Limited Liability Partnership (LLP) – All You Want to Know

Last Updated at: February 11, 2020
2713
Limited Liability Partnership (LLP) – All You Want to Know

A limited liability partnership comes mid-way between partnerships and corporations and is an up and coming area that investors are making use of. It has several benefits to rise in popularity amongst entrepreneurs. If you are interested in knowing about LLPs but don’t know where to go, then you have come to the right place.  Here’s a look at everything you need to know about limited liability partnerships (LLPs).

What is a Limited Liability Partnership?

LLPs restrict liability by making sure that the personal assets and belongings of the partners do not get involved in the payment of debts inherited by the company. This makes them a more secure form of investment for entrepreneurs as it reduces the risk that they have to take. While the company has several partners, no individual is kept liable for the actions of others, and this clears them of having undue responsibility for the conduct of others. Such limited liability partnerships are governed by the Government as of April 2009 and are also a popular concept in foreign nations such as the UK and Australia.

Important things to be kept in mind before starting an LLP

Before proceeding with registering your LLP, make sure to have your LLP Agreement drafted by expert lawyers; and your LLP Partners and their respective DIN registrations. Every LLP shall mandatorily have at least two designated partners. One of the partners must be a resident of India, which means he/she must have stayed in India for at least 182 days.

Read to know more about the important aspects here. 

15 doubts you should clarify about LLP registration

Some of the doubts that entrepreneurs get about LLP are:

  • Is it a separate legal entity?
  • What are the conditions of the partners?
  • Is DSC important for LLP?
  • How to register LLP name?
  • Can other forms of a company be converted into an LLP?

Read more to get your other important doubts clarified. 

What are the features of LLP?

    1. As per Section 3 of the LLP Act, 2008, such companies serve as corporate bodies and is an entity of its own legally.
    2. LLPs are different from partnerships with respect to succession. An LLP will exist even after its partners die, retire or step down.
    3. Being a legal entity ensures that while the partner’s do not have full liability, the LLP itself is entirely liable for the assets it possesses.
    4. An independent decision or action taken by one partner does not make any of the others liable.
    5. The roles, duties and powers vested in each partner are legally binding via an agreement signed by them. If such a document is not created, then all rights and powers are split equally by all the partners involved.
    6. Section 14(c) of the LLP Act has decided that if the partners wish to, they can create a common seal for the company, which may be used whenever two or more partners are present.
    7. The minimum number of partners required is 2, and there is no cap for the maximum number of partners.

Your LLP Registration is easy now

List of forms related to LLP

  • Form 7 is required to obtain a Designated Partner Identification Number while registering your LLP. It may be sought from the MCA website. Along with the duly completed form, a registration fee of Rs 100 must also be paid.
  • Form 1/ RUN-LLP is required to register a name for the LLP and reserve it. It may be used to christen an LLP or to alter the present name. The fee for submitting this form is Rs 10,000.
  • A request must also be filed by the partners for their DSC to be registered if it hasn’t already been done before.
  • Form 2/FiLLiP  is required for incorporating a registered LLP. This form must be sent to and acknowledged by the concerned State’s Registrar.
  • An LLP agreement must be made which outlines the duties of each partner involved. This requires the filling and submitting Form 3.
  • In the case of changing, altering, adding or removing partners, the others must submit Form 4.
  • Form 11 must be used to file the IT returns of the LLP.
  • If the office address of the LLP is to be changed, then Form 15 must be filed.

How LLP is formed?

Here are the steps involved in forming an LLP:

  1. Issue a Designated Partner Identification Number for yourself, which serves as an ID card. File Form 7 and pay the required fees to do so.
  2. Obtain a DSC or Digital Signature Certificate as the following steps will require it. File for one if you don’t already have one.
  3. Once you obtain a DSC, register a name for your LLP using Form 1 and paying Rs 200.
  4. Next, incorporate the LLP via Form 2. The LLP agreement must also be made at this stage.
  5. File the LLP Agreement as per Section 2(o) of the LLP Act, 2008 using Form 3.

What is FiLLiP?

To make LLPs easier to incorporate, the Government brought in some changes into the registration process in September 2018, and these came into force from October of the same year. Forms 1 and 2 were replaced by Reserve Unique Name-Limited Liability Partnership or RUN-LLP and Form for incorporation of Limited Liability Partnership, or Form FiLLiP, respectively. Both these forms will be sent to and verified by a Registrar as appointed by the Central Registration Centre. These forms were introduced to make it easier to register and run such companies, and to reduce the time required to incorporate them. FiLLiP may also be used to acquire DPINs if the LLP has only two partners.

