Benefits of Incorporating Limited Liability Partnership in India

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Limited Liability Partnership (LLP) registration is one of the popular forms of business structure among the new-age Indian entrepreneurs. It is a hybrid business structure that combines the benefit of a private limited company (liability and separate legal entity) and a partnership firm's flexibility. 

LLP came into existence in 2008, and it is governed under the provisions of the Limited Liability Act of 2008. Unlike other businesses, LLP is a new business structure in India. It is modelled in such a way that it is easy to set up with no compulsory tax audit requirement, hassle-free business operations, etc. Hence, LLP has become a preferred option for entrepreneurs. 

It has been popular since 2008 with SMEs, professional service providers and other small-scale businesses that want to reduce the tax and compliance burden.

So, if you are considering LLP registration for your new company, here are some of the exclusive advantages that are worth considering.

Benefits of LLP Registration in India:

Separate Legal Entity:

  • Like Pvt ltd company, LLP is a separate legal entity liable only to the assets it's been tied up with. 

  • The LLP partners' liability is limited to their contribution as per the LLP agreement. 

  • Any LLP can sue and can be sued in its own name. 

  • An LLP can enter into contracts in its name.

  • Regardless of the change in partners, an LLP can continue to exist in perpetual succession. The legal status of the LLP will remain intact until its existence.

  • Even if the number of partners falls below the minimum requirement of two, the LLP will continue to exist for 6 months until the existing partner brings in a new partner.

Limited Liability of the Partners:

  • Every partner's liability in an LLP is limited to the extent of the contribution made by them. It means when an LLP is declared insolvent at the time of winding up, only assets of the LLP are liable for clearing the debts. 

  • The partner's personal assets cannot be attached to it. So, the entrepreneur can operate freely as a credible businessman and launch a new venture. It is one of the critical reasons why entrepreneurs need to consider LLP as a preferred form of business structure.

  • In the traditional partnership and proprietorship firm, personal assets are not protected against bankruptcy.

Ease of Incorporation:

The cost of incorporating an LLP is less than that of a private limited or public company.

Less Compliance Requirement:

For an LLP, compliance is much simpler than other types of business structures. An LLP needs to file just two types of statements annually:

  • Form 8: Statement of Accounts and Solvency (Due date is 30th October)

  • Form 11: Annual Returns

Other than that, compliance related to board meetings, annual general meeting (AGM), preparation and maintenance of minutes of the meetings, Board resolutions, etc., does not apply to LLP. 

It means LLP merely depends on its partners for significant decisions and votes. Also, in the case of transfer of LLP ownership, it is easily transferable from one person to another with simple procedures laid down under the LLP rules and acts.

Statutory Audit is mandatory for an LLP only under two conditions(Rules 24 of the LLP rules, 2009):

  • When LLP contribution is more than 25 lakhs in rupees. 

  • When the turnover of LLP is more than 40 lakhs in rupees.

Easy Profit Withdrawal:

The profit of an LLP is only taxed and not the profit of the partners, i.e., partners' profit shares are tax-exempt according to section 10(2a) of the Income Tax Act. 

Example:

Considering ABD LLP has two partners, X and Y, and their profit share is 60:40. The total income of ABD LLP is Rs 1,00,00,000.

As per the above example, LLP is taxable at 31.2% because its income is upto one crore. 

So, after deducting the tax of INR 31,20,000, the profit of INR 68,80,000 is shared between partners X and Y at a 60:40 ratio, i.e., 41,28,000 and 27,52,000 respectively. 

When the partners withdraw profits from LLP to their personal accounts, they need not pay any amount of tax. And there are no formalities to make such withdrawal. 

No Minimal Capital Requirement:

An LLP can be formed without a minimum capital for incorporation. The capital can be of both tangible and intangible assets. 

No Upper Limit On Business Owners:

An LLP can only be formed with a minimum of two partners coming together to form a Limited Liability Partnership firm. Still, there is no maximum limit on the number of partners. 

Tax Benefits:

An LLP is liable to pay taxes, while the partners of the LLP are not liable to pay taxes for the profit of LLP. The dividend distribution tax levied while withdrawing profits does not apply to the partners of an LLP. 

And, expenditures incurred for conducting the business, such as salary and bonus payment, are considered deductibles before calculating taxes. 

LLP Agreement Clauses:

Partners have the right to determine the various clauses of their LLP Agreement. It includes the partner's rights, duties and obligations of each partner towards LLP and also obligations between partners. 

It also includes clauses that bare any activities that may result in a conflict of interest between the partners and between partners and LLP. 

Given the wide range of benefits an LLP offers compared to other types of business formation, it is worth considering LLP as a preferred business structure in your entrepreneurial journey. 

If you plan to set up an LLP firm, you should reach out to the business experts at the eAuditor Office. We are here to guide you to make a well-informed decision and answer all your queries related to business formation. 

Just speak to us at +91 96297 34296 or email us at connect@eauditoroffice.com.
 


Author : Dharani

Date     : 27-Aug-2022


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