In this article we will be discussing some of the key aspects to keep in mind while determining whether to select the LLP structure for your business entity.
A Limited Liability Partnership structure is abbreviated as LLP. It is an alternative business structure that, in addition to providing the benefits of limited liability for any business, allows for the flexibility of partnership. This type of corporate structure is unaffected by changes in the firm’s composition of partners. This dynamic structure is becoming a common form of corporate organisation for many licensed professionals such as lawyers, doctors, accountants, and so on. This business model is widely accepted even in countries such as the United States, the United Kingdom, Australia, and Germany.
| In the United Kingdom, the LLP Act was enacted in 2000, in India, the LLP act was passed in 2008 for smooth incorporation of LLPs, and in the United States of America, LLPs became part of the Uniform Partnership Act in 1996. |
A significant benefit of an LLP is that it protects the individual partners from joint liability and mistakes of other partners in a partnership firm. While there are other business structures to choose from, the LLP structure is a hot pick in this day and age, to understand why it is necessary to discuss the advantages of choosing LLP as your business structure. Keep reading to know more as knowing all of the facts and figures associated with an LLP allows one to select the most manageable and appropriate business structure for a Startup.
Why Choose The LLP Structure for Your Business?
There are various advantages to using an LLP as your business structure. Let us go over them in detail-
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Convenient Formation with Minimum Contribution
With no minimum capital necessary for formation, a Limited Liability Partnership allows partners to join forces even if they have little resources. Furthermore, capital contribution can be in any tangible form, such as land, machinery, or intangible properties.
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No Limit on the Number Of Business Owners
LLPs may have any number of partners, provided there are at least two members. There is no limit on the maximum number of partners an LLP can have.
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Limited Liability
LLPs exist as separate legal entities from their owners. All liabilities incurred by LLP, whether for debt payments or lawsuits, fall on the firm, not the members.
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Flexibility of Management
The LLP Act of 2008 grants complete control over its operations. The LLP agreement allows owners to determine how they want their business to run and prosper. The LLP partners may also agree to delegate daily business operations to a managing partner or a partner-led committee. There is complete flexibility in terms of management in an LLP as partners may distribute responsibilities based on their knowledge and skillset.
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Capacity to Sue
As a juristic legal entity, a Limited Liability Partnership can sue in its own name and can likewise be sued by others. The partners are not liable to be sued for dues.
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Low Cost of Registration
An LLP has a minimal registration fee when compared to other types of businesses (public or private limited company). Furthermore, the registration process is relatively straightforward, and the typical time-period necessary to finish the registration process is around 15- 20 days.
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Group Resource Pooling
Most are formed by a knowledgeable and experienced group of professionals, each with their own set of resources. They can each pool their resources to reduce business costs while also increasing the company’s capacity for growth.
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Audit not Mandatory
Limited liability partnership firms have various compliance benefits compared to limited companies as audits are not compulsory. This is a significant benefit for those who are going to start an LLP. Tax audits are only mandatory in those where the annual contributions exceed ₹25 lakhs and the annual turnover exceeds ₹40 lakhs.
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Mid-Way Entry or Exit of Partners
The agreement in an LLP accommodates one more basic feature: existing partners can easily exit the firm, and new partners with their own businesses can be added. However, adding a new partner usually necessitates approval from the existing partners.
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Taxation Outlook
Limited liability companies must pay tax at a flat rate of 30% of their total income. If the total income exceeds ₹1 crore, an LLP must also pay a surcharge of 12% on the income tax. In addition, a 4% health and education cess is payable on top of the income tax plus surcharge.
Bottom Line
The expanding market scenario brings forth a need for the structure. A framework like this works best for businesses that provide services or work in professional or technology-related fields. It can also be suited to entities providing venture capital funds.
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