A Limited Liability Partnership (LLP) is a form of business entity that combines the flexibility of a partnership and the limited liability of a company. It is a separate legal entity from its partners and has perpetual succession. LLP registration is suitable for small and medium-sized businesses, such as startups, professional service providers, as it provides limited liability protection to its partners while allowing them to maintain flexibility in managing the business.
ADVANTAGES OF LLP INCORPORATION
LLP is a body corporate formed and incorporated under LLP Act, 2008. It is a legal and separate entity from that of its partners. It is preferred as it incorporates the benefits of both partnership firm and company into a single form of organization. The concept of the Limited Liability Partnership (LLP) was introduced in India in 2008. The Limited liability Partnership Act, 2008 regulates the LLP in India. Minimum two partners are required to incorporate an LLP and there is no upper limit on the maximum number of partners. The rights and duties of designated partners are governed by the LLP agreementADVANTAGES OF LLP INCORPORATION
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SEPARATE LEGAL ENTITY
An LLP is different from its partners, has its own seal and assets, and can own property and enter contracts.
NO MINIMUM CAPITAL CONTRIBUTION
An LLP can be formed with any capital amount contributed by partners, and no minimum paid-up capital is required.
LIMITED LIABILITY
An LLP has limited liability, and only its assets are liable for clearing its debts, and partners have no personal liabilities.
LESS COMPLIANCE
The LLP needs to file only two statements annually: Annual Return and Statement of Accounts and Solvency.
CONTINUOUS EXISTENCE
An LLP isn't affected by partners' death, retirement, or insolvency and is wound up per the 2008 act provisions.
NO MAXIMUM PARTNERS
An LLP has no maximum limit of partners, allowing abundant contributions from all partners.
Frequently Asked Questions
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1. Whether name of LLP can end with words like ‘Limited’ or ‘Pvt. Limited’?
Answer: No, name of the LLP shall end with either ‘Limited Liability Partnership’ or ‘LLP’. Word ‘limited’ shall be allowed in name only within ‘Limited Liability Partnership’.
2. When does audit becomes mandatory in case of LLP?
Answer:‘LLP’ is required to get their books of accounts audited when the total revenue is more than INR Rs. 40 lacs or total capital of partners exceeds INR Rs. 25 lacs.
3. Can an existing partnership firm be converted to LLP?
Answer: Yes, an existing partnership firm can be converted into LLP by complying with the Provisions of clause 58 and Schedule II of the LLP Act. Form 17 needs to be filed along with Form 2 for such conversion and incorporation of LLP.
4. Can an existing company be converted to LLP?
Answer :Yes, any existing private company or existing unlisted public company can be converted into LLP by complying with the Provisions of clause 58 and Schedule III and IV of the LLP Act. Form 18 needs to be filed with the registrar along with Form 2 for such conversion.
5. Whether LLPs would be required to maintain books of accounts?
Answer :An LLP shall be under an obligation to maintain annual accounts reflecting true and fair view of its state of affairs. A “Statement of Accounts and Solvency” in prescribed form shall be filed by every LLP with the Registrar every year.
LLP DEED KEY FEATURES
1. Number of Partners:
LLP partners require a minimum of two partners with no limit to maximum partners.
2. LLP Agreement:
LLP Agreement governs LLPs, outlining operation, management, rights, and duties of designated partners.
3. Competence of Partners:
All partners must be competent to enter into the partnership agreement.
4. Sharing of Profit and Loss:
In partnership firms, profits and losses are shared according to agreed ratios.
5 Liability:
Partner liability is limited according to their contribution to the business.
6. Legal Status:
Partnership firms have a separate legal status from partners.
7. More Preferable to General Partnership:
LLP combines advantages of a corporation with a traditional partnership.
8. Purchase of property:
LLP can purchase property in its name; Partnership firms cannot.
9. No Partners’ Dependency:
In LLPs, changing partners will not affect existence or operations, unlike Partnership firms.
General Partnership vs. LLP
General Partnership and LLP are similar but differ in structure, regulation, liabilities, advantages / disadvantages. One can Choose based on business goals. Few of the differences are highlighted below
Parameter
Difference
Number of Partners
General Partnership has 2-10 members, while LLP needs 2 partners, with no limit on maximum.
Legal Status
Partnerships lack separate legal status while LLPs have perpetual succession and separate entity.
Compliance
LLPs must file annual returns with MCA and ROC, while partnership firms don't need to file.
Transferability
Partnership requires all partners' consent for share transfer, while LLP allows more flexibility. Transferee isn't automatically a partner. LLP's ownership structure is more complex.
Perpetual succession
Partnership Firm does not have perpetual succession whereas LLP has perpetual succession.
Property Purchase
Partnership can't buy property in its name, while LLP can buy movable/immovable property in its name.
Audit of accounts
Partnership firms need to have their accounts audited as per the provisions of the Income Tax Act. In contrast, an LLP's audit requirements depend on its annual turnover which is 40 lakhs annually
Agreement between Partners.
Partnership governed by Partnership Act, while Partnership Deed controls operation. LLP governed by LLP Act, and LLP Agreement controls operation.
Manageability
Partnership firms tied to state government, while LLPs registered under MCA and have more flexibility to move and operate.
Partners’ Dependency
Partnership's dissolution affected by partner's resignation or death, while in LLP, the subsistence doesn't depend on partners.
Dissolution
Partnership can dissolve by agreement, court order, etc. LLP can dissolve voluntarily or by order of National Company Law Tribunal.
Private Limited vs. LLP
Private Limited Company
LLP
It is a tightly held business entity incorporating the qualities of a corporation and a partnership.
It is a type of partnership in which participants’ liability is fixed to the amount of money they invest.
LLC stands for Limited Liability Company.
LLP stands for Limited Liability Partnership.
The obligation of its members is determined by the number of unpaid investment returns on the shares they own.
The partners’ liability is restricted to the amount they contribute.
It is regulated by Memorandum of Association(MoA) and Article of Association (AoA)
It is regulated by the LLP Partnership Agreement.
Directors are the owners of the firm.
Partners are the owners of the firm.
The tax on profit is 25%.
The tax on profit is 33%.
The choice of a company name is the first stage in the process of company formation. Then the next step is to submit an application for a Director Identification Number and Digital Signature Certificates.
To create an LLP, you must first register for a Designated Partner Identification Number (DIN) for each of the two different partners and get a Digital Signature Certificate Registration for at least a one partner
A Private Limited Company continues to exist even if the directors change.
An LLP ceases to exist if partners leave or die.
Audit Requirement is mandatory.
The audit is mandatory only if annual turnover exceeds Rs. Forty Lakhs or the Capital exceeds Rs. Twenty Five Lakhs.