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Imagine you and your partners want to start a business together, but you don't want to risk losing everything if something goes wrong. You may consider forming a limited liability partnership (LLP), which is a unique type of company that gives you some legal protection. An LLP is like a separate person in the eyes of the law, and it can own property, make contracts, and sue or be sued. However, unlike a regular company, an LLP does not have shareholders or directors but partners who agree to split the profits and losses of the business. The best part is that each partner only has to pay for their own liability and not for those of their partners. This means that if the LLP gets into trouble, you will only lose as much as you invested in the business and not your personal assets. Unless, of course, you are involved in misconduct or negligence, in which case you will still be held accountable.
The LLP is a separate legal entity, is liable to the full extent of its assets but liability of the partners is limited to their agreed contribution in the LLP.
An LLP comprises the benefits of a company and a partnership, and it might be a good fit for you and your partners. Explore the cost of registering a new LLP in India and understand the benefits of Limited Liability Partnerships.
The liabilities of partners in an LLP are limited to their contributions made toward the capital. This means that partners are not liable for any other partner's wrongdoing in an LLP. Partners are liable for their actions and for part of the capital they invested. Unlike a corporation, which has to follow many rules and formalities, an LLP can choose how to manage and govern itself.
While incorporating a Limited Liability Partnership, the cost depends on the capital invested in it. The fee slabs are as follows:
LLP incorporation takes roughly 10 days, subject to official approval and response from the competent department, between acquiring DSC to filing Form 3.
The name of LLP can be reserved for 90 days, after which it becomes invalid. Both designated partners need to pay for digital signatures, which vary depending on the agency that issues them Form fees for Registration LLP agreement drafting fee DIN form fees Stamp duty for the LLP agreement execution, which differs from state to state Fee for registering the agreement within 30 days of Registration. This fee is based on capital offering, and if it is not filed within 30 days, a late fee of ₹ 100/- per day will be charged.
Separate Legal Entity: An LLP is like a separate person in the eyes of the law. It can do many things that a normal partnership firm cannot do, such as signing contracts, owning property, and borrowing money. It can also go to court if it has any legal issues with others. An LLP does not depend on its partners for its existence. Even if one or more partners leave or die, the LLP can continue to operate as long as there is at least one partner left. The remaining partner has six months to find a new partner.
Limited Liability: An LLP protects its partners from losing their personal assets if the business fails. The partners are only responsible for the amount of money they have invested in the LLP and not for the entire debt of the business. This is different from a sole proprietorship or a traditional partnership, where the owner or partners have to pay for the business losses from their own pockets. This is why many people choose LLP as a safer and more secure way of doing business.
Low incorporation and compliance cost: The cost of registering an LLP and filing annual reports is much lower than that of a public or private limited company. The LLP does not have to follow many rules and regulations that apply to companies, such as holding board meetings, keeping minutes, passing resolutions, etc. The LLP only has to file two forms every year: the annual report and the Statement of Accounts and Solvency. The LLP also does not have to get its accounts audited unless its contribution or turnover exceeds certain limits.
Easy withdrawal of Profit: An LLP allows its partners to withdraw their share of profits without paying any extra tax on it. The profits of the LLP are taxed only once at the LLP and not again in the hands of the partners.
Less Rules to Follow: LLPs don't have to follow as many rules and regulations as big companies. This means less paperwork and less to worry about.
No Minimum Money Needed: Unlike big companies, you don't need a certain amount to start an LLP. Partners can invest what they can afford.
Public Disclosure: One of the drawbacks of an LLP is that it has to share a lot of information to the public. Anyone can pay a small fee of ₹ 50 and access the LLP’s documents, like how it was formed and how much profit it makes, and so on. This is not the case with proprietorship and traditional partnership, where documents and finances are kept private.
Limited Ways to Raise Funds: Another challenge for an LLP is that it has few options to get funds for its business. It can either borrow funds from a bank or from its partners. It cannot attract investors like Venture Capitalists, Angel Investors, and Private Equity firms who prefer to invest in a private limited company. This is because it does not have shareholders who own the part of the business without involving its management. Investors do not want to be partners who have certain duties and liabilities toward an LLP. Also, foreign investors face more restrictions in an LLP than in a company. It also cannot offer Employee Stock Options to its employees. I.e., an LLP may not be suitable for startups who want to grow fast, raise funds and want to reward their employees with stock options.
Costly Non-compliances: The last thing to keep in mind is that an LLP has to follow some rules and regulations. Even if there is no activity, an LLP has to fill out Form 8 and Form 11 annually and, if failed to do so, will be liable to pay ₹100 per day per Form, which can add up to a huge amount over time. There is no cap for an added fee, and it could go up to lakhs if an LLP has not been filing Forms 8 and 11 for the past few years. If a fine can extend up to 5 lakh, then LLP and its partner would be liable to pay for the same. In the case of proprietorship and traditional partnership firms, there is no need to file annual forms, and it does not have to incur non-compliance expenses.
Ending an LLP: An LLP needs at least two partners. It must stop if it has fewer than two partners for six months. Also, it might have to close if it can't pay its debts.
Registering an LLP and managing it is less complex as it has fewer formalities. The cost of registering an LLP is lower than that of registering a Pvt Ltd company. An LLP is a separate legal entity and separate legal existence from its partners.
Only an active partner can get a salary from an LLP, and sleeping partners are not allowed to get a salary from an LLP.
Designations like MD and CEO are only meant for the internal purposes of an LLP and are not for official meaning. So yes, an LLP can have a CEO if they need it for internal purposes.
Registering for GST is not mandatory for all LLPs in India, it depends on a few factors whether an LLP should register for GST or not.
An NRI can serve as a designated partner in an LLP, provided they possess a Designated Partner Identification Number (DPIN). However, it's important to note that at least one designated partner in the LLP must be a resident Indian.
FDI is allowed under automated route in an LLP by the Foreign Investments Promotion Board (FIPB). Note: Foreign Institutional Investors and Foreign Capital Investors are not allowed to invest in LLPs.
An existing partnership firm or a Company that is unlisted can be converted into an LLP. This conversion into an LLP brings in many benefits.
