Learn everything about Limited Liability Partnerships (LLPs) in India, including the registration process, key forms, required documentation, and compliance guidelines.
A Limited Liability Partnership (LLP) is a modern business structure that blends the benefits of a traditional partnership with the limited liability protections of a corporation. Established under the Limited Liability Partnership Act, 2008, an LLP provides entrepreneurs and professionals with flexibility in management and protection from personal liability for business debts.
This guide delves into everything you need to know about LLPs—from their features and formation process to tax benefits and compliance requirements. Whether you’re an entrepreneur seeking a streamlined business model or exploring alternatives to private limited companies, understanding LLPs can help you make informed decisions about your business’s structure.
In the sections ahead, we’ll discuss the key features of LLPs, their formation process, tax advantages, and how they compare to other business structures like private limited companies.
What Is an LLP Company?
An LLP company, or Limited Liability Partnership company, is a hybrid business structure that combines the flexibility of a traditional partnership with the benefits of limited liability. This means that while the business operates like a partnership firm, its partners enjoy liability protection similar to that of a private limited company.
An LLP company is an independent legal entity, meaning it operates separately from its partners. Unlike a general partnership, the personal assets of partners in an LLP company are safeguarded from the firm’s debts or liabilities. Additionally, one partner is not held accountable for the misconduct or negligence of another, making an LLP company a preferred choice for startups, professionals, and small businesses seeking reduced risks and streamlined management.
By blending the operational ease of a partnership with the legal protection of a corporation, an LLP company offers a robust business structure for entrepreneurs aiming to balance flexibility with liability protection.
Important Things to Be Kept in Mind Before Starting an LLP
Before starting an LLP company, there are key considerations to ensure smooth registration and compliance with legal requirements:
- Drafting the LLP Agreement: The LLP Agreement is a critical document that defines the roles, responsibilities, and profit-sharing terms between partners. Consulting an expert to draft this agreement ensures clarity and legal validity.
- Designated Partner Identification Number (DIN): Each designated partner of the LLP must obtain a DIN before registration. This identification number is mandatory for compliance with the Ministry of Corporate Affairs (MCA) guidelines.
- Minimum Number of Designated Partners: Every LLP must have a minimum of two designated partners. These partners are responsible for managing the LLP and fulfilling regulatory obligations.
- Resident Partner Requirement: At least one designated partner must be a resident of India. A resident partner is someone who has stayed in India for a minimum of 182 days in the preceding financial year.
By addressing these critical points before registering an LLP company, businesses can ensure compliance, reduce risks, and streamline the setup process.
Common Doubts About LLP Registration
The following are some of the concerns that entrepreneurs have concerning LLP:
- Is it a separate legal entity?
- What are the conditions imposed on the partners?
- Is DSC important for LLP?
- How to register an LLP name?
- Can other forms of a company be converted into an LLP?
The answers to the same are enumerated in the upcoming sections, in case you require further clarifications, get in touch with our experts today!
What Are the Features of Limited Liability Partnership?
- As per Section 3 of the LLP Act, 2008, such companies serve as corporate bodies and are an entity of their own legally
- LLPs are different from partnerships with respect to succession. An LLP will exist even after its partners die, retire, or step down
- Being a legal entity ensures that while the partners do not have unlimited liability. The LLP itself is entirely liable for the assets it possesses
- An independent decision or action taken by one partner does not make any of the others liable
- The roles, duties, and powers vested in each partner are legally binding as per 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
- Section 14(c) of the limited liability partnership Act further explains that if the partners wish to, they can create a common seal for the firm, which may be used whenever two or more partners are present
- The minimum number of partners required is 2. there is no cap for the maximum number of partners.
List of Forms Related to LLP
To comply with the Limited Liability Partnership (LLP) registration and operational requirements in India, businesses must submit specific forms to the Ministry of Corporate Affairs (MCA). Below is a list of essential forms related to LLP:
Form 7:
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- Purpose: To obtain the Designated Partner Identification Number (DPIN) required for LLP registration.
- Fee: ₹100.
