As an entrepreneur, striking the right balance between operational agility and personal risk mitigation is essential for sustainable growth. Traditional business structures often present a dilemma, but Limited Liability Partnerships (LLPs) offer a compelling solution. In this article, we delve into the advantages and disadvantages of LLPs and and the process of getting LLP in existence.
Limited Liability Partnership (LLP) has become a preferred form of organization among entrepreneurs in India. An LLP incorporates the benefits of a partnership firm and a company. As the name suggests, an LLP is a partnership firm established by a minimum of two partners who enter into an LLP agreement. However, the partners of an LLP have limited liability and the LLP has perpetual succession just like a company. The LLP can continue its existence irrespective of changes in partners. It is capable of entering into contracts and holding property in its own name.
A limited liability partnership (LLP) is a flexible legal and tax entity where every partner has a limited personal liability for the debts or claims of the partnership.
The concept of the Limited Liability Partnership (LLP) was introduced in India in 2008. The Limited Liability Partnership Act, 2008 regulates the LLPs in India. Minimum two partners are required to incorporate an LLP. However, there is no upper limit on the maximum number of partners of an LLP.
Among the partners, there should be a minimum of two designated partners who must be natural persons, and at least one of them should be resident in India. The rights and duties of designated partners are governed by the LLP agreement. They are directly responsible for the compliance of all the provisions of the LLP Act, 2008 and provisions specified in the LLP agreement.
Features of LLP
1.It has a separate legal entity just like companies.
2.Minimum two persons should come together as partners to establish LLP.
3.There is no upper limit on the maximum number of partners.
4.There must be a minimum of two designated partners.
5.At least one designated partner must be a resident of India.
6.The liability of each partner is limited to the contribution made by the partner.
7.The cost of forming an LLP is low.
8.Less compliance and regulations.
9.No requirement of minimum capital contribution.
Advantages of LLP
Separate legal entity:
An LLP has a separate legal entity, just like a company. The LLP is distinct from its partners. An LLP can sue and be sued in its own name. The contracts are signed in the name of the LLP, which helps to gain the trust of various stakeholders and gives the customers and suppliers a sense of confidence in the business.
Limited liability of the partners:
The partners of the LLP have limited liability. The liability of the partners is limited to the contributions made by them. This means that they are liable to pay only the amount of contributions made by them and are not personally liable for any loss in the business. If an LLP becomes insolvent at the time of winding up, only the LLP assets are liable for clearing its debts. The partners have no personal liabilities, and thus they are free to operate as credible businessmen.
Low cost and less compliance:
The cost of forming an LLP is low compared to the cost of incorporating a public or private limited company. The compliances to be followed by the LLP is also low. The LLP needs to file only two statements annually, i.e. Annual Return and a Statement of Accounts and Solvency.
No requirement of minimum capital contribution:
The LLP can be formed without any minimum capital. There is no requirement of having a minimum paid-up capital before going for incorporation. It can be formed with any amount of capital contributed by the partners.
Disadvantages of LLP
Penalty on non-compliance:
The compliance that is to be followed by LLP is minimal. But, if these compliances are not completed on time, then the LLP will have to pay a heavy penalty. Even if the LLP does not have any activity in the year, it is required to file returns with the Ministry of Corporate Affairs (MCA) annually. If it fails to file the returns, then a heavy penalty will be imposed on the LLP.
Winding up and dissolution of LLP:
A minimum of two partners is required to form an LLP. If the minimum number of partners is below two for six months, then the LLP will be dissolved. It may be dissolved if the LLP is unable to pay its debts.
Difficulty to raise capital:
The LLP does not have the concept of equity or shareholders like a company. Angel investors and venture capitalists cannot invest in the LLP as shareholders. This is because the shareholders must be partners in the LLP and have to take up all the responsibilities of a partner. Thus, angel investors and venture capitalists prefer to invest in a company rather than an LLP making it difficult for the LLPs to raise capital.
Process Limited Liability Partnership Incorporation:
1. Name reservation: Please provide with a couple of names in order of preference for us to reserve and get approval from MCA for your Limited Liability Partnership which might take 3-5 Business days.
2. Digital Signature Certificate (DSC)*: While we wait for the name approval, simultaneously we will start collecting and readying the documents and DSCs required in the incorporation process.
*Digital Signature Certificates (DSC) are the digital equivalent (that is electronic format) of physical or paper certificates. Likewise, a digital certificate can be presented electronically to prove one’s
Identity, to access information or services on the Internet or to sign certain documents digitally.
3. Incorporation: Once the name approval is received and DSCs are ready we will next proceed with the incorporation. This process usually takes 7-10 Business days.
4. Certificate of Incorporation is issued once the company is incorporated. Also, in the process Designated Partner Identification Number (DPIN) ** is issued to both the partners. Next, we proceed to apply for PAN, TAN of the company.
**DPIN is a unique Identification Number allotted to an individual who is appointed as a designated partner of a company, upon making an application in form DIR-3 pursuant to section 153 & 154 of the Companies Act, 2013.
5. Once the PAN card is received, we proceed to apply for the other registrations in the name of the LLP. Other business registrations include, Trade License (GHMC License), The Shop & Establishment Act Registration, GST Registration, MSME Registration, Fssai Registration and the Import Export Code Registration among others depending upon the nature of the business.
(PAN Card is delivered through mail in 7 Business Days & hard copy will be delivered to your registered address after 15 Business Days)
6. All the other registrations might take up to another 5-7 Business Days from the date of application except GST registration.
In conclusion, Limited Liability Partnerships (LLPs) offer entrepreneurs a powerful blend of operational freedom and personal asset protection. By embracing the agility of partnerships while mitigating personal risk, entrepreneurs can unlock their full potential and thrive in today’s competitive landscape. Whether you’re launching a consultancy or expanding a legal practice, consider the advantages of LLPs in maximizing your entrepreneurial journey.