Before you can start a business in India, the most important decision is to choose the most appropriate business structure for startups. Limited Liability Partnership amongst all business structures has been gaining popularity in the market recently. The concept of LLPs in India dates back to 2008. LLPs are a hybrid business model having the features of a private limited company and a partnership firm. There are many implications that business owners need to consider before choosing the most appropriate business structure for them. Through this article, let’s take a look at all the advantages and disadvantages of opting for LLP Registration.
Pros of LLP registration
Since this is a hybrid form of business it comes with all the positives of both, the private limited companies and the partnership firms. The advantages include separate legal existence, management powers, ease of transferring, perpetual succession, DPIIT recognition, limited liability, etc. Let’s take a closer look at the pros of LLP registration in India.
1. Protection of personal assets
As the name suggests, in a limited liability partnership, the partner’s liability is limited to any of the following:
- The extent of their capital; or
- The amount they have stated in the subscribers’ sheet.
When LLP is registered, the personal assets of the partners are protected even if the business incurs losses.
2. Management Flexibility
In a limited liability partnership, the partners have the sole discretion to choose their management. There is no need for a board of directors. The owners can themself be the managers in a limited liability partnership. They even have the right to decide the entire structure and the roles and responsibilities of all members of an LLP.
3. Separate legal entity
A business receives a separate legal entity after undergoing the registration process as provided by the Ministry of corporate affairs. A registered LLP has a separate legal existence and is an artificial person under the eyes of the law. Having a separate legal existence comes with the following rights:
- To buy, own and sell property;
- To use;
- Be sued in the name of the LLP;
- Stamp of the company; and
- Enter into contracts.
4. Benefit of taxation
Limited Liability Partnerships in India fall under the favorable taxation scheme. According to this favorable tax scheme, the LLP is not treated as a body corporate while considering the income tax. Rather, it is treated as a partnership firm. Hence, the income of all partners is treated separately for taxation.
5. Cost effective
Since Limited liability partnerships are a hybrid business model, there is no requirement for compulsory audit. Further, even the cost of incorporation is quite low. Apart from this, the annual compliance requirements are also way less than compared to a private limited company.
Because LLPs impose limited liabilities on partners, it is easier to onboard venture capitalists to get capital for the business. A lot of innovative startups that are Limited liability partnerships are getting capital from venture capitalists. This also helps them in getting a lot of knowledge apart from the capital.
The perpetual succession, limitation of liability, and other pros of an LLP are what attract people towards opting for LLP Registration the most.
Cons of LLP Registration
Just like a coin, businesses have two sides as well. Now that we are aware of all the pros of LLP registration, let’s dive into its cons.
Penalty for Non-Compliance
LLPs have to go through annual compliance requirements, where all LLPs registered in India need to file Form 8 and Form 11, each year, before the due dates, to avoid penalties. If the LLP fails to submit the forms on or before the given date, a penalty of rs.100 per day is applicable. Hence, if the designated partners of LLP fail to fulfill the annual compliance requirements, high penalties are chargeable.
Equity is a concept related to companies. Since LLPs are a hybrid model, there is no equity in LLPs. The new investors of an LLP can subscribe to the subscriber list. However, they cannot hold equity shares of the company. This means that the only option for funding is debt funding for LLPs. Which can be a bit of a con when compared to private limited companies.
Income Tax Rates
While considering the income tax, LLPs are charged at a fixed rate of 30% no matter the turnover. However, when the income tax of companies is considered, they are treated based on their turnover, which is beneficial for small companies.
When an entity is incorporated with the Ministry of Corporate Affairs, all the basic information of such an entity becomes available to the general public through the MCA mast data. Here, all you need to do is enter the firm’s name and you will get its LLPIN, contact number, Details of partners, capital structure, address, email ID, date of incorporation, etc.
Minimum two members
There is a minimum member requirement for an LLP to exist. This means that if there are only two partners and one dies, the LLP will dissolve.
Mandatory Indian Partner
Even though LLPs allow 100% Foreign Direct Investment, there is a requirement for one Indian partner. All foreign nationals cannot incorporate a company in India.
LLP is one of the most flexible types of business structures available in India. After understanding what is llp it becomes easy to know why people are opting for it now-a-days. Lose all your worries by opting for LLP registration with the help of certified online professionals.