There has been a need to create a business structure that combines the freedom of a partnership with the benefits of limited liability of a corporation while maintaining a low compliance cost for a long time. A Limited Liability Partnership format is such an alternative that gives the benefits of limited liability for a corporation while also allowing its members to manage their internal governance based on common goals and mutual understanding as in a partnership firm. Such a structure is most beneficial to small businesses such as Start-ups.
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What Is An LLP?
A limited liability partnership (LLP) is a business structure that has a separate legal entity, different from its members (partners), who are solely liable for the amount of money they invest in the concerned business and for any other personal guarantees. The partnership is registered under the Companies Act.
Although there must be at least two members at the time of organization, who may be either individuals or limited liability companies, the number of partners is not limited. It’s also possible to form an LLP with just one person and a dormant business.
Conventional business entities like companies, do not have the same level of protection as LLPs, and if the business is not converted into an LLP, participants may be held personally accountable for its obligations. Clients also do business with the partners individually rather than with the partnership as a whole.
Edge For Start-ups That Are LLPs
It was considered that start-ups in India required a business structure that provided the flexible character of a partnership with the benefits of a limited liability company at a low compliance cost.
The Limited Liability Partnership is an effective option that offers the advantages of limited liability for the company while also giving its members the liberty to organize their internal management as they see fit. This structure has proven to be very effective, particularly for Indian start-ups, small and medium businesses, and businesses in the services industry. Some of the benefits for start-ups in LLPs are:
Independence of Partners
In a partnership, one partner’s conduct holds the other partners liable as well as they are each other’s agents. In an LLP, however, one partner is not held liable for the activities of another partner’s incompetence or wrongdoing. This function is quite advantageous and makes it a favored choice for entrepreneurs.
Flexibility in Operations
While a company structure can be rather rigid with respect to compliance for a start-up, registering an LLP could be a lifesaver. You can have operational flexibility along with having company branding. This is stipulated in the LLP Agreement signed by the partners.
The parameters of the partnership could be adjusted to meet the needs of the partners. Every element, including rights and liabilities, capital, and profit sharing could be personalized and altered as needed. Such stipulations, however, should not take precedence over the LLP Act.
Lesser Investment and Maintenance Cost
In the case of an LLP, the investment cost is very low and the expenditure on registration of an LLP is also minimal. The partners could contribute as little as INR 100 in the capital. The investment amount should ideally be determined by the partners based on the business’s operations and scale.
The maintenance of a company is a lot more expensive than that of an LLP. Although the cost for an LLP may be more for less formal entities such as a sole proprietorship or partnership, but its other benefits make up for the price difference.
More Credibility Due to Registration With the Centre
LLPs, unlike typical partnerships, are registered with the Centre and have a distinct identity across the country. So, despite the fact that your company is registered in a specific state, your company could be easily recognized nationally and globally.
An LLP’s data is also publicly accessible to some extent being registered with the Ministry of Corporate Affairs. The availability of financial information ensures that financial agencies and other external agencies, such as vendors, can rely on the start-up.
Furthermore, the suffix LLP offers legitimacy to your start-up. It aids consumers and negotiating parties in identifying a trustworthy business structure. LLP is also preferred by banks and financial organizations over other informal structures.
Lesser Degree of Compliance
Greater compliance and mandatory audits sometimes deter the registration of start-ups by entrepreneurs. A Limited Liability Partnership instills confidence in them as it requires fewer compliances and fewer audits. Except for cases where modifications in the formation of the partnership are to be made, formalities such as meetings and announcements are limited.
In addition, the audit’s fixed cost is also reduced. In contrast to a company, an audit is required when the turnover or contribution surpasses INR 40 lakh. Annual compliance, in addition to even-based compliance and intimations to the Registrar, are still required.
An LLP name must be distinctive to be approved. In addition to registered trademarks, the name is also matched with other existing company and LLP names. Despite the fact that reserving a name can be challenging due to such regulations, it assures that your LLP stands out amid the crowd. When compared to the trademark database, the odds of obtaining quick permission for the registration of trademarks only improve.
Taxed as a Partnership
When it comes to picking a business structure, tax benefits are frequently overlooked. Despite of being a corporate body, an LLP is treated as a regular partnership firm for tax purposes.
Furthermore, a refund to partners is not subject to double taxes. As far as a company is concerned, the profits are taxed in its hands, and dividend distribution tax (DDT) is also levied during distribution whereas in the case of an LLP, the profit portion is exempt in partners’ possession.
Multiple Returns to Partners
An entrepreneur’s first priority is his or her profit and salary. You are entitled to a variety of benefits through LLP, but only under certain conditions. Returns could be withdrawn by a partner in the following ways:
- Remuneration: It is a compensation, bonus, or commission paid to a partner in exchange for his or her contributions in the LLP business. It’s similar to an employee’s salary. This is rightfully due to LLP’s engaged partners.
- Interest on Capital: Investing money in a business means foregoing the chance to earn consistent interest from banks or other sources. This opportunity cost is repaid in the form of a fixed rate of interest.
- Share in Profit: Every partner, whether active or not, wants a piece of the profits from the company. When the profit of the business is calculated, it is distributed among the partners according to an agreed profit-sharing ratio.
Income Tax law and the LLP Agreement govern the taxability of headings. A clause concerning partner remuneration must be included in the LLP agreement.
It is common knowledge that partners do not want their information to be made public. The privacy of an LLP is comparable to that of a corporation. Every document that a firm files with MCA are open to the public. In the case of LLP, however, this is not the case. The details and arrangements between the partners are still confidential.
Documents like LLP agreements and paperwork filed for partner information are not available to the public. Furthermore, if one is not a designated partner, his/her information is not included in the LLP’s master data. As a result, he/she will be able to keep some privacy.
An LLP permits individual partners in a partnership firm to be exempt from joint liability. The partners’ liability in the ordinary course of business is that of the LLP, and it does not extend to the partners’ personal assets. To adapt to the market, start-ups may form LLPs as it will help them organize and operate in a more dynamic and productive manner as a result of the LLP’s hybrid form.