Introduction to Limited Liability Partnership
Limited Liability Partnerships (LLPs) have emerged as a popular business structure, especially among small and medium enterprises. Combining the flexibility of a partnership with the benefits of limited liability, Limited Liability Partnership offer a unique blend of advantages and some limitations. In this article, we delve into the key features, pros, cons, and annual compliance requirements for LLPs.
Key Features of an LLP
1. Limited Liability Structure:
The liability of each partner in an LLP is limited to the amount of their contribution. This ensures that personal assets remain protected, providing a significant advantage over traditional partnerships.
2. Separate Legal Entity:
An LLP enjoys the status of a separate legal entity with perpetual existence, meaning it can own, sell, and transfer property, and incur debts independently of its partners.
3. Easy to Incorporate & Low Maintenance:
The process of incorporating an LLP is simpler and more cost-effective compared to a company. Annual compliances are fewer and maintenance costs are lower, making it an attractive option for small businesses.
4. No Limit on Maximum Number of Partners:
While a minimum of two partners is required to form an LLP, there is no upper limit on the number of partners, allowing for extensive collaboration and growth.
5. Transferability:
Designated partners can be changed, and partnership ratios can be transferred without disrupting the functioning of the LLP.
6. Raising of Funds:
Funds can be raised through capital contributions by partners or by incurring debt, providing flexibility in financing the business.
7. Foreign Direct Investment (FDI):
LLPs allow 100% FDI under the automatic route, making them an attractive option for NRIs and foreign nationals looking to invest in India.
Pros of an LLP
1. Audit Not Compulsory:
An LLP is required to undergo an audit only if its contributions exceed Rs. 25 lakhs or its annual turnover exceeds Rs. 40 lakhs, whichever is earlier.
2. Low Capital Requirement:
LLPs can be formed with a minimum capital contribution of Rs. 5,000, making it accessible for small businesses.
3. No Tax on Profit Distribution:
Unlike private and public companies, LLPs do not have to pay Dividend Distribution Tax (DDT) on the distribution of profits among partners.
4. Preferred by Small Businesses:
LLPs are favored by small businesses seeking a structured form with low maintenance costs.
Cons of an LLP
1. Penalties for Non-Compliance:
Failure to file annual compliance forms on time incurs a penalty of Rs. 100 per day. Continuous delays can result in significant penalties, adding to the cost of running an LLP.
2. Limited Fundraising Options:
LLPs are not preferred by venture capitalists for raising funds. Additionally, they cannot be converted into a company, which may be a limitation for those looking to scale up.
Requirements to Form an LLP
Minimum of 2 Designated Partners.
Minimum of 2 Partners who are the owners of the LLP.
Minimum capital contribution of Rs. 5,000.
At least 1 resident Designated Partner.
Annual Compliance Requirements for LLPs
Compulsory Annual Compliances:
MCA Filing: Must be filed annually.
IT Filing: Income tax returns must be filed.
GST Filing: If applicable, GST returns must be filed.
Situational Compliances:
Trademark Registration: To protect the brand name and logo.
Audit: Required once contributions exceed Rs. 25 lakhs or annual turnover exceeds Rs. 40 lakhs.
GST Registration and Compliance: As required by law.
Trade License: If necessary, based on business activities.
Professional Tax Filing: If the LLP has hired employees.
EPFO Registration and Compliance: Mandatory once the number of employees crosses 20.
ESIC Registration and Compliance: Required once the number of employees crosses 10 in other states and 20 in Maharashtra.
Conclusion
Limited Liability Partnerships offer a viable business structure combining the benefits of limited liability with the operational flexibility of a partnership. While they are particularly suitable for small businesses, it is crucial to be aware of the compliance requirements and potential drawbacks. By understanding these aspects, businesses can make informed decisions about whether an LLP is the right choice for them.
