It is a form of alternative corporate business which provides flexibility as that of a partnership and the benefits of limited liability of a company.
Limited Liability Partnership (LLP) can continue their existence even after changes in partners. LLP is capable of entering into contracts and holding property in its name.
It is a separate legal entity, is liable to the full extent of its assets, but the accountability of the partners is limited to their agreed contribution in the LLP.
Further, no partner is responsible for the account of the individualistic or un-authorised actions of other partners; thus, individual partners are protected from joint liability for another partner’s wrongful decisions or conduct.
A between the partners and the LLP or agreement between the partners as the case may govern the mutual rights and duties of the partners in an LLP. The LLP, however, is not released of the liability for its other obligations as a separate entity.
Structure of an LLP
By following the provisions specified in The Limited Liability Partnership Act, 2008, LLPs should be registered under the provisions of the Companies Act, 1956 with the Registrar of Companies (ROC) and all LLPs shall have their registered office. An Incorporation Document supported by at least two partners shall have to be filed with the Registrar in a prescribed form. Contents of LLP Agreement, as may be specified, shall also be required to be filed with Registrar, online. Also, the contents of LLP Agreement or any changes made therein, if any, may be filed in Form 3 and details of partners/designated partners may be filed in Form 4 in accordance with LLP Rules, 2009.
As per provisions of The Limited Liability Partnership Act, 2008, in the inadequacy of agreement as to any matter, the liabilities and mutual rights shall be as provided under the Schedule I to the Act. Therefore, if any LLP proposes to exclude provisions/requirements of Schedule I to the Act, it will have to enter into an LLP Agreement, explicitly mentioning the excluding applicability of any or all paragraphs of Schedule I.
Advantages of LLP
- It is organised and operates based on an agreement.
- Provides flexibility without imposing detailed legal and procedural requirements
- Enables professional/technical expertise and initiative to combine with financial risk-taking capacity in an innovative and efficient manner
- No minimum capital requirement in LLP. An LLP can be formed with the least possible capital.
- A minimum of 2 partners is required for LLPs while there is no limit on the maximum number.
- Lower registration cost
- LLPs are needed to get the tax audit done only in the case: The aidings of the LLP exceeds Rs. 25 Lakhs or The annual turnover of the LLP exceeds Rs. 40 Lakhs
Disadvantages of LLP
- Higher Penalty for Non-Compliance: Even if an LLP does not have any activity, it is required to file an income tax return and annual return each year. In case an LLP fails to file Form 8 and 11 (Annual Filing), There is no limit on the penalty, and it could run into lakhs if an LLP has not filed its annual return for a few years.
In the case of a company, the penalty for not filing an annual return for the company is set to increase and matched with the LLP. In the case of a proprietorship or partnership firm, there is no requirement for filing an annual return. Hence, the only penalty under the Income-tax Act would be applicable.
- Restricted Access to Capital Markets: LLPs are a small form of business and cannot get its shares listed on any stock exchange through initial public offerings. With this restriction, limited liability partnerships may find it difficult to attract outside investors to buy the shares.
- Inability to Have Equity Investment: An LLP does not have the concept of equity or shareholding like a company. Most LLPs have to rely on funding from promoters and debt funding.
- Higher Income Tax Rate: The income tax rate for a company with a turnover of up to Rs.250 crores is 25%. However, LLPs are taxed at a 30% rate irrespective of the turnover.