Remuneration to LLP partners according to the IT Act

The most important thing for an LLP partner is remuneration or how much he will be getting from his company. Remuneration includes everything from base salary to bonuses and commissions. The LLP agreement contains all the details of partner remunerations. Some of the key points to know about the amount deductible under the IT Act are:

  • Deduction is possible only if the remuneration is received by a working partner or individual
  • The remuneration received by the partners is taxed as Business Income. Share of profit is not included in the same section as remuneration
  • For both working and non-working members, the share of profit returns is exempted as per Section 10(2A) of the Income Tax Act.
  • Interest received on the capital invested by them is also taxed as Business Income.

Statutory compliance requirements for an LLP

LLP is easy to maintain, relative to a private limited company. For example, you need not have an auditor until you cross Rs. 40 lakh in turnover or have a paid-up capital of over Rs. 25 lakh. Also, in the absence of shareholders (the partners own the company themselves), the compliances are severely reduced. But LLPs do have some compliance requirements, like filing of annual returns, statement of accounts and solvency, minutes of the meeting of partners; maintaining book of accounts, etc.

Here is a complete list of statutory requirements that an LLP need. 

Annual e-Filing for a limited liability partnership

LLPs must file their Statement of Accounts & Solvency on or before October 30th of every financial year. The annual return for LLPs is due on May 30th every year even if the LLP has not completed any business in that specific financial year. For e-Filing on LLP, you can download the e-form, fill it up offline and submit it for further processing. There is also a choice to fill it up online using the facility to pre-fill the data available in the LLP system. 

Get to know the step-by-step procedure for e-filing annual returns of LLP here. 

What are the advantages of forming LLP?

  1. LLPs are easy to form with fees ranging from Rs 500 to Rs 5600. The process is quite intuitive and easy to follow and is not lengthy or time-consuming.
  2. Partners enjoy less risk as they do not have complete liability. Their personal assets will not be dissolved if the company comes under debt, making this a safer option.
  3. LLPs are easier to manage as the Board has more power. Shareholders have little power as far as the management of the company is concerned and this makes them easier to govern.
  4. Joining and leaving the company is easy as there are no restrictions on transferring or leaving an LLP.
  5. They have an unlimited life, making perpetual succession a reality. An LLP is not affected by things like death or retirement and hence, the smooth functioning of the company is assured.
  6. LLPs enjoy several tax benefits. They also do not require compulsory audits unless their income exceeds Rs 40 lakhs.

Tax benefits

Some of the tax benefits an LLP offers are:

  • No tax is levied on the income of the partners
  • No dividend distribution tax is payable under Section 40B
  • Partner remunerations, including bonus, commission, interest, are allowed as a deduction

In addition, there are other tax-saving benefits that entrepreneurs can avail by registering as LLP.

LLP vs private limited company

Although both the entities have similar features there are slight differences which entrepreneurs must be aware of. The cost of setting up and registering an LLP is much cheaper when compared to a private limited company. An LLP is flexible, easy-to-maintain with less compliance and no compulsory audits. Whereas private limited companies’ require many compliance filings with the MCA. Both the business structures are considered to be separate legal entities and both are transferrable. But a private limited company is flexible in terms of transferring the ownership.

Should startups pick more LLPs in the future? Read about it here. 

Seven advantages of converting a partnership into limited liability partnership

Some of the benefits of converting a Partnership into an LLP are:

  • Reduced risk exposure
  • No capital gains tax on the conversion
  • Carry forward of losses allowed
  • Perpetual succession
  • No limit on the number of partners

Read the other two important advantages here. 

What are the disadvantages of an LLP?

  • As LLPs provide entrepreneurs with several tax benefits, not all states in India encourage them. This leads to severe restrictions in some states, making it hard to set up such companies in those states.
  • Mostly, we find that there is a lack of communication between the partners in such companies, leading to several of them making decisions without consulting others.
  • LLPs are yet to be accepted as a fully credible source of investment as they are still relatively new. It will take a while for the general mindset to change, and for such companies to become as credible as Private Limited companies.
  • While there are no restrictions on transferring power in LLPs, this is a long and complicated procedure, making the process lengthy and cumbersome.

Procedure for changing the name of an LLP

There could be many reasons to change the name of an LLP, for instance, when there is a change in business activity, or when there are any mergers or acquisitions, etc. To change the name of the LLP, you should:

  • Verify the availability of the name,
  • Get certified copies of the consent of the Partners
  • Get a copy of the registration certificate or trademark registration certificate copy
  • File form LLP-5 with the MCA, giving notice of change in the name

Once your name is approved you will get the registration certificate.

