Limited Liability Partnership
Limited Liability Partnerships (LLPs) are one of the highly preferred categories of business entity in almost all economic sectors of the countries worldwide. LLPs were introduced in India through the Limited Liability Partnerships Act, 2008. The main advantage of LLP is ease of maintenance while at the same time providing limited liability to the owners. Like Private/Public Limited Companies, this form of business constitution also provides an advantage of limited liability but at the same time the control of a Partnership firm is hindered to some extent.
Therefore, LLPs are considered as unique form of entities which integrate the features of both limited companies and traditional partnership firms. Due to their hybrid structure, LLPs are suitable for small to medium-sized business or professional enterprises. The only disadvantage of LLP is in rising of capital or attracting and retaining talent by way of issuing Employee Stock Ownership Plans (ESOPs).
Compliance Requirements for an LLP
- Two or more persons associating to carry on a lawful business with a view to earn profit must subscribe their names to the incorporation document. This incorporation document is to be filed in such a manner and with such fees as may be prescribed by the registrar of the state in which the registered office is located of the LLP. Further, a statement is to be filed by an advocate, company secretary or chartered accountant or a cost accountant who is engaged in the formation of the LLP with respect to all the statutory requirements being complied with. In case of a foreign direct investment (FDI) in LLP, permission is to be taken from the RBI.
- To start the LLP formation procedure, a copy of PAN card of the partners and their address proof are required. The documents pertaining to the registered office of the LLP can be submitted after obtaining the name approval from the registrar of companies. It is to be noted that the name of every LLP shall have Limited liability partnership or LLP at the end of it and it should not be undesirable or identical to the name of a Partnership firm, LLP, body corporate or similar to a Registered Trademark .
- Every designated Partner is required to obtain a DIN from the Central Government. If a person already has a DIN, the same can be used for forming LLP. It acts as a unique identification for the designated Partner.
- All the designated Partners of the proposed LLP need to have a Digital Signature Certificate (DSC) for the purpose of signing all the forms like eForm 1, eForm 2, and eForm 3, etc., which are required for the purpose of incorporating the LLP and filed electronically through the internet. The DSC will be useful in filing various forms which are required to be filed during the course of subsistence of the LLP with the Registrar of LLP. There are certain benefits of registering LLP apart from the basic benefits like easy to form, perpetual succession, separate legal entity and limited liability.
Usually, LLPs are taxed at a lower rate as compared to a Private Limited Company. Furthermore, LLP is also not subject to Dividend Distribution Tax, so there will not be any tax while you distribute profit to your partners.
An LLP can easily attract finance from PE Investors, financial institutions, etc. Unlike a sole proprietorship or partnership, seeking funds by an LLP is not difficult at all.
An LLP has a less burden of compliance as compared to a private limited company.
The Partners of an LLP have utmost freedom in managing the affairs of their LLP. In form of LLP Agreement the Partners can decide the way they want to run and manage the LLP. The Act does not regulate the LLP to a large extent, but allows partners the liberty to manage their LLP as per their will and fancies.
One can easily become a Partner or leave the LLP or otherwise it is easier to transfer the ownership in accordance with the terms of the LLP Agreement.
An LLP having its annual turnover and contribution exceeds Rs. 40 Lakh and Rs. 25 Lakh, respectively, is required to get its account audited annually by a chartered accountant. It comes off as a great reinforcement to small businessmen.
The personal liability of an individual partner is limited under the LLP. It means that a partner cannot be held liable for the errors, omissions, incompetence, or negligence of another Partner and employees or other agents of the LLP.