Since 2000, Limited Liability Partnerships also known as LLP’s were introduced by the Partnerships Act 2000, it became quite popular among the investors as it was formulated to provide limited liability previously which was only available for companies. LLP has been a famous business form for licensed professionals. This is especially liked by accountants, solicitors, architects, consultants, surveyors, etc. and other fields of specialists where a partnership is preferred to a limited company are business entities created by state law. Limited liability partnerships provide owners with as the name suggests with limited liability.
Benefits and Advantages of a Limited Liability Partnership:
There are several advantages of LLP’S which are beneficial for entrepreneurs and they are the reason why entrepreneurs prefer LLP over .Ltd. Let’s see these advantages and how they are going to be useful for you.
The Legal Liability of Partners is limited:
The partners in the LLP’S have limited liability and equal responsibility of capital as per the agreed terms and will not be able to able to ruminate over the other partners’ liability. The amount they invest in LLP will only be considered as their liability. In legal words, if someone sues the LLP, the partners will not be indefinitely liable for that amount. Although, this limited legal liability shield will be broken if the lawsuit stems from an intentional act of the partner.
Roles of Partners are flexible:
The management roles for the partners are very flexible. The roles of a partner in LLP can be chosen by the partners themselves as the drafting of the agreement is done under their own consideration. This provides the role flexibility of the partners as under this structure, each partner has the right to manage the LLP and have the right to choose how much management that they want. Thus, partners role in LLP could be very active or silent. Thus, the duties and responsibilities can be self-chosen and as desired. No compulsion or restrictions could be done on a partner by other partners.
Ease of Formation:
The process of forming an LLP is as simple as the process for which is simple and sorted. Thus, they are relatively easy to form. Generally, the partners are required to fill out a registration form and then file it. It could be easily done and you could also opt for a consultant for smoothening the process. Opting for a consultant could eliminate the hectic of documentation and legal processes. The only thing the partners of LLP need is to provide their roles, responsibilities, financial contributions, and debts distributions according to their understanding. This is also needed to be given in writing for the registration process.
Multiple numbers of partners:
Informing of LLP, one must have at least 2 members. However, there is no practical limit on the number of members whereas in a private limited company the 200. Thus, the number of owners or partners could be far much than 200 or as much you want to have. This gives an LLP a wide scope of involvement of investors who are willing to be a partner or we could say an owner.
Low Registration Cost:
As compared to a private limited company or public limited company the registration cost for LLP is less. This is because of the simplicity of registration process and lesser law enforcements in it. This is also beneficial as it saves money and time.
Tax Exemption and No Audits:
Yes! You heard it right. Another huge advantage of LLPs is that it has a pass-through tax which helps you to avoid taxation. LLP will not be taxed as a business entity, the partners are supposed to pay only their own individual personal income taxes. So this ensures us that no dividend distribution tax is to be paid. This sounds perfect when we think about money as nobody is ever willing to get taxed twice. Also, this saves the effort of conducting a tax audit for your firm. Although, you might need to audit your LLP in the following cases:-
1) LLP contribution exceeds Rs. 25 Lakhs, or
2) If the LLP’S annual turnover exceeds Rs. 40 Lakhs
Some other advantages of LLP:
- The LLP is considered to be a legal person. LLP can buy, rent, lease, own property, employ staff, enter into contracts, if necessary it could be held responsible.
- LLP’s can appoint two companies as it’s members. In a private limited company, at least one director must be a real person.
- You can operate LLP with different levels of management.
- You can protect the partnership name as well.
Disadvantages of LLP’S:
As everything has a negative side, LLP’S to have it. Since we are willing to do something or going to start something then we should know its disadvantages too. This would give you a clarity of thought if you have decided to start LLP. Let’s just go through it.
Non-compliance penalty is high:
As we know, LLP does not have any taxation activity but still, it is mandatory for an LLP to file an income tax return and MCA annual return each year. If an LLP fails to file Form 8 or Form 11 (LLP Annual Filing), it is penalized Rs.100 per day perform. If an LLP has not filed its annual return for a few years the penalty could rise up to lakhs as there is no capping on the penalty. This is quite noted worthy and should be remembered thoroughly.
There is no requirement for filing an annual return in the case of partnership or proprietorship. Hence, the only penalty that is applicable is under Income Tax Act.
Equity or shareholding concept as like a private company does not apply in the LLP. So, in the LLPs shareholders like angel investors, HNIs, venture capital, and private equity funds cannot invest. This enforces most of the LLPs to rely on funding from promoters and debt funding.
Higher Income Tax Rate:
As stated above, the LLPs doesn’t have to pay Income tax but if your LLP comes under the 2 cases of taxation as mentioned earlier then the tax rate will be higher than the private limited company or public limited company. For eg. Consider an LLP and Private limited company with similar turnover, then if the private limited company is paying 30% tax then LLP might have to pay 36% tax for the same.
Some other disadvantages and problems associated with the LLP:
- Public disclosure is the first and most annoying problem of LLP. Financial accounts of the partners have to be submitted to Companies House for the public record. The accounts may declare income of their partner which he/she might want not to be disclosed.
- All the earned profit is effectively distributed with no flexibility to hold over profit to a future tax year.
- An LLP is fragile to maintain. Consider an LLP with 2 partners and if one member chooses to leave the partnership the LLP may have to be dissolved.
- Residential addresses of partners were used as company address for the registration process in most of the cases. Whilst the use of ‘service addresses’ now allows for home addresses to be kept out of public view. This addressed issue was a big problem for professionals who had to deal with sensitive cases, for e.g. a solicitor who has an LLP and used his residential address for registration.
As we have gone through the positives and negatives of the LLP. This would have given you a proper idea of LLP and it’s formation. If you are going to start one of it, consider the facts and information given above before doing it. Although LLP has some disadvantages it is really advantageous in much of the cases. Especially, if your company is a small or medium scale.
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