limited liability partnership (LLP)

A Limited Liability Partnership (LLP) is a form of general partnership in which each partner enjoys limited personal liability for the partnership's debts. Partners are not held responsible for the wrongful actions of their fellow partners but may potentially bear liability for contractual debts, depending on the state's regulations. LLPs are particularly favored for larger partnerships and are commonly chosen by professionals. Some states restrict the use of the LLP structure to professionals exclusively. Similar to general partnerships, an LLP must consist of two or more partners. However, LLPs offer flexibility in determining the distribution of control and profits among partners. In an LLP, most decisions can be delegated to specific partners, except for those related to modifications in the partnership agreement, which require unanimous approval from all partners.

Unlike limited partnerships, LLPs grant limited liability to partners even when they actively participate in managing the business. Nevertheless, if a court determines that partners have attempted to defraud creditors through improper distributions, it may disregard the limited liability protection and recover funds for the creditors. It's important to note that the actions leading to such treatment vary and necessitate a case-specific assessment under the relevant state laws. This should be contrasted with limited partnerships and limited liability companies (LLCs).

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There are several reasons why many entrepreneurs opt for LLP (Limited Liability Partnership) registration over forming a Private Limited Company. LLPs are known for their simplicity in both the setup process and daily operations, and they come with fewer compliance requirements, especially when there's minimal activity involved. This is why many entrepreneurs find it advantageous to establish their organizations in this manner. In this article, we will explore the various pros and cons of LLPs in India.

Advantages of LLP in India

  1. No Minimum Contribution Requirement: LLPs do not have a minimum capital requirement. They can be formed with minimal capital, and partners can contribute tangible, movable, immovable, intangible property, or other benefits to the LLP.

  2. Unrestricted Ownership: An LLP mandates a minimum of two partners, but there is no upper limit on the maximum number of partners. In contrast, private limited companies are restricted to a maximum of 200 members.

  3. Lower Registration Costs: Registering an LLP is cost-effective compared to incorporating a private limited or public limited company. However, the cost difference between registering an LLP and a Private Limited Company has diminished in recent times.

    For instance, you can register an LLP through IndiaFiling for Rs. 7899, which is comparable to the cost of registering a company through IndiaFilings.

  4. No Mandatory Audit: While all companies, whether private or public, are obligated to have their accounts audited, LLPs are exempt from this mandatory requirement. Tax audits are only required if the LLP's contributions exceed Rs. 25 Lakhs or its annual turnover surpasses Rs. 40 Lakhs.

  5. Taxation Aspect on LLP: For income tax purposes, LLPs are treated similarly to partnership firms. The LLP is liable for income tax, and the share of its partners in the LLP's income is not subject to taxation. Consequently, there is no dividend distribution tax (DDT) payable. Moreover, provisions related to 'deemed dividend' under income tax law do not apply to LLPs. Section 40(b) allows deductions for interest to partners and payments like salary, bonus, commission, or remuneration.

  6. No Dividend Distribution Tax (DDT): In the case of a company, if profits are withdrawn by the owners, the company is liable for additional tax in the form of DDT at 15% (plus surcharge & education cess). However, LLPs are not subject to such a tax, allowing partners to easily withdraw profits.

Disadvantages of LLP in India

  1. Penalty for Non-Compliance: Even if an LLP is inactive, it must file an income tax return and an MCA annual return each year. Failure to file Form 8 or Form 11 (LLP Annual Filing) incurs a penalty of Rs. 100 per day, per form, with no upper limit on the penalty amount. In contrast, sole proprietorships or partnership firms are not required to file annual returns, and only penalties under the Income Tax Act would apply.

  2. Inability to Attract Equity Investment: LLPs do not incorporate the concept of equity or shareholding like companies. As a result, angel investors, high net worth individuals (HNIs), venture capital firms, and private equity funds cannot invest in LLPs as shareholders. This means that most LLPs rely on funding from promoters and debt financing.

  3. Higher Income Tax Rate: Companies with turnovers up to Rs. 250 crores are taxed at a rate of 25% (with further reductions for new manufacturing companies in 2019). In contrast, LLPs are subject to a flat 30% income tax rate regardless of their turnover.

This article provides insight into the advantages and disadvantages of LLPs in India, highlighting key factors to consider when choosing the right business structure.

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