name of the Partnership:
  The official business name under which the partnership operates is stated, along with the physical address where the primary business activities occur. This section also highlights the duration of the partnership firm alongside the date of the commencement.
• Details of the Partners:
  This section includes the full name, address, and relevant particulars of the Individuals participating in the Partnership.
• Purpose:
  Here, the nature and scope of the business activities conducted by the partnership is clearly stated. The firm shall have the power to fulfill the objectives of thecompany and conduct any such lawful business activities.
• Capital Contribution:
  The total capital of the firm and the individual share contributed by each partner are to be mentioned here. The contribution can be in cash, goods, or property on agreed values.
• Profit and Loss Sharing:
  ‍It clearly articulates the agreed-upon ratio or percentage in which profits and losses will be distributed among the partners.
• Financial Decisions:
  It includes information such as the partners' salary and commission, permissive drawings from the firm for each partner, the interest payable to the firm on these drawings, partnership loans, and other relevant details.
• Admission and Retirement of Partners:
  ‍This part outlines the criteria and process for admitting new partners into the business. Similarly, it details the procedures for the retirement or withdrawal of existing partners.
• Dispute Resolution:
  Procedures for resolving disputes among partners are established. This may include mechanisms for mediation or arbitration to address conflicts and maintain a harmonious partnership.
• Dissolution:
  It states the conditions and procedures for the dissolution of the partnership which highlights the distribution of assets, settlement of liabilities, and the overall process of winding up the business.
• Witnesses and Signatures:
  The partnership deed is formally executed with the signatures of all partners, and done in the presence of witnesses.

How to draft a Partnership Deed?

A partnership deed can be a verbal or written agreement outlining the rights, responsibilities, profit-sharing, and other obligations of the partners.

While it can be recorded verbally, it is highly advisable to formalize a written partnership deed with the Registrar of Firms as it aids in resolving potential disputes. It also proves beneficial for tax purposes and ensures the formal registration of the partnership firm.

• The Partnership Deed, formulated by the partners, must be executed on stamp paper with a minimum value of Rs. 200, as per the Indian Stamp Act.
• Each partner should retain a copy of the partnership deed for future reference.
• Once stamped, the Partnership deed is attached with the application to the Registrar of Firms for formal registration and legal validation.

As per the Partnership Act, Registration of Partnership Firms is optional, but if you still choose to register your firm-

The application should be accompanied by essential documents, including a duly filled affidavit, a certified true copy of the Partnership Deed, and proof of ownership or a rental/lease agreement for the main business location.

Validity of the Partnership Deed

The validity of the firm is mentioned in the deed, whether it's for a limited period, for a specific project or for an unlimited period.

Note: A partnership deed that has been notarized alone does not hold legal validity in the event of legal disputes. However, if the partnership firm is formally registered with RoF, the partnership deed will be recognized as having legal standing.

Fees for the Partnership Deed in India

The Partnership Deed must be executed on a stamp paper with a minimum value of Rs. 200, as per the Indian Stamp Act.

However, Partnership registration fees vary among states due to different compliance requirements and stamp duty rates. The cost for registering a Partnership Firm ranges from Rs. 500 to Rs. 3000.

Note: Stamp duty is calculated based on partner contributions and follows state-specific regulations.

Alterations in the Partnership Deed

Partners have the flexibility to modify, alter, or change the partnership deed through mutual agreement. All partners are required to sign the amended deed.

Subsequently, the modified partnership deed should be registered at the Sub-Registrar's office, where the original deed was registered. Additionally, it is necessary to submit the modified deed to the Registrar of Firms for record-keeping purposes.

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