Some of the primary advantages of an LLP are low registration costs,
minimal capital requirement and no restrictions on business owners.
A Limited Liability Partnership or LLP is one of the business entities that combines the elements of both - partnership firms and corporations and is viewed as a corporate hybrid. LLP companies enjoy the flexibility of organizing their own managerial structure based on mutual understanding as one partner is not solely liable to the liabilities or misconduct of another partner. Unlike Private limited companies and Limited companies that are governed by the Companies Act, LLPs are regulated by the Limited Liability Partnership Act 2008. These companies form a common LLP agreement and operate accordingly.
Although the concept of LLP traces back to 1957 in India, the idea was not well conceived and was in the form of recommendation in the 7th Law Commission. Again in 1997, the Report of the Expert Committee on Small Enterprises stated the advantages of a Limited Partnership Act that it would enhance the source of funds and skill but in vain. Later with the increase of potential growth rate in the Indian economy, in 2003 it was felt that entrepreneurship, knowledge and risk capital combined would provide a further impetus to the country’s growth. Hence, the need for a limited liability partnership emerged, emphasising the suggestions on how this new entity should function. It was decided that an LLP would be an alternative corporate business vehicle, an alternative to the traditional partnership to the young breed of entrepreneurs. The LLP Act was thus enacted by the Parliament in 2008 and came into force in 2009. If you need assitance with LLP registration, Vakilsearch will help you the procedue for a nominal fee.
The key characteristics of LLP according to the LLP Act 2008 are:
1. The LLP is a body corporate and a legal entity separate from its partners and has perpetual succession. An LLP can be formed by any two or more persons that are to be mentioned in the incorporation documents and duly filed with the Registrar.
2. There should be a minimum of two designated partners wherein at least one of them must be a resident in India. All the other partners can be agents of the LLP. The obligations of the partners must be as per the law.
3. An LLP is regulated by the provisions mentioned in the LLP agreement that is formed on common terms with all the partners during its establishment. It is also to be noted that these are subject to the provisions of the Limited Liability Partnership Act 2008. In absence of such an agreement, the mutual rights and responsibilities have to be as per the act.
4. As an LLP organization is a separate legal entity, all the partners are liable to the intangible or tangible assets of LLP and each of the partner’s agreed contribution in the company.
5. LLPs accounting system and trading disclosures are similar to that of other forms of companies.
6. The provisions in the Indian Partnership Act, 1932 are not applicable to LLPs.
An LLP is much easier and cheaper to run compared to a private limited company as there are just three compliances required per year. On the other hand, a private limited company has a lot of compliances to fulfil and conduct an audit of its books
The partners have the liberty to draft the agreement as they wish, with regard to their duties.
LLPs are relatively easier to wind up than private limited companies. It takes about two to three months to complete this process while it can take over a year to close a private limited company.
There is no limit on the maximum number of partners for an LLPs whereas it is 200 for private limited companies.
The partners can contribute in either tangible, intangible (movable and immovable properties) assets and there is no minimum limit set for the capital. But for private limited companies, the minimum contribution is Rs 1 lakh.
Although the LLP compliances are minimal, negligence could lead to high penalties which could go up to Rs 5 lakh for a single year.
As all shareholders of an LLP must be partners holding responsibilities towards the entity, Venture capitalists would not be willing to take upon any responsibility and only prefer investing. Hence, there are high possibilities that VCs go for private limited companies.
Irrespective of the company’s turnover the income tax rates for LLPs are taxed at 30%
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