Benefits of incorporating Limited Liability Partnership in India
Before starting any new business, the first question which comes to mind of any person is “whether to form a private limited company or an LLP or partnership firm?”. Well, there cannot be any stereo-typed answer to this question and the answer to this question will vary depending upon the objects and the scale of operations to be carried out by the businessman. This article is written for those who are desirous of creating a distinct brand image with limited capital at their disposal. So, friends if you are boasting to starting a new business venture with limited resources, this article will be certainly helpful to serve your purpose.
In this article, we have made an attempt to cover the intricacies of an LLP which will certainly be helpful for you to decide the mode of running your business. The very first question in your mind would be “What is an LLP?”. So, we will start with answering this question first and then move ahead to answer your other questions.
What is a Limited Liability Partnership?
An LLP is an alternative form of business organization that is becoming immensely popular amongst the business community these days. An LLP gives the benefits of a private limited company (such as limited liability and separate legal entity) along with flexibility offered by a traditional partnership firm with an advantage of limited compliance costs.
In a traditional partnership firm, the liability of its partners is unlimited but in the case of an LLP, the liability of its partners is limited to the extent of capital contribution like a private limited company. Therefore, partners are not responsible for one another’s misconduct or negligence.
Which law governs an LLP?
An LLP is governed by the provisions of the Limited Liability Partnership Act, 2008 along with the Limited Liability Partnership Rules, 2009.
What is the minimum number of partners in an LLP?
Only two members (partners) are required to incorporate an LLP. However, there is no upper limit of members in an LLP.
Who can become a partner in LLP?
The following can become a partner in LLP:
- An individual (India/ Foreign National) or
- A Body Corporate (i.e. a Company or an LLP incorporated in India or outside India)
To mention especially, a HUF cannot become a partner in an LLP. Further, if an individual is found to be of unsound mind by a court or is an undischarged insolvent/ has applied to be adjudicated as an insolvent and his application is pending; then such an individual shall not be capable of becoming a partner in an LLP.
Who can become Designated Partner in an LLP?
According to LLP Act 2008, there should be at least two Designated Partners who shall be individuals and at least one of them should be a resident in India. Designated Partners are like directors. Designated Partners are the partners who are responsible for making timely compliances in respect of LLP as per the provisions of the LLP Act. In case of any non-compliances or defaults, the Designated Partners are held liable for penalties.
- Only a natural person can become a ‘Designated Partner’. In case a Body Corporate is a partner in an LLP and wants to become a ‘Designated Partner’, it shall nominate an individual who shall act as ‘Designated Partner’ on behalf of such Body Corporate.
- Minimum 2 Designated Partners are required in an LLP. In case of death/ retirement of a Designated Partner, if the number of Designated Partners goes below two, the LLP shall have to appoint another Designated Partner within 6 months otherwise the LLP shall not be allowed to file any form in respect of the LLP on the MCA portal.
- At least one of the Designated partners should be a resident in India. An individual is treated as ‘Resident’ of India if his period of stay in India is not less than 182 days during the immediately preceding one year.
What are the minimum requirements to form LLP in India?
The minimum requirements to form an LLP in India are as follows:
- Minimum two partners (Partners may be an individual or a body corporate)
- Minimum two designated partners who are individuals and at least one of them should be a resident in India.
- Proposed name of the LLP
- Digital Signature Certificate (DSC) of designated partners
- LLP Agreement
- Place of business of LLP (Registered Office)- Rent Deed/ NOC/ Ownership documents including electricity bill of the place of business
- Objects or Proposed business activities of LLP
What is an LLP Agreement?
An LLP agreement is like a partnership deed in a traditional partnership firm. The LLP agreement is a legal document that defines the terms and conditions of the partnership between the partners in the LLP. The LLP agreement contains various clauses like the name of the LLP, place of business, objects of the LLP, profit sharing ratio between partners, manner of distribution of interest on capital & remuneration between partners, arbitration clause, etc. Further, the LLP agreement also states the mutual rights and duties of partners among themselves and in relation to the LLP.
Which type of business should choose LLP?
LLP is suitable for a small or mid-size business organization. Specially, we have seen a lot of professional firms or service-based enterprises incorporating LLPs for running their businesses. But it is not the case that LLP is not suitable for trading or manufacturing enterprises.
Incorporation of LLP is much easier as compared to a private limited company or even a traditional partnership firm. The process of forming a traditional partnership firm and registering it with the Registrar of Firms (RoF) might take more time as compared to an LLP. Furthermore, the alteration/dissolution of a traditional partnership firm requires various formalities like the publication of public notice in newspapers and Gazette which makes it cumbersome to make alteration or dissolution of a traditional partnership firm. These complexities drive us towards the formation of an LLP that has a hassle-free incorporation process as well as a dissolution or alteration process.
Therefore, if you are aspiring for a small to mid-sized enterprise, you should definitely look for incorporating an LLP as your suitable business model. However, if you are looking to go public for raising funds, then LLP is not your preferred business model. In that case, you should form a public limited company or a private limited company (to be converted into a public limited company later).
