Why should LLP be your go-to business structure in India?

Why should LLP be your go-to business structure in India?

 


We have recently witnessed the spike in numbers of entrepreneurs who are opting for LLP (limited liability partnership), even though it has been the new development in the ocean of entrepreneurship.

There are various reasons behind this spike, such as low-cost information, less compliance and limitations, and the flexibility it offers compared to others. Now, let's dwell on the concept of LLP and its features after getting the online LLP registration

Defining LLP

LLP (limited liability partnership) is a concoction of company and partnership which incorporates advantageous features to both. It buckles the operational and organizational flexibility of a partnership (with the protection and benefits of limited liability) and separate legal identity for the company. Compliance prerequisites are more of LLP compared to the partnership, but they are less in comparison to LLP.

LLP as a business model is available in many countries such as U.K, Singapore, U.S., Australia, etc.; for a long time, it has been introduced in India recently. Here, in India, the limited liability partnership act, 2008 was brought on the 31st of March, 2009. Since then it has been the most preferred way for professional service companies, SMEs, and small businesses that look for less tax compliance liability. 

Many lenders and investors remain perplexed about the business structure and choose to deal with public and private limited companies. Due to this, it becomes tough for LLPs to raise capital. Here, one should keep in mind that companies' partnerships can be transformed into an LLP and vice versa, without any tax liability. 

Characteristics of LLP.

- Its existence would remain standstill even if there are changes in the partners, which means it has a perpetual continuation just like a company. If there is a change in the company's shareholders, then it will not affect the company's existence and legality. The same goes for the partners as well if there are any changes to be made. 

- LLP can set foot into a contract and possess properties in its name.  

- LLP has its own separate legal identity and is liable to the extent of its assets; nonetheless, partners' liability is lesser than the contribution they made during the LLP incorporation. This resembles companies as well, where shareholders will be liable to the company's debts only to the extent that the share capital to which he/she contributed might be utilized to repay the creditors. LLP creditors cannot, under usual circumstances, claim the partners' assets of the LLP in case if LLP is not able to pay the debts. 

Operational flexibilities

Being the first choice for the entrepreneurs, LLP flexibility offers sui generis advantages and intrinsic positivity over other business structures. It enables partners to embrace the internal organization identical to the traditional company while constraining their liability to the extent of their capital contribution made by them. LLPs are intended to fill the gap between partnership firms and sole proprietorship under the Indian partnership act, 1932 and companies under the companies act, 1956, offering the other channels for the businesses and precision of corporate governance without being vulnerable to other members' responsibilities of the actions and omissions.

-    Registration of office and address for communication.

In the limited liability partnership act, it has been stated that documents might be served on LLP or designated partner via sending it by mail or other such mediums (to be mentioned by the rules) to the registered office and any different particular declared address by the LLP to serve the purpose in the form and manner mentioned in the regulations. Hence, LLP will have the option to proclaim another address (except head office) to acquire statutory letters/notices, etc., of the registrar by filing Form 2.

-    Agreement clauses' choice. 

Partners will have the right and choice to clarify the LLP agreement's clauses, which govern and regulate the rights, obligations, and duties of the LLP partners regarding their necessity, such as transfer and inheritance rights clauses can be adjoined, which then makes such eventualities easy.

The LLP act 2008 offers partners the rights to share LLP's profits and losses and receive the distribution in a manner conforming with the LLP agreement, which is transferable either fully or in part. Partners might confer money to and transact other business with the LLP.

It may consist of rights such as access to records of the LLP firm, books, and to examine them. Also, one can add this clause in the agreement that exhibits any activities that may result in a conflict-of-interest situation. It also offers rights to every partner to carry on their individual, separate, and independent business and can contain a clause for remuneration to be given to the partners.

LLPs for a specific venture.

As LLPs are governed and regulated by the LLP agreement, it is feasible to offer suitable clauses in said agreement to link time limits for LLP's contract duration. In such cases, once the venture fulfills its initial objectives, LLP could be either dissolved, or the provision of closing down of the name of the LLPs can be utilized in place of winding-up provisions.

For instance, BCD LLP is formed to carry out four batches of a management course (3 months/batch) for one-year. After the conclusion of 4 batches, LLP can be either one. Wound up or two. Its name can be struck down from the LLP register, bringing its existence to an end if the LLP agreement prescribes that the LLP's existence is to come to an end after operation of one-year.

Audit.

Rule 24 in the LLP rules, 2009 says that I. any LLP whose turnover does not go beyond Rs. Forty lacs in any financial year, or II. Whose contribution does not go beyond Rs. Twenty-five lacs are not compulsorily needed to get its account audited. If these thresholds are breached for an LLP, it should get its account compulsorily audited.

Relaxation in submission and applicability of mulcts. 

Statutorily LLP requires its documents such as SAS (statement of accounts and solvency) and AR (annual declaration) and changes between partners concerning communications etc., within the timeframe given in the relevant provisions. The law has provisions to enable LLPs to furnish these documents after their time limits in paying additional fees. If LLP provides forms after the deadline with an additional commission of up to 300 days, no action will be initiated against them. If it gets delayed beyond 300 days, LLP has to pay the standard deposit fees and additional cost. It also includes the capitalizations of an offense subject to punishment with a fine. 

Less compliance.

Compliance that has to be made under the LLP act is less than a limited liability company. For instance, there is no clause to arrange meetings and no clause to keep the records of designated meetings between partners. LLP accounts are needed to be accounted for by CA. Nonetheless, compulsory checking is not required until billing in a financial year goes beyond Rs. Forty lacs or capital contribution goes beyond Rs. 25 lacs.

Tax advantage.

Profit of the LLP will be entitled to be taxed separately and not to the partners. This can avoid double taxation.

Amalgamation & merger.

Provisions of the arrangement, compromise, or reconstruction of LLPs are available that make it feasible to merge two or more LLPs, just like a company or betwixt Pvt ltd company formation and LLP registration.

Right to manage.

Partners will have the right to manage (not like the corporate shareholder like in private limited) directly, which provides better control over the activities.

No threshold on the numbers of partners.

LLP has no restriction over the number of partners; thus, it raises the possibility of getting the company's maximum number of investors. The requirement of a new business organization providing a substitute to resort to an association beneath the association act with limitless responsibility, at one end, robust governance relying on corporate limitations and at another end had been heard for a long-time.

Conclusion. 

As stated above, why everyone prefers to go with LLP while forming a new business is easy to set up, with less compliance and numerous other benefits to entrepreneurs. LLP offers unmatched flexibility in the operation and management of the company.

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