A Limited Liability Partnership (LLP) is a partnership in which partners have limited liability. It, therefore, exhibits elements of partnerships and corporations. In an LLP, one partner is not responsible or liable for another partner’s misconduct or negligence.
A limited liability partnership (LLP) is a hybrid of a partnership and a corporation that is gaining popularity among investors. It has a number of advantages that have helped boost its favour among entrepreneurs. If you want to learn more about LLPs but aren’t sure about where to start, you’ve come to the right place. Here’s all you need to know about limited liability partnerships (LLPs).
What Is a Limited Liability Partnership?
LLPs limit liability by ensuring that the partners’ personal assets and belongings are not liquidated in order to pay off obligations incurred by the firm. As a result, they are a safer kind of investment for businesses because the risk they incur is minimised. Despite the fact that the firm has numerous partners, no one is held accountable for the activities of others, which relieves them of taking on any unnecessary responsibility for the actions of others. They are also common in other countries including the United Kingdom and Australia.
Important Things to Be Kept in Mind Before Starting an LLP
Before registering your LLP, make sure you have an expert in the field to help you draft your LLP Agreement, as well as help you and your LLP partners obtain their respective DIN registrations. Every LLP should 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.
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 LLP?
- 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 LLP 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
- Form 7 is required to obtain a Designated Partner Identification Number while registering your LLP. It may be downloaded from the MCA website. Along with the duly completed form, a registration fee of ₹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 ₹ 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 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 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.
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 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
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 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 an LLP.
- 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 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