‘Taxwink’ has a team of dedicated professionals who are experts in the incorporation of LLP in India at the minimum costs. If you are desirous of forming an LLP, you may connect with our executives at 09660930417.
What are the benefits of registering LLP in India?
- Separate Legal Entity of LLP
LLP is treated as a separate person distinct from its partners in the eyes of law just like a company. An LLP can sue and be sued in its own name. Therefore, an LLP can enter into a contract with other entities, own assets in its own name, and even borrow funds in the name of LLP. This benefit is not available in the case of a traditional partnership firm.
Also, the LLP need not be wound up, if the number of partners falls below 2 temporarily. The LLP can continue to exist, and the surviving partner has a period of 6 months to introduce a new partner.
- Continuous Existence of LLP
Since an LLP acts as a separate legal person in the eyes of law, the existence of LLP remains unaffected in the case of the death of any partners. An LLP is not affected even after changes in ownership.
- Limited Liability of LLP
The liability of partners is limited to the extent of agreed capital contribution and they are not personally liable for any loss in the business. Therefore, in the case an LLP is wound up, the partners could be called to pay off the debts of the LLP to the extent of their capital contribution in LLP and they are not liable to pay off debts of LLP out of their personal assets. This is the biggest advantage of forming an LLP because, in the case of a proprietorship or traditional partnership firm, the owner or partner’s personal assets can also be attached to pay off business losses.
- Minimum Regulatory compliances of LLP
An LLP requires minimum regulatory compliances. This is why LLP is ideal for start-ups and MSMEs. The LLP needs to file only 2 statements annually. The first one is Annual Return (Form-11; filed once on or before 30th May every year). The other one is the Statement of Accounts and Solvency (Form-8 to be filed on or before 30th October). Further, the audit is not mandatory, unlike the private limited companies.
- Easy Transferability of Ownership in LLP
The ownership of an LLP can be easily transferred to another person by inducting them as a designated partner of the LLP.
- Easy to dissolve an LLP
As already discussed above, the process of winding up LLP is quite simpler as compared to a private or public limited company. In our opinion, the dissolution process of LLP is even simpler as compared to a traditional registered partnership firm.
Is audit compulsory in the case of LLP?
Statutory Audit is not compulsory in the case of an LLP. According to LLP Act, 2008, statutory audit for LLP is mandatory only when the contribution of partners exceeds Rs. 25 Lakhs or the turnover is more than Rs. 40 Lakhs.
Further, an LLP is not required to make other compliances like holding board meetings or AGM, maintenance of minute book, board resolutions, etc. That’s why it is easier to operate an LLP as compared to a Private Limited Company.
What are the income tax rates applicable to an LLP?
An LLP is treated similarly to a traditional partnership firm from the Income Tax point of view. The only difference is that an LLP can not opt for a presumptive taxation scheme as under section 44AD/ 44ADA of the Income Tax Act, 1961.
Applicable Tax rates for LLP AY 2022-23
The Income Tax Rate applicable for an LLP for A.Y. 2022-23 is 30%. Further, if the total taxable income of the LLP exceeds Rs. 1 crore, Surcharge @ 12% will also apply. The amount of income tax and surcharge shall be further increased by “Health and Education Cess” @ 4%.
Therefore, the effective tax rate of an LLP shall be:
- If Taxable Income is up to Rs. 1 Crore: 31.2%
- If Taxable Income exceeds Rs. 1 Crore: 34.944%
What are the disadvantages of forming an LLP?
- Penalties for non-compliance:
As discussed above, the regulatory compliances in an LLP are minimum. But if you fail to make timely compliances, it might cost you heavily in the form of penalties. An LLP is required to File Form-8 and Form-11 annually. Any delay in filing these forms is penalized by an additional fee of Rs. 100 per day per form. Further, the LLP and each of its designated partners would be liable for a fine extending up to Rs. 5 Lakhs.
- Less attractive from a funding point of view
If you are a start-up and looking for any venture capital funding or arranging private equity from angel investors, then LLP is a lesser attractive option for you. VCs/ Angel investors/ Private Equity firms generally like to invest in private or public limited companies as compared to LLPs. Further, Foreign Direct Investment (FDI) in LLP has more restrictions as compared to companies. An LLP is also not allowed to issue Employee Stock Options (ESOP). Due to these reasons, LLP is not an immediate choice for start-ups seeking seed or venture capital funding or private equity, etc.
- Higher tax rates as compared to a company:
The companies enjoy the benefits of lower tax rates under the Income Tax Act, 1961 as compared to LLPs. The companies are liable to pay tax at 25% whereas LLPs are subjected to a tax rate of 30%. Further, if you are desirous of starting manufacturing activities, you can take benefit of an even lower tax rate of 15% in the case of companies.
We hope that the above information will be helpful for you in deciding your preferred mode of business. In case any assistance is required, feel free to contact our executives at 09660930417.