Here is a detailed, step-by-step procedure to change the name of your LLP. 

Limited Liability Partnership (LLP) – All You Want to Know

2713

A limited liability partnership comes mid-way between partnerships and corporations and is an up and coming area that investors are making use of. It has several benefits to rise in popularity amongst entrepreneurs. If you are interested in knowing about LLPs but don’t know where to go, then you have come to the right place.  Here’s a look at everything you need to know about limited liability partnerships (LLPs).

What is a Limited Liability Partnership?

LLPs restrict liability by making sure that the personal assets and belongings of the partners do not get involved in the payment of debts inherited by the company. This makes them a more secure form of investment for entrepreneurs as it reduces the risk that they have to take. While the company has several partners, no individual is kept liable for the actions of others, and this clears them of having undue responsibility for the conduct of others. Such limited liability partnerships are governed by the Government as of April 2009 and are also a popular concept in foreign nations such as the UK and Australia.

Important things to be kept in mind before starting an LLP

Before proceeding with registering your LLP, make sure to have your LLP Agreement drafted by expert lawyers; and your LLP Partners and their respective DIN registrations. Every LLP shall mandatorily have at least two designated partners. One of the partners must be a resident of India, which means he/she must have stayed in India for at least 182 days.

Read to know more about the important aspects here. 

15 doubts you should clarify about LLP registration

Some of the doubts that entrepreneurs get about LLP are:

  • Is it a separate legal entity?
  • What are the conditions of the partners?
  • Is DSC important for LLP?
  • How to register LLP name?
  • Can other forms of a company be converted into an LLP?

Read more to get your other important doubts clarified. 

What are the features of LLP?

    1. As per Section 3 of the LLP Act, 2008, such companies serve as corporate bodies and is an entity of its own legally.
    2. LLPs are different from partnerships with respect to succession. An LLP will exist even after its partners die, retire or step down.
    3. Being a legal entity ensures that while the partner’s do not have full liability, the LLP itself is entirely liable for the assets it possesses.
    4. An independent decision or action taken by one partner does not make any of the others liable.
    5. The roles, duties and powers vested in each partner are legally binding via an agreement signed by them. If such a document is not created, then all rights and powers are split equally by all the partners involved.
    6. Section 14(c) of the LLP Act has decided that if the partners wish to, they can create a common seal for the company, which may be used whenever two or more partners are present.
    7. The minimum number of partners required is 2, and there is no cap for the maximum number of partners.

Your LLP Registration is easy now

List of forms related to LLP

  • Form 7 is required to obtain a Designated Partner Identification Number while registering your LLP. It may be sought from the MCA website. Along with the duly completed form, a registration fee of Rs 100 must also be paid.
  • Form 1/ RUN-LLP is required to register a name for the LLP and reserve it. It may be used to christen an LLP or to alter the present name. The fee for submitting this form is Rs 10,000.
  • A request must also be filed by the partners for their DSC to be registered if it hasn’t already been done before.
  • Form 2/FiLLiP  is required for incorporating a registered LLP. This form must be sent to and acknowledged by the concerned State’s Registrar.
  • An LLP agreement must be made which outlines the duties of each partner involved. This requires the filling and submitting Form 3.
  • In the case of changing, altering, adding or removing partners, the others must submit Form 4.
  • Form 11 must be used to file the IT returns of the LLP.
  • If the office address of the LLP is to be changed, then Form 15 must be filed.

How LLP is formed?

Here are the steps involved in forming an LLP:

  1. Issue a Designated Partner Identification Number for yourself, which serves as an ID card. File Form 7 and pay the required fees to do so.
  2. Obtain a DSC or Digital Signature Certificate as the following steps will require it. File for one if you don’t already have one.
  3. Once you obtain a DSC, register a name for your LLP using Form 1 and paying Rs 200.
  4. Next, incorporate the LLP via Form 2. The LLP agreement must also be made at this stage.
  5. File the LLP Agreement as per Section 2(o) of the LLP Act, 2008 using Form 3.

What is FiLLiP?

To make LLPs easier to incorporate, the Government brought in some changes into the registration process in September 2018, and these came into force from October of the same year. Forms 1 and 2 were replaced by Reserve Unique Name-Limited Liability Partnership or RUN-LLP and Form for incorporation of Limited Liability Partnership, or Form FiLLiP, respectively. Both these forms will be sent to and verified by a Registrar as appointed by the Central Registration Centre. These forms were introduced to make it easier to register and run such companies, and to reduce the time required to incorporate them. FiLLiP may also be used to acquire DPINs if the LLP has only two partners.

