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What is a Limited Liability Partnership Company?
A limited liability partnership (LLP) in India is similar to a general partnership, except the partners are not personally liable for negligent acts conducted by other partners or employees not under their supervision. This is different from a general partnership, in which each partner is liable for the debts and obligations of the business as well as the malpractice of any other partner. Income taxes in an LLP are passed through the business and reflected on the partners’ individual tax returns. Because of the limited liability of each partner and pass-through tax status, LLPs are a very popular business structure.
- LLP, a legal form available world-wide is now introduced in India and is governed by the Limited Liability Partnership Act 2008, with effect from April 1, 2009.
- LLP combines the advantages of ease of running a Partnership and separate legal entity status and limited liability aspect of a Company.
- Here are some of the main features of a LLP
- LLP is a separate legal entity separate from its partners, can own assets in its name, sue and be sued.
Partnership Stakes and responsibilities :
Unlike corporate shareholders, the partners have the right to manage the business directly. One partner is not responsible or liable for another partner’s misconduct or negligence.
- Minimum of 2 partners and no maximum.
- Should be ‘for profit’ business.
- Perpetual succession.
The rights and duties of partners in LLP will be governed by the agreement between partners and the partners have the flexibility to devise the agreement as per their choice. The duties and obligations of Designated Partners shall be as provided in the law.
- Liability of the partners is limited to the extent of his contribution in the LLP. No exposure of personal assets of the partner, except in cases of fraud.
- LLP shall maintain annual accounts. However, audit of the accounts is required only if the contribution exceeds Rs. 25 lakhs or annual turnover exceeds Rs.40 lakhs.
Why Limited Liability Partnership Company?
A LLP is indeed advantageous because of comparatively lower cost of formation, lesser compliance requirements, easy to manage and run and also easy to wind-up and dissolve, no requirement of minimum capital contributions, partners are not liable for the acts of the other partners and importantly no minimum alternate tax (as of date). But, LLP cannot raise money from the public.
Likely users of the LLP :
The ‘Limited Liability Partnership” (LLP) format of registered company was originally created to enable the professions to take advantage of limited liability, but its popularity is growing among a much wider range of business.
India has witnessed considerable growth in services sector and the quality of our professionals is acknowledged internationally. It is necessary that entrepreneurship knowledge and risk capital combine to provide a further impetus to our impressive economic growth. Equally the services sector promises an economic opportunity similar to that provided by information technology over the past few years. It is likely that in the years to come Indian professionals would be providing accountancy, legal and various other professional/technical services to a large number of entities across the globe. Such services would require multidisciplinary combinations that would offer a menu of solutions to international clients.
In view of all this, the LLP framework could be used for many enterprises, such as :
- Persons providing services of any kind
- Enterprises in new knowledge and technology based fields where the corporate form is not suited.
- For professionals such as Chartered Accountants (CAs), Cost and Works Accountants (CWAs), Company Secretaries (CSs) and Advocates, etc.
- Venture capital funds where risk capital combines with knowledge and expertise.
- Professionals and enterprises engaged in any scientific, technical or artistic discipline, for any activity relating to research production, design and provision of services.
- Small Sector Enterprises (including Micro, Small and Medium Enterprises)
- Producer Companies in Handloom, Handicrafts sector.
But, LLP might not be a choice due to certain extraneous reasons, for example, DOT would approve the application for a leased line only for a company; Angels / VCs would be comfortable investing in a company.
Is LLP better than private limited company the choice is yours when you are starting a new business?
- However there are so many advantages of starting a limited liability partnership than a private limited company in India.
Will the number of employees we expect to have affect my choice of LLP or LTD?
- If the company expects to employ people and the employee’s payroll is likely to be higher than the owners’ salary, a “private company limited by shares” may well be more tax efficient that an “limited liability partnership”.
- If the business is likely to remain as just two or three members who are each making a similar contribution and each draw similar salaries then the LLP option will probably be more tax efficient.
Will there be any problems if I plan to sell the business at some stage?
- One other important factor should be weighed in the balance : How likely is it that the business will be sold as a going concern? A “private company limited by shares” (LTD) is more anonymous and easier to separate from the owners by means of transferring the shares. A partnership is more personal and therefore less straight-forward to separate from the owners.
Which is better – an LLP or an LTD?
- There is no absolute rule that makes one format better than the other. In any case, if your business changes over the years so that the alternative format becomes more appropriate, it is possible to form a new company of the other type – then transfer the business over to the new company.
- LLP is an alternative corporate business form that gives the benefits of limited liability of a company and the flexibility of a partnership.
- The LLP can continue its existence irrespective of changes in partners. It is capable of entering into contracts and holding property in its own name.
- The LLP is a separate legal entity, is liable to the full extent of its assets but liability of the partners is limited to their agreed contribution in the LLP.
- Further, no partner is liable on account of the independent or un-authorized actions of other partners, thus individual partners are shielded from joint liability created by another partner’s wrongful business decisions or misconduct.
- Mutual rights and duties of the partners within a LLP are governed by an agreement between the partners or between the partners and the LLP as the case may be. The LLP, however, is not relieved of the liability for its other obligations as a separate entity.
- Since LLP contains elements of both ‘a corporate structure’ as well a ‘a partnership firm structure’ LLP is called a hybrid between a company and a partnership.
Comparative Analysis :
|Registration||Compulsory registration required with the ROC. Certificate of Incorporation is conclusive evidence.||Not compulsory. Unregistered Partnership Firm will not have the ability to sue.||Compulsory registration required with the ROC|
|Name||Name of a public company to end with the word "limited" and a private company with the words "private limited"||No guidelines.||Name to end with "LLP" "Limited Liability Partnership"|
|Capital Contribution||Private company should have a minimum paid up capital of Rs. 1 lakh and Rs.5 lakhs for a public company||Not specified||Not specified|
|Legal Entity Status||Is a separate legal entity||Not a separate legal entity||Is a separate legal entity|
|Liability||Limited to the extent of unpaid capital.||Unlimited, can extend to the personal assets of the partners||Limited to the extent of the contribution to the LLP.|
|No. of Shareholders / Partners||Minimum of 2. In a private company, maximum of 50 shareholders||2- 20 partners||Minimum of 2. No maximum.|
|Foreign Nationals as shareholder / Partner||Foreign nationals can be shareholders.||Foreign nationals cannot form partnership firm.||Foreign nationals can be partners.|
|Taxability||The income is taxed at 30% + surcharge+cess||The income is taxed at 30% + surcharge+cess||The income is taxed at 30% + surcharge+cess.|
|Meetings||Quarterly Board of Directors meeting, annual shareholding meeting is mandatory||Not required||Not required|
|Annual Return||Annual Accounts and Annual Return to be filed with ROC||No returns to be filed with the Registrar of Firms||Annual statement of accounts and solvency & Annual Return has to be filed with ROC|
|Audit||Compulsory, irrespective of share capital and turnover||Compulsory||Required, if the contribution is above Rs.25 lakhs or if annual turnover is above Rs. 40 lakhs.|
|How do the bankers view||High creditworthiness, due to stringent compliances and disclosures required||Creditworthiness depends on goodwill and credit worthiness of the partners||Perception is higher compared to that of a partnership but lesser than a company.|
|Dissolution||Very procedural. Voluntary or by Order of National Company Law Tribunal||By agreement of the partners, insolvency or by Court Order||Less procedural compared to company. Voluntary or by Order of National Company Law Tribunal|
|Whistle Blowing||No such provision||No such provision||Protection provided to employees and partners who provide useful information during the investigation process.|