Think of starting your business and you are divided into n types of business entities that you can choose from. Most easiest and simplest of them all is Sole Proprietorship. But if you don’t want to do business alone and want to have some partner with you then you have the most simplest option of getting into a partnership deed without registering your company (which will otherwise cost you money and time to get all the legal formalities done).
But these two entities poses a huge risk and unlimited liability to the owner in case of some mishappening. For very long time there was nothing which can act as intermidiatery entity which can give you simplicity of operation and protection, Hence came into existence a law on Limited Liability Partnership which will give you the protection of a company and a freedom of Partnership.
The Limited Liability Partnership Act was recently published in January 2009 and the first LLP in India was incorporated in the first week of April 2009.
So to understand why LLP form of entity was formed, we have to understand the prior existing models.
Corporation/Private Limited company
Gives you protection but you have to comply to lot of rules and regulation formed by government to run a registered company (i.e. regular and Annual board meetings quarterly financial results, hiring auditors, etc )
You don’t have to comply to any of the rules and regulations of a registered company. You have all the freedom to run your company however you want but if something goes wrong, your whole wealth can vanish in paying off debts made by your firm or the other partners of your firm(unlimited Liability).
Limited Liability Partnership
You will have protection of a registered company, one partner is not responsible or liable for another partner’s misconduct or negligence. And LLP can operate not according to company Act of 1932 but according to the LLP Agreement they form during the formation. You can read the Details of the Complete Act published by government of India here http://www.mca.gov.in/Ministry/pdf/LLP.pdf
- Like Corporation (unlike General Partnership) : LLP is a separate legal entity and has its own name. Can buy and sell movable/non-movable property under the company name. Registration with ROC (Registrar of Companies) is must. Book of Accounts must be maintained and income tax has to be filed every year under LLP name to ROC in prescribed format. Of course liability is limited.
- Like General Partnership (unlike Corporation) : No minimum capital requirement to start LLP, Taxation is according to Partnership act but there is no double taxation like General Partnership. No requirement for payment of Dividend distribution/Corporation Tax. There is no requirement as to Minimum Alternate Tax. Auditing is not required unless capital exceeding Rs. 25 lakh or turnover exceeding Rs. 60 lakh.
Advantages of LLP
- Low cost for setting up and running it
- Lesser requirements to maintain account, records and meetings.
- No limit on number of partners
- Very less Government intervention
- Easy to Leave/join/transfer your partnership
- No minimum Capital requirement
- The property of LLP is not the property of its partners. Therefore partners cannot make any claim on the property in case of any dispute among themselves.
- LLP does not have Dividend Distribution Tax as compared to company, so there will not be any tax while you distribute profit to your partners.(i.e no double tax)
- Provisions have been made for corporate actions like mergers, amalgamations etc.
- Easy to Dissolve
Disadvantages of LLP
- LLP cannot raise money from general public, so there is no possibility of going for an IPO
- All decision has to be taking with all the partners present, can be binding.
- There are no enabling provisions neither in Companies Act nor LLP Act to convert LLP into Private Company, so it is not possible to convert LLP into Private Company.
- Management cannot be separated from owners.