Need to know whether or not an LLP is the best structure for your new company… Not asking, it’s something you do need to know, and we have you covered.
Overview:
A Limited Liability Partnership (LLP), as the name proposes, is a corporate business entity that enables a partnership between the business partners wherein their liabilities are proportional to the amount with which they venture into the business. While partnership firms have been in practice for ages, LLP firms are relatively new players in the corporate sphere.
In an LLP, the partners fundamentally divide the risks proportionately while offering their shared skill set to leverage the business. Another notable difference in the Limited Liability Partnership is that, if the business doesn’t take off as planned and if the partnership fails in dire circumstances, the creditors cannot claim the personal property of the partners. Here, it can be stated that the LLP by itself is responsible for the debts incurred during the business rather than the respective partners of the firm.
In other words, it’s a body corporate is an individual legal personality and is separate from its partners. Also, an LLP is of perpetual succession. It would live on forever even after the partners cease to exist. Partners may come and go, but the LLP will stay on for eternity. An LLP is a corporate culmination of the advantages of a partnership firm and that of a limited liability company.
Minimum Requirements for Incorporating a Limited Liability Partnership (LLP) would be:
- The LLP should be working with a minimum of two partners
- At least one of the partners must be an Indian citizen and should be living in India
- The registered office of the LLP firm must be located in India.
Like any other company, it would mandate that the Limited Liability Partnership possesses a unique name and the same should have the words ‘LLP’ appended to the name to show that the firm operates as one.
Why Choose a Limited Liability Partnership?
Operating as a Limited Liability Partnership possesses several advantages as stated herewith:
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Ease of Incorporation:
The fact that formulating an LLP has fewer guidelines and simpler protocols makes it the most sought-after corporate entity. The procedures concerning annual meetings, board meetings, legal compilation, etc are quite minimal. Further, even the cost of incorporating an LLP is comparatively economical as to incorporating a public or a Private Limited Company.
The responsibility of an LLP when it comes to compliance is much simpler. For instance, one needs to submit only two statements of accounts yearly i.e., the annual return and a statement of accounts and solvency. While a public or private company has to pay heed to its board of directors, an LLP is merely dependent on its partners for major decisions and votes. Additionally, the ownership in the case of an LLP is also easily transferable from one person to another. However, the person to whom the ownership is being transferred must be imbibed in the LLP as a partner.
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Absence of Minimum Capital Requirement:
A large category of entrepreneurs romanticizes the idea of an LLP as it does not obligate a minimum capital requirement to incorporate the same. Here, capital can be either a tangible or an intangible asset. Therefore, an LLP can be accomplished with the least required capital as per the wish of the partners.
Key Features of Limited Liability Partnership (LLP)
- Limited Liability Protection: LLP shields the personal assets of members from business liabilities, establishing it as a distinct legal entity.
- Flexibility: Partnerships and profit distribution are governed by a written agreement, providing operational flexibility.
- Corporate Ownership: LLPs can include two companies as members, offering a unique corporate structure.
- Designate and Non-Designate Members: Various membership levels can operate within an LLP.
- Protecting the Partnership Name: Registering the LLP prevents others from using the same name.
What is a Small LLP?
The concept of Small LLP is introduced to ease compliance burdens and reduce fees. A Small LLP is one:
- Whose contribution doesn’t exceed Rs 25 lakhs (can go up to Rs 5 Crores as per government discretion).
- Whose turnover in the previous year doesn’t exceed Rs 40 lakhs (can go up to Rs 50 Crores as per government discretion).
The Small LLP concept streamlines compliance processes and eliminates the need for professional signatures.
Steps to Register a Limited Liability Partnership (LLP)
- Obtain Digital Signature Certificate (DSC): Secure DSC for proposed directors
- Obtain Director Identification Number (DIN): Obtain DIN for proposed directors
- Select Suitable Company Name: Apply for name availability
- New User Registration: Register as a new user
- Payment of Requisite Fee: Pay necessary fees to the Ministry of Corporate Affairs (MCA) and Stamp Duty
- Incorporate an LLP: File Form FiLLiP with partner details, business objectives, and other relevant information
- File LLP Agreement: Submit the LLP Agreement within 30 days of incorporation
LLP Annual Compliance
- Annual Return (Form 11): Every LLP should file an Annual Return within 60 days from the financial year’s closure. It must be signed by designated partners.
- Statements of Accounts and Solvency (Form 8): Form 8 should be filed within 30 days from the end of 6 months from the financial year’s end. It consists of Statement of Solvency and Statement of Accounts.
- Director KYC: Designated partners must file Director KYC before September 30th each year.
- Income Tax: LLPs should file the Income Tax Return in ITR 5 every year. The due date for Non-Audit LLPs is July 31st, and Audit LLPs is September 30th.
- Audit: LLPs with a contribution over Rs 25 lakhs or turnover exceeding Rs 40 lakhs require an audit.
No Limit of Business Owners:
But for the minimum requirement of at least two partners, there is no limit to the maximum number of partners the LLP can comprise of. On the other hand, in the case of a private limited company, there lies a limitation that it should not have more than 200 members.
Tax Benefits:
The major advantage when it comes to an LLP is that while being treated on par with partnership firms, the LLP is liable to pay the tax while the partners of the LLP are not liable to pay the same. Dividend distribution tax is thus not payable in the case of an LLP. ‘Deemed dividend’ is therefore not relevant with respect to LLP firms. Various expenditures incurred during the business such as payment of salary to the partners, other remuneration like a bonus, etc are sanctioned as deductions. Also, the dividend distribution tax which is levied for companies when the partners withdraw the profit from the company is not applicable in the case of a Limited Liability Partnership.
Do Not Require a Compulsory Audit:
Companies that are incorporated, whether they are public or private, regardless of the share capital have to submit their accounts for auditing. Here, LLP is an exception, as there are no such hard and fast rules that mandate an LLP to get their accounts to be audited. However, an LLP is required to undergo auditing when:
- The contributions of the LLP exceed ₹25 Lakhs
- The annual turnover of the LLP exceeds ₹40 Lakhs.
Given the wide ambit of perks an Limited Liability Partnership has to offer as compared to private partnership firms, this has become the most fitting option for budding entrepreneurs and venture capitalists. Yet, it has to be accepted that not all businesses find LLPs to be accommodative. A few of them opine that the lack of a single business head and engaging all the partners to make decisions can be a challenge in running an Limited Liability Partnership efficiently. However, this has been the most preferred corporate body as per many professionals like accountants, auditors, lawyers etc.
When it comes to Limited Liability Partnership incorporation, however, there’s only one choice for you. Reach out to the experts at Vakilsearch and get going today!
FAQs
How to Convert Existing Partnership Firms into LLP?
Submit Form 17 (Application and statement for conversion of a firm into LLP) along with Form 2 (Incorporation document and Subscriber's statement).
How to Convert Existing Private/Unlisted Public Company into LLP?
Apply through Form 18 (Application and Statement for conversion of a private/unlisted public company into LLP) along with Form 2.
How to Start a Foreign LLP (FLLP)?
Fill Form 27 (Registration of particulars by Foreign LLP) with the digital signatures of an authorized representative.
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