A new trend has been emerging among the entrepreneurs that have started opting for LLP. But what does LLP mean? Before going into that, we would explore the reasons behind the emergence of LLP. A few years back, there used to be two forms of organizations.
It becomes highly crucial to register LLP in India before initiating your business that can ensure the follow:
– Limited liability organizations such as companies.
– Unlimited liability partnership such as proprietorship or partnership.
Both of the above mentioned organizations have their advantages and disadvantages. There is limited liability of the company’s owners compared to proprietorship or partnerships that are easy to set up and operate. Still, small businesses and professionals generally tend to join the partnership as they are easy to establish and operate.
Nonetheless, as businesses enriched, there was a requirement for a form of organization that was a hybrid betwixt two forms of organizations. The service sector’s rapid growth created an environment and a demand for a new form of organization. Hence, the concept of LLP came into place that incorporates the benefits of both partnerships and companies.
As per the law, it is a corporate business body that allows professional skills and entrepreneurial initiative to operate and combine in an innovative, flexible and efficient manner, offering benefits of the limited liability while enabling its members to organize their internal structures as a partnership.
Characteristics of the LLP
– It is a separate legal entity as partners and LLP are both distinct from each other.
– Minimal two partners are needed to set up an LLP. Nonetheless, there is no bar on the maximum number of partners.
– No desideratum of minimum capital contribution.
– The LLP Act does not limit the benefits of LLP structure to certain classes of professionals only and will be available for usage by any enterprise.
Advantages of LLP
– Each partners’ liability will be limited to his/her share as mentioned in the agreement submitted at the time of establishing an LLP compared to partnership firms where the liability is unlimited.
– It can be formulated at low cost, easily.
– Partners will not be liable for each other’s’ acts and can be held liable only for their actions compared to partnerships wherein partners can be held liable for others’ acts.
– Minimal compliance and limitations are enforced on an LLP by the government compared to limitations on the company.
– As a juristic legal person, an LLP can sue in its name and be sued by others as well. Partners will not be liable to be sued for dues against the LLP.
Disadvantages of LLP
– LLP cannot launch its IPO and raise money from the public, which a company form of organization can easily do.
Distinction betwixt LLP and traditional partnership firm
The fundamental distinction starts with the liability of the partners. In a partnership firm, every partner will be liable, combined with all other partners and severally, for all the firm’s deeds or acts while he/she is a partner.
Nonetheless, under the LLP structure, the partner’s liability is restricted only to his/her agreed contribution. Also, no associate would be held liable on account of the unsanctioned or independent acts of other associates, hence enabling associates individually to be protected from combine liability formed by another associate’s unlawful acts or misconduct.
Distinction betwixt LLP and the company
The main difference between Private Limited Company and LLP is that there are minimal regulatory and other compliance regulations to follow for an LLP that makes it cost-effective and easy to manage.
Taxation on LLP in India
In India, the government has mandated that LLP would be taxed in the same manner as partnerships as tax will be levied on the LLP, and partners would be exempted from tax.
Also, LLP would be taxed in the same manner as partnership firms; no tax will be levied on converting partnership firms into the LLP.
The ITR should be signed and verified by the designated partner. For any inevitable reason, the designated partner cannot sign the ITR or where there is no designated partner; any other partner can do it.