What is an LLP? Limited Liability Partnerships explained in under 5 minutes
An LLP is a partnership formed and incorporated under the Limited Liability Partnership Act 2008. It is a separate legal entity where each partner’s liability is limited to the amount they contribute to the business. Every partner’s liability in an LLP is limited which means that their responsibility for the debts and liabilities is also limited
The LLP Act, 2008 defines an LLP as:
- A limited liability partnership is a body corporate formed and incorporated under this act and is a legal entity separate from its partners.
- A limited liability partnership shall have perpetual succession.
- Any change in the partners of a limited liability partnership shall not affect the existence, rights, or liabilities of the limited liability partnership.
Features of LLP
- The features of the LLP are as follows:
- The LLP has a separate legal entity.
- The minimum number of partners required in an LLP is 2, however, there is no limit specified for the maximum number of partners.
- There is no requirement for minimum capital contribution by partners in the LLP.
- The LLP Act is applicable to all enterprises and is not restricted to only one kind of enterprise.
Benefits of LLP
- The following are the advantages of forming an LLP:
- The liability of partners in an LLP is limited as compared to the liability of partners in partnership firms, which is unlimited.
- The cost of formation of an LLP is low and it is also very easy to form an LLP.
- The partners of the LLP cannot be sued for any dues pending against the LLP.
- The partners of the LLP are only responsible for their own acts. They can not be held liable for the acts of other partners or the LLP.
- The compliances and restrictions applicable on LLP are low as compared to compliances enforced on companies.
- The business structure of the LLP is very flexible which enables it to add more limited partners at any time.
- Income received by the partners from LLP is not taxable under the income tax act. Only the personal income of the partners is chargeable to tax.
Disadvantages of LLP
The following are the disadvantages of forming an LLP:
- An LLP can not raise money from the public or make an IPO to generate funds, as there is no concept of equity or shareholding in an LLP. The LLP has to rely on funds received from promoters.
- The income tax rate chargeable on an LLP is 30% which is higher than companies or other assessees.
- It is necessary for an LLP to file income tax returns every year, even if there is no business operation going on in the LLP.
- The powers of the limited partners are restricted in the LLP. They can not take part in any decision-making or other daily operations of the LLP.
Difference Between LLP and Partnership Firm
The major difference between an LLP and a Partnership firm is that of liability of partners. Under LLP, the liability of partners is limited only to the extent of their capital contribution. Also, the partners are not responsible for the acts of other partners. There is no concept of joint liability in LLP.
On the other hand, in a partnership firm a partner is liable jointly and severally for the acts done by the firm or the partners.
Audit of LLP
If the turnover of LLP exceeds Rs.40 lakhs or the contribution exceeds Rs.25 lakhs, the books of accounts of LLP has to be audited by the Chartered Accountant in practice.
Taxation of LLP in India
In India, the provisions of the Income Tax Act that are applicable to LLP are the same as that of Partnership firms. The LLP and partnership firm both come under the same slab rate of income tax i.e. 30%.
Further, the tax on any income received during the year is levied on LLP or partnership firms and not on the partners. Any income earned by the partners from LLP or partnership firm is not taxable under income tax.
There is no provision for levy of income tax on the conversion of a partnership firm into a limited liability partnership.
The income tax return under both LLP and partnership firm is signed and verified by the designated partner. However, in case due to any unavoidable reason, the designated partner is not in the position to sign the return then any other partner in his position can sign the return.
Author : Simran
Date : 13-Jul-2022