Limited Liability Partnerships
Limited liability partnership, popularly known as LLP is an attractive form of business that gives the benefit of limited liability of a company structure and flexibility of a partnership firm. The LLP may be a separate legal entity, is susceptible to the complete extent of its assets but the liability of the partners is restricted to their agreed contribution within the LLP. Further, no partner is liable for the actions of another partner’s wrongdoing and thus has no responsibility for another partner’s unauthorized actions. This form of business has gained popularity amongst the Professional Service sector of the industry such as accountants, solicitors, architects, consultants, surveyors.
Features of an LLP:
- The liability of the partners is limited to the amount of contribution made by them to the LLP.
- The LLP can continue its existence irrespective of changes in partners. It is capable of getting into contracts and holding property in its name.
- Mutual rights and duties of the partners are distinctly laid down in the LLP agreement. The LLP, however, isn’t relieved of the liability for its other obligations as a separate entity.
- The LLP is a formal hybrid structure that requires a written LLP agreement which has to be registered in the Registrar of Companies. It comes with its Annual Reporting requirements.
- It will have perpetual succession.
Advantages of LLP:
- Separate Legal Entity:
The LLP has a separate legal entity. It can buy, rent, lease, own property, employ staff, enter into contracts, and be held accountable if necessary. It can hold property and can conduct business in its name. The LLP or its partners are not liable for each other’s conduct and actions.
- Limited Liability:
The Liability of each partner is limited to his share as written in the Agreement filed at the time of the creation of LLP as compared to Partnership Firms which have unlimited liability.
LLP provides flexibility without imposing detailed legal and procedural requirements. The overall reporting and compliance are less compared to a corporate structure.
The operation of the partnership and distribution of profits is determined by a written agreement between the members. This may allow for greater flexibility in the management of the business.
- Taxation Aspect:
LLP is not liable to pay tax on the income and share of its partners. Thus, no dividend distribution tax is payable as under section 40(b). Bonus, commission or remuneration, Interest to partners, any payment of salary, allowed as deduction. Provision of ‘deemed dividend’ under income tax law, does not apply to LLP.
Disadvantages of LLP:
- Penalty for Non-compliances:
Annual filing of LLP is mandatory, irrespective of whether there is any business activity. Public disclosure is mandatory. The LLP has to file the income tax return and Form 8 or Form 11 with the MCA. if any LLP fails to comply with these provisions a penalty of Rs. 100 per day can be levied and there is no limit on the penalty levied.
- Equity Investment:
An LLP cannot raise equity capital from the market like a company. It can have only the capital brought in by its partners. Hence there is a restriction on capital derived from the market.
- Higher Income Tax Rate:
The income tax rate for a company is 25% whereas the income tax rate of an LLP is 30%, irrespective of the turnover made during the year.
- Transfer of ownership:
The partners of the LLP have to obtain the consent of all the other partners for the transfer of ownership rights. It cannot do so without the consent of shareholders of a company can.
Thus it can be concluded that LLP is a simple form of business in which you have the flexibility of a partnership firm and the comprehensive structure of a company also. We at SMT help you in the formation of an LLP with expert business guidance which will help you to form the best Business setup.
Still, if you are confused about this business structure do follow our Blog on “ LLP vs Private limited company” and also go through the article on “LLP and a partnership Firm.