Business Structure: Limited Liability Partnership

Concept of Limited Liability Partnership or LLP was introduced in India in 2008 by the Limited Liability Act, 2008. LLP has features that are a mix of a company and a partnership. LLP concept is very well known in other countries specially in the service sector.

Advantages

  • Registration: It is very easy to form LLP, as the process is very simple as compared to companies and does not involve much formality. The cost incurred in setting up is less.
  • Corporate Structure: LLP is also body corporate, which means it has its own existence as compared to partnership.

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  1. LLP and its Partners are distinct entity in the eyes of law. LLP will know by its own name and not the name of its  partners.
  2. A LLP exists as a separate legal entity.
  3. A LLP as legal entity is capable of owning its funds and other properties. The property of LLP is not the property of its partners. Therefore partners cannot make any claim on the property in case of any dispute among themselves.
  4. Financing a small business like sole proprietorship or partnership can be difficult at times. A LLP being a regulated entity like company can attract finance from PE Investors, financial institutions etc.
  5. Liability for repayment of debts and lawsuits incurred by the LLP lies on it and not the owner.
  6. Any business with potential for lawsuits should consider incorporation; it will offer an added layer of protection.
  7. LLP, being a juristic person, can sue in its name and be sued by others. The partners are not liable to be sued for dues against the LLP.
  • Perpetual succession: An incorporated LLP has perpetual succession. Notwithstanding any changes in the partners of the LLP, the LLP will be a same entity with the same privileges, immunities, estates and possessions. The LLP shall continue to exist till its wound up in accordance with the provisions of the relevant law.
  • Members: There is no limit on number of partners, and less requirement of maintaining accounts, records etc..
  • Taxation: LLP are taxed at a lower rate as compared to Company. Moreover, LLP are also not subject to Dividend Distribution Tax as compared to company, so there will not be any tax while you distribute profit to your partners i.e. no double taxation like that in case of General Partnership.
  • Auditing: Audition of an LLP is not required unless it has capital exceeding 25 Lakh or turnover exceeding 60 lakh.
  • No Mutual agency: In LLP, Partners unlike partnership are not agents of the partners and therefore they are not liable for the individual act of other partners in LLP, which protects the interest of individual partners.
  • Capital Requirement: No minimum capital is required to start an LLP.

Disadvantages

  • An LLP cannot raise money from the general public, so there is no possibility of going for an IPO.
  • An LLP cannot be formed by a single person. NRI/ Foreign national who want to form an LLP in India then at least one partner should be a resident of India. Two foreign partners cannot form LLP without having one resident Indian partner along with them
  • Ownership rights are not transferable easily without obtaining consents of all partners of the LLP.
  • Admission of a new partner involves a lot of formalities. The supplementary agreement containing details of new partners and his contribution  has to be created and then accordingly the existing partners need to revise or change the contribution held by them due to admission of new partners in the LLP agreement.
  • LLP is not allowed to raise External Commercial Borrowing (“ECB”). Thus LLP cannot take commercial loans from its foreign partners, FII’s (Foreign Institutional Investors), banks from outside India, any financial institution outside India or any other entity resident/incorporated outside India.

 

 

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Nivedita Saxena is currently an undergraduate student at National Law Institute University, Bhopal. She enjoys reading novels and learning about new startups and businesses & has in the past worked with quiet some startups in various capacity. She currently is also the Public relations In-charge at Grayscale Legal.

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