LIMITED LIABILITY PARTNERSHIP

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Limited Liability Partnership concept was introduced in India by way of Limited Liability Partnership Act, 2008. It is a preferred mode of doing business in several Countries. A Limited Liability Partnership is a corporate business vehicle that provides both the benefits of a company and flexibility of a partnership firm i.e. limited liability and allows its partners the flexibility of organising their internal structure as a partnership based on a mutual agreement. This structure is available to small business start ups and service industries.

A corporate entity status enables LLP to be taken more seriously than a proprietorship/partnership status does. LLPs also have many advantages over proprietorships, partnerships and limited companies, as elaborated below:

  • A LLP is very easy to form with less formality. It can be formed with least possible capital. There is no minimum capital requirement.
  • A LLP is a legal entity, a juristic person established under the Act.It has its existence separate from its partners.
  • A LLP requires a minimum 2 partners while there is no limit on the maximum number of partners.
  • The liability of partners is limited to the contribution to the LLP, as it has separate legal entity from its partners. Their personal assets are free from the liabilities of LLP. Liability for repayment of debts and lawsuits incurred by the LLP lies on it and not on the partners.
  • In LLP, Partners unlike partnership are not agents of the partners and therefore they are not liable for the individual act of other partners in LLP, which protects the interest of individual partners.
  • In case of LLP, there is no such mandatory requirement to get their accounts audited. This is perceived to be a significant compliance benefit. Audit is not required unless capital exceeding Rs. 25 lakh or turnover exceeding Rs. 40 lakh.
  • In a LLP, there are less regulatory formalities and compliances. A LLP is required to file only two, namely, the Annual Return & Statement of Accounts and Solvency.
  • For income tax purpose, LLP is treated on a par with partnership firms. Thus, LLP is liable for payment of income tax and share of its partners in LLP is not liable to tax. Thus no dividend distribution tax is payable.
  • Provision of ‘deemed dividend’ under income tax law, is not applicable to LLP. Section 40(b): Interest to partners, any payment of salary, bonus, commission or remuneration allowed as deduction.
  • However, no such tax is payable in the case of LLP and profits of a LLP can be easily withdrawn by the partners.
  • In case of the death of the partner, a LLP will continue with other partners. The legal heirs of LLP will get the profit/contribution of the deceased partner. They are not entitled to become a partner of the LLP unless a LLP agreement can provide the same.
  • It is easy to become a Partner or leave the LLP or otherwise it is easier to transfer the ownership in accordance with the terms of the LLP Agreement and a partner can transfer his share of profit/loss in an LLP wholly or part subject to the LLP agreement.
  • If a LLP becomes insolvent and is wound up, only the assets of the LLP are used to clear its debts.The partners of LLP have no personal liabilities and are not made bankrupt and are free to operate as credible businessmen.
  • A LLP has an easy procedure to dissolve or wind-up.
  • There is less Government Intervention in a Limited Liability Partnership. Limited Liability Partnership Act, 2008 gives LLP the at most freedom to manage its own affairs. Partners can decide the way they want to run and manage the LLP, in form of LLP Agreement.
  • Body corporate can be a partner of a LLP.
  • As a juristic legal person, a LLP can sue in its name and be sued by others. The partners are not liable to be sued for dues against the

 

Parul

Senior Associate

The Indian Lawyer

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