Remuneration to LLP partners according to the IT Act

The most important thing for an LLP partner is remuneration or how much he will be getting from his company. Remuneration includes everything from base salary to bonuses and commissions. The LLP agreement contains all the details of partner remunerations. Some of the key points to know about the amount deductible under the IT Act are:

  • Deduction is possible only if the remuneration is received by a working partner or individual
  • The remuneration received by the partners is taxed as Business Income. Share of profit is not included in the same section as remuneration
  • For both working and non-working members, the share of profit returns is exempted as per Section 10(2A) of the Income Tax Act.
  • Interest received on the capital invested by them is also taxed as Business Income.

Statutory compliance requirements for an LLP

LLP is easy to maintain, relative to a private limited company. For example, you need not have an auditor until you cross Rs. 40 lakh in turnover or have a paid-up capital of over Rs. 25 lakh. Also, in the absence of shareholders (the partners own the company themselves), the compliances are severely reduced. But LLPs do have some compliance requirements, like filing of annual returns, statement of accounts and solvency, minutes of the meeting of partners; maintaining book of accounts, etc.

Here is a complete list of statutory requirements that an LLP need. 

Annual e-Filing for a limited liability partnership

LLPs must file their Statement of Accounts & Solvency on or before October 30th of every financial year. The annual return for LLPs is due on May 30th every year even if the LLP has not completed any business in that specific financial year. For e-Filing on LLP, you can download the e-form, fill it up offline and submit it for further processing. There is also a choice to fill it up online using the facility to pre-fill the data available in the LLP system. 

Get to know the step-by-step procedure for e-filing annual returns of LLP here. 

What are the advantages of forming LLP?

  1. LLPs are easy to form with fees ranging from Rs 500 to Rs 5600. The process is quite intuitive and easy to follow and is not lengthy or time-consuming.
  2. Partners enjoy less risk as they do not have complete liability. Their personal assets will not be dissolved if the company comes under debt, making this a safer option.
  3. LLPs are easier to manage as the Board has more power. Shareholders have little power as far as the management of the company is concerned and this makes them easier to govern.
  4. Joining and leaving the company is easy as there are no restrictions on transferring or leaving an LLP.
  5. They have an unlimited life, making perpetual succession a reality. An LLP is not affected by things like death or retirement and hence, the smooth functioning of the company is assured.
  6. LLPs enjoy several tax benefits. They also do not require compulsory audits unless their income exceeds Rs 40 lakhs.

Tax benefits

Some of the tax benefits an LLP offers are:

  • No tax is levied on the income of the partners
  • No dividend distribution tax is payable under Section 40B
  • Partner remunerations, including bonus, commission, interest, are allowed as a deduction

In addition, there are other tax-saving benefits that entrepreneurs can avail by registering as LLP.

LLP vs private limited company

Although both the entities have similar features there are slight differences which entrepreneurs must be aware of. The cost of setting up and registering an LLP is much cheaper when compared to a private limited company. An LLP is flexible, easy-to-maintain with less compliance and no compulsory audits. Whereas private limited companies’ require many compliance filings with the MCA. Both the business structures are considered to be separate legal entities and both are transferrable. But a private limited company is flexible in terms of transferring the ownership.

Should startups pick more LLPs in the future? Read about it here. 

Seven advantages of converting a partnership into limited liability partnership

Some of the benefits of converting a Partnership into an LLP are:

  • Reduced risk exposure
  • No capital gains tax on the conversion
  • Carry forward of losses allowed
  • Perpetual succession
  • No limit on the number of partners

Read the other two important advantages here. 

What are the disadvantages of an LLP?

  • As LLPs provide entrepreneurs with several tax benefits, not all states in India encourage them. This leads to severe restrictions in some states, making it hard to set up such companies in those states.
  • Mostly, we find that there is a lack of communication between the partners in such companies, leading to several of them making decisions without consulting others.
  • LLPs are yet to be accepted as a fully credible source of investment as they are still relatively new. It will take a while for the general mindset to change, and for such companies to become as credible as Private Limited companies.
  • While there are no restrictions on transferring power in LLPs, this is a long and complicated procedure, making the process lengthy and cumbersome.

Procedure for changing the name of an LLP

There could be many reasons to change the name of an LLP, for instance, when there is a change in business activity, or when there are any mergers or acquisitions, etc. To change the name of the LLP, you should:

  • Verify the availability of the name,
  • Get certified copies of the consent of the Partners
  • Get a copy of the registration certificate or trademark registration certificate copy
  • File form LLP-5 with the MCA, giving notice of change in the name

Once your name is approved you will get the registration certificate.

Here is a detailed, step-by-step procedure to change the name of your LLP. 

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