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Limited Liability Partnership (LLP)

Limited Liability Partnership (LLP)

Limited liability partnership is governed by Limited Liability Partnership Act, 2008. LLP contains elements of both ‘a corporate structure’ as well as ‘a partnership firm structure’ LLP is called a hybrid between a company and a partnership. LLP is an alternative corporate business form that gives the benefits of limited liability of a company and the flexibility of a partnership. The LLP can continue its existence irrespective of changes in partners. It is capable of entering into contracts and holding property in its own name. The LLP is a separate legal entity, is liable to the full extent of its assets but liability of the partners is limited to their agreed contribution in the LLP. Further, no partner is liable on account of the independent or un-authorized actions of other partners, thus individual partners are shielded from joint liability created by another partner’s wrongful business decisions or misconduct. Mutual rights and duties of the partners within a LLP are governed by an agreement between the partners or between the partners and the LLP as the case may be. The LLP, however, is not relieved of the liability for its other obligations as a separate entity.

Meaning of Limited Liability Partnership

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

  1. The LLP has Separate Legal Entity i.e. the LLP and the partners are distinct from each other
  2. Minimum of 2 partners are required to form a LLP. However, there is no limit on the maximum number of partners.
  3. No requirement of Minimum Capital Contribution.
  4. The LLP Act does not restrict the benefits of LLP structure to certain classes of Professionals only and would be available for use by any enterprise.

Benefits of forming a LLP

Following reasons can help you decide, why you should go for an LLP:

  • Renowned form of business: Though the concept of Limited Liability Partnership has been recently introduced in India but it is very known concept in other countries of the world especially in service sector.
  • Easy to Form: It is very easy to form LLP, as the process is very simple as compared to Companies and does not involve much formality.
  • Body Corporate: Just like a Company, LLP is also body corporate , which means it has its own existence as compared to partnership. 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.
  • Liability: A LLP exists as a separate legal entity from your personal life. Both LLP and person, who own it, are separate entities and both functions separately. Liability for repayment of debts and lawsuits incurred by the LLP lies on it and not the owner. Any business with potential for lawsuits should consider incorporation; it will offer an added layer of protection.
  • 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.
  • Flexible to Manage: LLP Act 2008 gives LLP the at most freedom to manage its own affairs. Partner can decide the way they want to run and manage the LLP, in form of LLP Agreement. The LLP Act does not regulated the LLP to large extent rather than allows partners the liberty to manage it as per their will and fancies..
  • Easy Transferable Ownership: It is easy to become a Partner or leave the LLP or otherwise it is easier to transfer the ownership in accordance with the terms of the LLP Agreement.
  • Separate Property: A LLP as legal entity is capable of owning its funds and other properties. The LLP is the real person in which all the property is vested and by which it is controlled, managed and disposed off. 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.
  • Taxation: Another main benefit of incorporation is the taxation of a LLP. 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.
  • Raising Money: 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.
  • Capacity to sue: 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.
  • No Mandatory Audit Requirement: Under LLP, only in case of business, where the annual turnover/contribution exceeds Rs 40 Lacs/Rs 25 Lacs are required to get their account audited annually by a chartered accountant. This provides great relief to small businessmen.
  • Partners are not agent of other Partners: 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.
  • Compliances: As compared to a private company, the numbers of compliances are on lesser side in case of LLP.Top of Form

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 & General Partnership Firm

A partnership is a business agreement between two or more people who are called partners. Each partner owns a share of the business personally. This is a less expensive business structure and is more customizable than a corporation. The attractive attribute of a partnership is that profits and losses are passed on directly to the partners, thereby avoiding double-taxation that is incurred through a corporation. There are three types of partnership structures: general partnerships, limited liability partnerships and limited partnerships. Each has unique characteristics, benefits and risks.

A general partnership is an agreement between two or more people who share equally in profits and liabilities for the company. This can be as informal as a verbal agreement made over coffee or a formalized contractual agreement between partners. There are no requirements for business structure or governance; it is entirely up to the partners to define how the company is to be run and who runs it. Each general partner receives profits and losses as personal income on a Schedule K-1 and the company itself is not taxed on earnings. Corporations are subject to tax on earnings that are then passed on to the owners, who pay tax on the same earnings on their personal income tax returns. Avoiding this double-taxation is a key advantage to owning a partnership. General partners are also responsible for the company’s solvency and liabilities, making this arrangement very risky. Unlimited liability rests on each general partner, even if one partner is solely responsible for any illegal activities or financial problems. Further increasing the risk for general partners is the fact that each general partner can act independently on behalf of the company without consent from the other partners.

