A new trend that has been observed of-late is that more and more entreprenuers have started opting for Limited Liability Partnerships. But What is a Limited Liability Partnership?
Before answering this question we’ll explain you reasons behind the emergence of LLP’s. Till a few years back there used to be only 2 forms of Organisations
- Limited Liability Organisations i.e. Companies
- Unlimited Liability Partnerships i.e. Partnership/ Proprietorship
Both these forms of organisations have their own plus and minuses. There is limited liability of the Owners in a Company as compared to Partnerships/Proprietorship which are easy to form and operate but Small Businesses & Professionals usually tend to opt for Partnerships as they are easy to form and operate.
However, as Businesses grew there was a need for a form of organisation which was a hybrid between the 2 forms of organisations. Moreover, the rapid growth of Service Sector created an environment and a demand for a new form of Organisation. Thus, the concept of Limited Liability Partnership was evolved which incorporates the benefits of both Companies as well as Partnerships.
Meaning of Limited Liability Partnership (LLP)
The Law defines LLP as:-
“A corporate business vehicle that enables professional expertise and entrepreneurial initiative to combine and operate in flexible, innovative and efficient manner, providing benefits of limited liability while allowing its members the flexibility for organizing their internal structure as a partnership”
Features of LLP
- The LLP has Separate Legal Entity i.e. the LLP and the partners are distinct from each other.
- Minimum of 2 partners are required to form a LLP. However, there is no limit on the maximum number of partners.
- No requirement of Minimum Capital Contribution.
- The LLP Act does not restrict the benefit of LLP structure to certain classes of Professionals only and would be available for use by any enterprise.
Benefits of forming a LLP
- The Liability of each partner is limited to his share as written in the Agreement filed at the time of creation of LLP as compared to Partnership Firms which have unlimited liability.
- It has a Low Cost of Formation and is Easy to Form.
- The Partners are not liable for the acts of each other and can be held liable only for their own acts as compared to Partnerships wherein they can be held liable for the acts of their partners as well.
- Less Restrictions and Compliance are enforced on a LLP by the Govt as compared to the restrictions enforced on a Company.
- As a Juristic Legal Person, a LLP can sue in its name and be sued by others. The partners are not liable to be sued for dues against the LLP.
Disadvantages of Forming a LLP
The only disadvantage of forming a LLP is that it cannot come out with its IPO and Raise Money from the Public which a Company form of organisation can easily do.
Difference between LLP & Traditional Partnership Firm
The basic difference between LLP and Partnership is with regard to the Liability of the Partners.
In a Partnership Firm, every partner is liable, jointly with all the other partners and also severally for all acts of the firm done while he is a Partner.
However, under the LLP structure, liability of the partner is limited only to his agreed contribution. Further, no partner is liable on account of the independent or unauthorized acts of other partners, thus allowing individual partners to be shielded from joint liability created by another partner’s wrongful acts or misconduct.
Difference between LLP & Company
The major difference between LLP’s and Company’s is that there are less Regulatory and other Compliance Regulations applicable on a LLP which makes it Easy and Cost-Effective to Manage.
Taxation of LLP’s in India
In India, the Govt has notified that LLP’s would be taxed in the same form as Partnerships i.e. Tax would be levied on the LLP and the partners would be exempt from Tax.
- Recommended Read: Computation of Income Tax on Limited Liability Partnerships
Moreover, as LLP’s would be taxed in the same form as Partnership Firms, no tax would be levied on the conversion of Partnership Firms into Limited Liability Partnership.
The Income Tax Return shall be signed and verified by the designated partner and where for any unavoidable reason the designated partner is not able to sign the return of income or where there is no designated partner, by any other partner.