- Availability: Downloadable from the MCA website.
Form 1 / RUN-LLP:
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- Purpose: For name reservation and LLP registration. It is also used to alter the existing LLP name.
- Fee: ₹10,000.
Digital Signature Certificate (DSC):
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- Purpose: Required for digitally signing and submitting LLP forms online. Partners must file a request to obtain their DSC.
Form 2 / FiLLiP:
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- Purpose: To incorporate and officially register an LLP with the MCA.
- Submission: Acknowledged by the respective State Registrar.
Form 3:
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- Purpose: To file the LLP Agreement, which details the roles, rights, and obligations of each partner.
Form 4:
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- Purpose: For making changes, such as adding, removing, or altering partners.
Form 11:
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- Purpose: To file the Annual Return of the LLP, a mandatory annual compliance requirement.
Form 15:
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- Purpose: To notify the MCA of any change in the office address of the LLP.
Importance of Accuracy: Filing these forms correctly and on time is critical for successfully setting up and maintaining an LLP in India. Compliance with MCA regulations ensures smooth operations and helps avoid unnecessary penalties.
How an LLP Is Formed
Here are the steps involved in the formation of an LLP:
- 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
- Obtain a DSC or Digital Signature Certificate as the following steps will require it
- Once you obtain a DSC, register a name for your LLP using Form 1 by paying ₹200
- Next, incorporate the LLP via Form 2. The LLP agreement must also be made at this stage
- 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 to the registration process in September 2018. 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 firms. And to reduce the time required to incorporate them. FiLLiP may also be used to acquire DPINs if the LLP has only two partners.
Tax Benefits Of Limited Liability Partnership
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 of by registering as LLP.
Remuneration to LLP Partners According to the Income Tax Act
The most important thing for an LLP partner is remuneration or how much they will be getting from the 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
An LLP is easy to maintain, relative to a private limited company. For example, you need not have an auditor until you cross ₹40 lakh in turnover or have a paid-up capital of over ₹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 for LLP like filing of annual returns, statement of accounts and solvency, maintaining minutes of a meeting of partners, and books of accounts, etc.
Annual e-Filing for a Limited liability Partnership
Similar to the requirements for company registration in India, LLPs must file their Statement of Accounts & Solvency on or before October 30 of every financial year. The annual return for LLPs is due on May 30 every year, even if the LLP has not undertaken 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.
What Are the Advantages of Forming an LLP?
- LLPs are easy to form with fees ranging from ₹500 to ₹5600
- Partners enjoy less risk as they do not have unlimited liability. Their personal assets will not be dissolved if the company comes under debt, making LLP’s a safer option
- 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
- Joining and leaving the company is easy as there are no restrictions on transferring or leaving a Limited Liability Partnership
- 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 firm is assured
- LLPs enjoy several tax benefits. They also do not require compulsory audits unless their income exceeds ₹40 lakhs.
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 firms 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.
LLP v. 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 below the prescribed threshold. 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 transferable. But a private limited company is more flexible in terms of transferring the ownership.
Advantages of Converting a Partnership into Limited Liability Partnership
Some of the benefits of converting a partnership firm 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.
Frequently Asked Questions
What is the minimum partner required in LLP?
A Limited Liability Partnership (LLP) requires a minimum of two partners for its formation.
Can LLP give salary to partner?
LLPs can distribute profits among partners, but technically, salaries are not paid. Instead, partners receive a share of the profits based on the partnership agreement.
Can husband and wife be partners in LLP?
Yes, husband and wife can be partners in an LLP, allowing them to jointly own and operate the business.
Which is better, LLP or Pvt Ltd company?
The choice between LLP and Private Limited Company depends on factors like liability, regulatory compliance, and the scale of operations. Pvt Ltd offers limited liability and is more suitable for larger businesses, while LLP is simpler with less compliance but also has some limitations.
Is LLP a good idea?
LLP is best for small businesses, startups, or professional services where flexibility, fewer compliance requirements, and shared management are valued. It provides a middle ground between a traditional partnership and a private limited company.
