What is LLP? Advantages and Disadvantages of LLP

An LLP is a business structure which is a combination of the benefits of a conventional partnership along with the limited liabilities of a corporation. In case of an LLP, no partner is personally liable for the obligations and debts of the partnership which is a common case for general partnerships. In an LLP, every partner is responsible for the debts and obligations of the business.

The Limited Liability Partnership a.k.a. LLP is quite famous. It has various advantages over the conventional partnership like the protection of limited liabilities, flexibility in the management and ownership, increased credibility and tax benefits. But, there are a few disadvantages to an LLP too. These disadvantages may include restricted access to capital, unlimited liability to certain partners, higher maintenance costs and many more.

In this blog, we will consider the various advantages and disadvantages of a Limited Liability Partnership (LLP) that need to be discussed.

What are the advantages of an LLP?

The advantages of an LLP in India are listed below:

No use of Minimum Contribution:

There is no requirement of minimum capital for an LLP. An LLP can be easily formed with the least amount of capital that is possible. Also, the partner’s contribution may consist of either movable or immovable or tangible or intangible property.

Unlimited Business Owners:

The minimum number of owners that an LLp needs to be formed are 2 but the maximum number of owners is unlimited. This means that there is no limit to the number of maximum partners. In contrast to this, a private limited company can only have a maximum of 200 partners.

Registration Cost is Lowered:

The registration cost for an LLP is quite less as compared to the cost of registering a private limited company. However, this difference in the registration cost of LLPs and Private Limited Companies has lessened in recent years.

A Compulsory Audit is not required:

All the companies whether private or public are required to get their accounts audited regardless of the share capital. But, LLPs don’t need to do so. The Audit of accounts has not been mandated by the government for LLPs. This is supposed to be a huge compliance advantage for LLPs. It only has to get its accounts audited if its contributions are more then Rs. 25 lakhs and if the turnover calculated annually is more than Rs. 40 Lakhs.

Taxation on LLP:

An LLP has to pay income tax but the share of the partners of an LLP are not liable to tax. Therefore, no dividend distribution tax needs  to be paid. The provision of “Deemed Dividend” that comes under the income tax law is inapplicable to Limited Liability Partnerships or LLPs.

Inapplicability of DDT:

For a private limited company, the owners of the company will need to pay an additional tax liability in the form of DDT at 15% if they try to withdraw profits from it. But, for an LLP no such additional tax liability needs to be paid and the profits of an LLP can be easily withdrawn by any of the partners.

What are the disadvantages of an LLP?

The various disadvantages of an LLP are listed below:

A Non-Compliance Penalty:

Whether an LLP performs an activity or not, every year it still has to file an Income Tax Return and an MCA annual return. If an LLP is unable to file these returns, a penalty of Rs. 100 per day will be levied per form. There is no end to this penalty; it can even run into lakhs if not paid along with the filing of annual return. However, for a partnership or a proprietorship firm, no need to file an annual return is there.

Don’t have equity investment:

The concept of equity or shareholding does not apply to an LLP. Therefore, the money can not be invested in an LLP by any angel investors, venture capitals and private equity funds. Therefore, most of the LLPs depend on the funding that they receive from promoters and funding from debt.

A Higher Rate of Income Tax:

LLPs are taxed at 30% rate no matter what the turnover is. However, the rate of income tax is 25% for those companies which have a turnover of Rs. 250 Crores.