What is an LLP? What are its benefits & drawbacks

Limited Liability Partnership or LLP is a rather new Business structure that was introduced in India with the Limited Liability Partnership Act, 2008. LLP offers the combined features of a Partnership firm and a Company. LLP is easy to setup, manage and operate. It has minimal compliances and very few legal formailities are required to run it

Due to this flexibility, it is rapidly becoming one of the most preferred Business Structure for Small & Medium family-owned Businesses and Entrepreneurs. Apart from these, there are multiple benefits of registering your Business as an LLP.

In this piece, I am going to discuss about LLP and all the compliances related to an LLP.

What is an LLP?

It’s a type of Business Registration, where more than one Individuals come together and establish a Partnership firm. These individuals are known as Partners. What sets apart an LLP from the general Partnership firm is the Limited Liability.

This means, in an LLP, every Partner has limited Liabilities in proportion to their share in the LLP. This is totally different from a normal Partnership firm in which every Partner is fully liable to the actions of other Partner/Partners.

LLP is a registered Business Structure and offers a complete immunity to the personal assets of every Partner.

What are the minimum requirements for an LLP registration

Following are the minimum requirements for an LLP registration

  1. At least two Partners are needed to start an LLP. If the number of Partners is more than two, then two of them should be Designated Partner.
  2. At least one Designated Partner should be Indian in case of any foreign involvement
  3. The LLP should have its registered office in India.
  4.  A DIN (Director Identification Number) for every Director is mandatory for setting up an LLP.
  5. A DSC (Digital Signature Certificate) is mandatory for setting up an LLP.

Benefits of an LLP

Let’s take a look at the benefits of an LLP

  1. Every LLP enjoys a separate legal status. This means, the Partners and their LLP are different entities in front of Law. This feature reduces the liabilities of the each Partner and limits their liabilities in the ratio of their contribution in the LLP.
  2. The registration process of an LLP is very easy. Unlike other registered Business structure where the application has to be made with the ROC (Registrar of Company), the process for LLP is quite simple. All the Partners has to do is fill up the registration form and file it with the local secretary of the state.
  3. In a normal Partnership firm, the maximum number of Partners is capped at 100. This is not the case with an LLP. There is no limit in the number of Partners in an LLP. This feature is of great help when a large number of Partners are required to start a Business.
  4. Unlike a Private Ltd or Public Ltd Company, the registration cost is significantly lower, reducing the burden on the Partners in the initial stage of Business.
  5. There is nothing like Minimum Capital Requirement to start incorporate an LLP.
  6. Even if an LLP goes Bankrupt or Insolvent, the personal assets of the Partners remain safe.
  7. The Transfer of Ownership of an LLP firm can be done easily.
  8. LLP is easy to operate, just like a normal PArtnerhsip firm. All day-to-day operations of an LLP are governed by an LLP Agreement. This Agreement also dictates important matters like Profit and Loss sharing ratio, Ownership of the Property,& Designated Partners.
  9. LLP enjoys the perpetual existence even in the case of death or incapacity of one or more partners to discharge the duty.
  10. Audit is not mandatory for an LLP. It has to be done under only circumstances:’
    1. If the annual turnover of an LLP exceeds INR 40 lakh
    1. If the annual contribution of an LLP exceeds INR 25 lakh

Drawbacks of an LLP

Now let’s take a look at the disadvantages of an LLP registration

  1. The income of an LLP is treated as the personal income and is taxed as such.
  2. All the Financial accounts has to be made Public by submitting them to the Companies House. For some individuals who do not want to disclose this information, Public disclosure may be disadvantage.
  3. Unlike a Private Ltd Company, the profit earned by an LLP is effectively distributed. This means an LLP cannot hold over profit to reduce tax in this year.
  4. The minimum number of Partner should be two and if any one of them chooses to leave, the LLP will be dissolved.
  5. Even if there is no business activity, an LLP has to file an ITR and annual return with MCA. Failure to file these returns attracts penalty of INR 100 per day for each return. The major issue here is, there is no upper limit on the penalty.
  6. As the concept of Equity is not applicable to the LLP, investments trough HNIs, Venture Capital and Angel Investors is not allowed. This might restrict the flow of Fund in an LLP.

Final thoughts

LLP is a great option for MSMEs and family run businesses that want a higher flexibility with lower compliances. There are some drawbacks with LLPs, but then there is no Business Structure that is ideal. So finally it depends on your Business structure, Goals and Nature of your Products and Services you offer.

So the final decision of whether to chose an LLP registration for your Business ultimately depends on you.

I hope this piece of information clears many of your doubts about an LLP Business structure. In the next blog I will explain the  whole registration process for an LLP.

Meanwhile, if you need any assistance feel free to reach our experts.

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