In this blog post, we have jotted the entire concept of Limited Liability Partnership and the pros and cons associated with it in a simple and clear-cut way.
A dilemma of unlimited liability plagues the usual partnership business structure. An enterprise’s partners’ liabilities extend to their holdings. It makes regular collaborations unappealing to many businesses. Limited Liability Partnership, abbreviated as LLP, is one answer to this problem.
The LLP (Limited Liability Partnership) has become a sought-after business structure among business owners since it merges the advantages of a corporation and partnership enterprise into an entity.
Limited Liability Partnership: What Is It?
Partners of usual partnership have limitless culpability for their combined debts and legal penalties. It implies that their personal assets may be attached to satisfy the enterprise’s liabilities and obligations. This is where LLP (limited liability partnership) comes in.
A Limited Liability Partnership has all of the fundamental characteristics of a traditional partnership enterprise, with the exception of the unlimited liability of participants and the same legal entity status. As a result, LLPs have an identity and legal existence apart from their partners. Moreover, its partners’ obligations are restricted.
In 2008, the idea of LLP (Limited Liability Partnership) was established in India. An LLP combines the features of a corporation and a partnership firm. In India, the LLP is governed under the LLP Act of 2008. An LLP must be formed with at least two partners. Nevertheless, LLPs have no upper restriction on the number of partners they can have.
There must be at least two approved partners who must be persons, with at least one of them residing in India. The Limited Liability Partnership agreement governs the rights and obligations of chosen partners. They are directly accountable for ensuring the terms of the 2008 LLP Act and provisions stated in the LLP agreement.
LLLP: Distinct Features
The following characteristics distinguish an LLP registration:
- Separate Legal Entity
Limited Liability Partnerships, unlike traditional partnership businesses, are considered separate legal entities. Limited Liability Partnerships can so hold belongings in their names and also incur liabilities. They can also form contracts and sue or get sued in their names.
Every partner in LLP shares business earnings in the same way as partners in regular businesses do. Nevertheless, they are free to choose how they’ll split earnings.
- Limited Liability of Partners
An LLP’s partners’ obligations are distinct and restricted. Their personal belongings won’t be subject to an attachment if the LLP is wound up or suffers particular legal consequences related to debt payment.
On the other hand, partners’ liabilities can become limitless in situations of fraud, any illegal and improper act, or offence commission.
- Partners of LLPs
A limited liability partnership’s partners might be either natural people, that is, body corporates or individuals. Moreover, a person can’t be a partner if they are insolvent or mentally ill.
Limited Liability Partnerships should always have at least two partners. Furthermore, the max number of partners is limitless, whereas usual partnership businesses are limited to 50. Suppose the total number of partners in a LLP falls below two at any moment, and the lone partner conducts business for over six months under these situations. In that case, their responsibility to the enterprise’s business functioning becomes limitless.
Limited Liability Partnerships come with a set of advantages:
- Simple to Establish: Establishing an LLP is a straightforward process. It’s not as time-consuming and intricate as a company’s procedure. The minimal charge for forming a Limited Liability Partnership is ₹500, and the highest amount that may be invested is ₹5,600.
- Liability: The LLP partners have limited liability, meaning they are not obligated to pay the enterprise’s obligations out of their personal belongings. No partner is liable for the misbehaviour or wrongdoing of another partner.
- Perpetual Succession: The retirement, insolvency, or death of a partner does not affect the life of the LLP. The Limited Liability Partnership will be wound up solely in accordance with the terms of the 2008 Act.
- Company Management: Every decision and other management operations are overseen and carried out by the enterprise’s directors. Shareholders have far less influence than the board of directors.
- Ownership Is Easily Transferable: There are no restrictions on leaving or entering the LLP. It’s simple to become a partner and then quit the business or effortlessly transfer proprietorship to others.
- Taxation: An LLP is free from certain taxes, including the minimal alternative tax and the dividend distribution tax. The tax rate on an LLP is lower than that of a corporation.
- No Requirement of Mandatory Audit: Every firm must engage an auditor to review the company’s internal management as well as its accounts. However, no statutory audit is necessary in the case of a Limited Liability Partnership. An audit is essential only when the enterprise’s sales surpass ₹40 lakhs and the donation exceeds ₹25 lakhs.
Limited Liability Partnerships come with a set of disadvantages too:
- Not Every State Is Covered: Many states ban the creation of LLPs due to numerous tax perks and requirements. It’s a disadvantage because many states do not permit entrepreneurs to create this.
- Less Credibility: A Limited Liability Partnership’s most significant disadvantage is that most people don’t regard it as a trustworthy business. Individuals continue to place their faith in companies compared to LLPs.
- Partners Do Not Consult: Partners in an LLP don’t consult one another while making decisions or reaching agreements.
- Transfer of Interest: While ownership and interest may be transferred, the process is typically lengthy. To comply with the terms of the legislation, many formalities are necessary.
- Lack of Recognition: Although LLP was established in the year 2009 in India, it’s not widely accepted. Because of its lack of acknowledgement, it impedes the smooth operation of the company. LLPs are unlikely to be formed by people.
Limited Liability Partnership V/s Partnership Firm: Differences Explained
To do business, a Limited Liability Partnership should be registered under the Limited Liability Partnership Act. The 1932 Partnership Act, on the other hand, makes partnership registration businesses voluntary. In a Limited Liability Partnership, each partner’s responsibility is restricted to the amount contributed by the partner. However, in a partnership business, every partner is individually accountable for the enterprise’s losses or debts.
The Limited Liability Partnership is an independent legal body, which means it may acquire property, get sued and sue in its own right. Partnership businesses are not permitted to purchase property or sue somebody in their name. Because the partnership firm lacks a separate legal body, it must be in the authorised partner’s name.
We hope by now you know the entire concept of Limited Liability Partnership and the advantages and disadvantages associated with it. Also, how an LLP is different from a traditional partnership firm, if you are planning to apply for an LLP registration, Vakilsearch can help you with the procedure and documents of LLP registration in India. Contact us to learn more.