- LLP is a platform where business can be carried out as a partnership, but with the limited liability of partners
- In LLP, partners are safe against wrongdoings of other partners
Entrepreneurship and start-ups have become the buzzwords in the past few years than ever before. Stories of MBA graduates rejecting campus placements and starting something on their own, people ditching the regular payslip for a shot to be the next Bansals are pretty common now. Among other things, what has helped this is the introduction of Limited Liability Partnership (LLP), a platform where business can be carried out as a partnership, but with the limited liability of partners.
What is an LLP?
As the name suggests, it’s a partnership firm that has limited liability. Ashok Shah, Partner, N.A Shah and Associates LLP says, “Simply put, we can say LLP is like a combination of a partnership firm and a private limited company. Here, the business has to be carried out in a corporate framework, which is guided by terms of the mutually adopted partnership deed.”
Shah adds that An LLP is a separate legal entity. “This means it has assets in its own name. LLP partners own and manage the business. This is different from a private limited company, whose directors may be different from shareholders,” he said.
What are the pros?
Sudhir Kaushik, co-founder and CFO, Taxspanner.com says, “In a partnership firm, partners are personally liable for a debt of the business. So their personal property may be used to settle the firm’s debts. The advantage of LLP is that the liability of partners is limited. This is a big benefit, as partners are safe against wrongdoings of other partners.” In short, if you are a partner in an LLP, you won’t be held responsible for any kind of misconduct of other partners. If you compare LLP to a private limited company, both have limited liabilities to its partners and members.
What are the cons?
LLP can be bind by the act of one partner without the other partner. This means, one partner can make all other liable or bind them.
From a taxation point of view, there isn’t any different. Both general partnerships and LLPs are taxed at a flat rate of 30%. Shah says, “Unlike a private company, an LLP is not required to pay any dividend distribution tax and profits distributed and is not liable to tax in the hand of the partners.” Also under section 40(b), deductions are allowed on the interest given to partners, any payment of salary bonus commission or remuneration.
What is the requirement for LLPs?
Shah says, “There is no minimum capital contribution requirement. Plus, LLPS must have at least two partners. There is no limit to the maximum number of partners. Of the partners in the business, at least one must be a resident of India.”
Audits and ends
Kaushik says an LLP is much easier and cheaper to start and run than a private limited company. “A private limited company has a lot of compliances to fulfil and conduct an audit of its books. It’s also easier to wind up an LLP.” In LLP, audits are compulsory only if a contribution is more than ₹25 lakh or turnover exceeds ₹40 lakh. LLP has to file only two, that is, annual return and statement of accounts and solvency. Kaushik says, “If you are testing waters and are new to the business, maybe LLP is the choice. If you’re looking to raise funds, private limited is the way.” The latter has more compliance and audit requirements, has more transparency, and is hence perceived as more trustworthy.