Recently, there has been an acceleration in the number of entrepreneurs who want to start their start-up with LLP. Multiple reasons are responsible for such trends, such as low formation costs, fewer limitations and legal compliances and flexibility that LLP provides compared to other business structures.
Once you decide on the structure, you need to register a limited liability partnership as per the LLP act’s provision, 2008.
An LLP is an amalgamation of the company and a partnership that incorporates the suitable features of both. It coalesces the operational and organizational flexibility of a partnership (with advantages and safeguarding the limited liability) and the company’s separate legal identity. Compliance desideratum is higher for LLP than a partnership, but they are minimal compared to limited liability companies.
LLP as a business model is available in many countries such as the UK, US, Australia, Singapore, etc. But in India, it is quite new. In India, the LLP act, 2008 was notified on 31s March 2009. Since then, it has become popular in professional service companies, SMEs, and small businesses.
Still, many leaders and investors seem oblivion and prefer public or private limited companies. Hence, it becomes tough for LLP to infuse capital. Here, partnerships in companies can convert into an LLP and other way around without any tax liability.
Characteristics of LLP.
– It is persistent irrespective of the partners’ changes that it has a perpetual succession as a company. If a company’s shareholders change, then it will not affect the existence and company’s legal status. The same goes for when there are changes in the partners.
– An LLP is allowed to make contracts and possess properties in its own name.
– An LLP is a separate legal firm and will be liable to the extent of its assets. Nonetheless, partners’ liability will be limited to their contribution in the LLP, just like the company where shareholders are liable to the company’s debts as per the contribution they have made in the share capital. LLP creditors are not allowed, under any circumstances, to claim the personal assets of the LLP partners’ if the LLP is unable to pay the debts.
– Operational flexibility.
LLP’s flexibility and uniqueness have been very beneficial to many entrepreneurs. An LLP enables its partners to embrace an internal organization identical in form to that of a traditional company while restricting their liability to the extent of their individual capital contributions. LLPs are meant to fill the gap betwixt sole proprietorship and partnership firms under the Indian partnership act, 1932 and companies under the companies act, 1956, offering a separate channel for businesses and better corporate governance without being exposed to personal responsibility for the act of others.
– Communication via registered office and address.
It has been offered in the LLP act that the document might be delivered on an LLP or designated partner via sending it by mail or by any other method (to be stated in the rules) to the registered office and any other particularly stated address by the LLP in the form and manner mentioned in the rules. Hence, LLP is allowed to declare another address (except head office’s) to acquire statutory notices or letters and so forth of the registrar by filing form 2.
– Choices in the agreement clauses.
Partners will have the right and choice to explicate the LLP agreement’s clauses that govern duties, rights and obligations of LLP partners according to their necessity, like transfer and inheritance rights, for easy eventualities. The LLP Act, 2008 offers the partners’ rights to share P&L of the LLP and obtain distribution as per the agreement that is transferable either partly or wholly. Partners are allowed to lend money to transact other business with an LLP.
It contains rights like access to books, firm records and to examine them and clause that bares any activities that might result in a conflict of interest situation. It also entitles each partner to conduct their own, independent, and separate business and add a remuneration clause to be paid to the partner.
– LLPs for specific ventures.
LLP is governed through an agreement; it is feasible for it to offer suitable clauses in agreement to fix stipulated time for the duration of the LLP and in the LLP agreement.
In such scenarios, after fulfilling the venture’s objectives, the LLP can either be wound up, or the striking off provisions of the name of the business can be used instead of winding up provisions.
Example: BCD LLP is formulated only to carry out 3 batches of a management course in one year. After the completion, LLP can be wound up, or its name can be struck off from the register of LLPs to end its existence after the completion of one year.
As per rule 24 of the LLP rules, 2009, any LLP whose turnover does not go beyond Rs. 40 lacs in FY, or whose contribution does not go beyond Rs. 25 lacs are not compulsorily needed to obtain its accounts audited.
– Relaxation in submission and applicability of penalties.
The statutory provision needs LLP to furnish documents like SAS (statement of account and solvency) and AR (annual declaration) and communication concerning changes betwixt partners and so forth within stipulated time in the relevant provisions. This law includes provisions to enable LLPs to furnish these documents after their due dates in paying additional fees. In such cases, if it is within an additional commission of up to 300 days, then no action will proceed against them. If it takes more than that, then LLP will be needed to pay the normal deposit fees, additional costs and will be processed. The law also includes capitalization provisions (settlement betwixt defendant and department without any competition) of offenses punishable only through a fine.
– Less compliance.
Compliances that need adherence in LLP are less than a limited liability company. For instance, there is no provision to arrange a meeting; in fact, it is not compulsory to keep a record of meetings of partners/designated partners.
All LLP accounts are needed to be controlled by CA. Nonetheless, no compulsory checking of accounts is needed until the billing in any FY goes beyond Rs. 40 lacs or capital contribution goes beyond Rs. 25 lacs.
– Tax advantages.
Profit will be taxed separately in LLP and not to the partners that avoid double taxation issues.
– Amalgamation and merger.
Provisions concerning arrangement, compromise, or reconstruction of LLPs are available, making it feasible to merge 2 or more LLPs, like a company or betwixt LLPs and a business having private limited company registration in India.
– Prerogative to manage the business.
Unlike other corporate shareholders, such as private limited, the partners will have the prerogative to manage the business directly. Thus, they will have better control over all the business activities.
– No cap on the limits on partners.
LLP can have any number of partners, which increases the possibility of infusing more capital in the company. The new business organization’s requirement provides a separate option to resort to an association under the association act with limitless personal responsibility. LLPs enable professional experience and entrepreneurship to arrange and operate in a flexible, effective and innovative way.
Numerous benefits propel many entrepreneurs to go after pursuing the LLP while initiating their start-ups.