Limited liability partnerships offer the same tax advantages as a general partnership but offer some protection for partners’ personal assets by limiting their liability to that of their interest in the company only. All partners are allowed to manage the business like in a general partnership; however, a formal agreement is required for this business type. This structure keeps all partners from subjecting their personal assets to the business liabilities. For example, Jim and Bob are attorneys and set up a limited liability partnership to share in each others’ success. Their firm is sued by a former client, but neither Jim nor Bob have personal assets at risk.

Though they share similar names, a limited liability partnership and a limited partnership are quite different. A limited partnership differs by requiring at least one general partner to manage and take on all risk, while passive limited partners enjoy no liability. For investment purposes, a limited partner is a prudent position in a partnership because only the partnership interest is subject to liability.

Difference between LLP & Company

The major difference between LLP’s and company is that there are less Regulatory and other Compliance Regulations applicable on a LLP which makes it easy and Cost- Effective to Manage.

Procedure to incorporate LLP

Any two or more persons can form an LLP. Even a limited Company, a foreign Company, a LLP, a foreign LLP or a non-resident can be a partner in LLP. Although, there is no specific mention, a HUF represented by its Karta and a Minor can also be partner in LLP.

An Incorporation document (similar to memorandum) and LLP agreement (similar to articles of association) is required to be filed electronically. The Registrar of Companies (ROC) shall register and control LLPs.

Steps to Form an LLP:-

1.      Deciding the Partners & Designated Partners for forming

2.      Obtaining the Director Identification Number and the Digital Signature

3.      Checking Name availability for LLP

4.      Drafting of LLP Agreement

5.      Filing incorporation Document

6.      Certificate of Incorporation

Accounting and Taxation Treatment of Limited Liability Partnership

 

Accounting Treatment

Every LLP shall maintain books of accounts and submit a statement of accounts and solvency within a period of 30 days from the end of six months of the financial year. It is also required to file annual return within 60 days from the end of the financial year. Apart from that, an LLP is also required to get its accounts audited if annual turnover exceeds Rs. 40 Lakhs or the contribution exceeds 25 Lakhs.

Revised Schedule-VI to the Companies Act, 1956 is not applicable to an LLP. It applies to all companies registered under the Companies Act but LLP is a body corporate and not a company.

Taxation Treatment

Income Tax

Budget 2009-10 has brought provisions regarding taxation of LLPs. Limited Liability Partnership will be treated as Partnership Firm for the purpose of Income tax and accordingly, all the relevant provisions regarding taxation of partnership firm has been modified.

The Income of LLP will be charged to tax in the hands of the LLP only and not in the hands of individual partners. Remuneration to partners will be taxed as “Income from Business & Profession” and share of profit in the hands of the partner is exempt from tax u/s 10(2A). The LLP is allowed to get deduction of remuneration paid to the partners subject to the maximum of limit prescribed u/s 40(b).

Benefit of presumptive taxation is not given to an LLP. At present, the Income of an LLP is taxable @30% plus education cess but surcharge is not applicable to an LLP.

The LLP is also subject to alternate minimum Tax (AMT) which is similar to minimum alternate tax (MAT) in case of companies. However, there is no concept of book profit and it is calculated based on the adjusted total income. The Income tax law has also been modified for bringing the taxation aspects of conversion of Private Company or unlisted Public Company into an LLP on the paper. There are no tax implications on conversion of a partnership firm into an LLP.

Note: Now all the persons other than company are also subject to alternate minimum tax with effect from 01/04/2012.

Service Tax

For the purpose of Service tax also, an LLP will be treated as partnership firm only. Service Tax Rules, 1994 has been amended by the Service Tax (Amendment) Rules, 2012 to consider LLP as a partnership firm.

Even when the word “body corporate” is used it will not include LLPs despite of its legal status being a body corporate. Accordingly, partial reverse charge is also not applicable to an LLP.

Sales Tax/Vat:-

Under Sales tax, LLP is treated as body corporate. The definition of “Dealer” under Central Sales Tax, 1956 includes body corporate also.

Actually, there is no dissimilarity in partnership firm, company, body corporate etc with regard to payment, returns, audit etc. under sales tax. Provisions for different kind of dealers are distinguished based on the volume/size or turnover of the dealer and not on the basis of the status of the dealer.

Foreign Direct Investment in LLPs

Foreign Direct Investment in Limited Liability Partnership is allowed, with the specific approval of the government, in those sectors/activities where 100% FDI is otherwise allowed under the automatic route and there are no FDI-linked performance related conditions.

 

 

 

 

 

 

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