A Limited Liability Partnership (LLP) has gained popularity among entrepreneurs in India as a preferred business structure. This is because it combines the advantages of both a partnership firm and a company. An LLP provides the flexibility of a partnership, while offering the added benefit of limited liability protection, similar to a company.
As the name suggests, an LLP is formed through a partnership between at least two partners, who agree to the terms outlined in an LLP agreement. The key feature of an LLP is that the personal assets of the partners remain protected, as they are only liable to the extent of their investment in the business. This means that in the event of any business losses or legal issues, the partners’ personal wealth is safeguarded.
LLPs are also relatively easier to manage compared to traditional companies, with fewer regulatory requirements and simpler compliance processes. This structure is especially attractive to small and medium-sized enterprises (SMEs) and startups, as it allows for operational flexibility while minimising personal financial risk.
Overall, LLPs are an ideal choice for entrepreneurs looking for a blend of limited liability protection and ease of management.
What is a Limited Liability Partnership?
A Limited Liability Partnership (LLP) is a form of general partnership where each partner’s personal liability for the partnership's debts is limited. Partners are not held responsible for the wrongful acts of other partners but may still be liable for contractual obligations, depending on the regulations of the state.
Understanding a Limited Liability Partnership
- Flexibility
LLPs offer flexibility in management and decision-making, allowing partners to actively participate in the business's day-to-day operations. - Limited liability
One of the key features is limited personal liability, protecting individual partners from being personally responsible for the LLP's debts.
What is the structure of an LLP?
A Limited Liability Partnership (LLP) is a distinct legal entity with partners who have limited liability, liable only up to their investment and any personal guarantees made. Registered at Companies House, LLPs are solely for profit-making entities. Partners must provide a business address and maintain a member register. There is no limit on the maximum number of partners, though a minimum of two members—individuals or limited companies—is required for incorporation. It's also permissible to form an LLP with one individual and a dormant company, offering flexibility in partnership structures within legal boundaries.
Features of LLP
A Limited Liability Partnership (LLP) has several distinct features:
- Separate legal entity: An LLP is recognised as a separate legal entity, much like a company, meaning it can own assets and enter into contracts in its own name.
- Minimum two partners: To form an LLP, at least two individuals must come together as partners. There is no upper limit on the number of partners an LLP can have.
- Designated partners: An LLP must have at least two designated partners responsible for regulatory compliance. One of these designated partners must be a resident of India.
- Limited liability: The liability of each partner is limited to the amount they have contributed to the LLP, protecting their personal assets from business debts.
- Low formation cost: Establishing an LLP involves lower costs compared to forming a private limited company.
- Less compliance: LLPs have fewer regulatory requirements and compliance obligations, making them easier to manage.
- No minimum capital requirement: There is no mandatory minimum capital contribution needed to start an LLP, allowing flexibility in setting up the business based on individual circumstances.
These features make LLPs a flexible and cost-effective option for entrepreneurs.
Benefits of an LLP
An LLP provides several benefits, including:
Limited Liability
Partners are not personally liable for business debts.Tax Advantages
LLPs enjoy pass-through taxation, avoiding double taxation on profits.
Disadvantages of LLP
While Limited Liability Partnerships (LLPs) offer several advantages, it is important to be aware of certain potential disadvantages:
- Compliance costs and penalties: LLPs must adhere to various compliance requirements, such as annual filings and maintaining records. Even minor non-compliance can result in significant penalties from the Ministry of Corporate Affairs. This adds to the overall cost of operating an LLP, particularly if professional assistance is required to meet these legal obligations.
- Dissolution risks: Unlike companies, LLPs do not enjoy perpetual succession. If the number of partners drops below two for a period of six months, or if the LLP encounters severe financial difficulties, it may face dissolution. This can disrupt business operations and create complications for stakeholders, especially if the dissolution process is lengthy.
- Limited access to capital: LLPs face limitations when it comes to raising capital. Their structure lacks a formal equity system, which makes it less attractive to investors and venture capitalists. Without the ability to issue shares, LLPs may find it harder to secure large-scale funding, which can restrict growth opportunities.
Understanding these drawbacks is essential for making informed decisions about the suitability of an LLP.
Difference between LLP and partnership
Aspect |
LLP (Limited Liability Partnership) |
General Partnership |
Legal status |
Separate legal entity |
No separate legal entity |
Liability |
Limited to the extent of the partner's contribution |
Unlimited; partners are personally liable |
Number of partners |
Minimum 2, no maximum limit |
Minimum 2, maximum 20 (10 for banking partnerships) |
Management |
Managed by designated partners |
Managed by all partners jointly |
Registration |
Mandatory under the LLP Act, 2008 |
Not mandatory, but advised for legal recognition |
Compliance requirements |
Higher compliance, annual filing mandatory |
Lower compliance requirements |
Ownership of assets |
Owned by the LLP as a legal entity |
Owned collectively by the partners |
Transfer of ownership |
Easier; governed by the LLP agreement |
More restrictive, requiring partner consensus |
Continuity of existence |
Continues regardless of changes in partners |
Dissolves upon a partner’s death or withdrawal |
Taxation |
Taxed as a partnership; no dividend distribution tax |
Taxed as a partnership |
Suitable for |
Professionals, businesses requiring limited liability |
Small businesses, professional services, family-run firms |
Difference between LLP and LLC
A Limited Liability Partnership (LLP) and a Limited Liability Company (LLC) both provide owner protections but differ in structure and management. An LLP requires a formal partnership agreement and often entails annual reporting. Management in an LLP must be equally shared among partners, unlike an LLC, which offers more flexibility in management structure. LLCs shield members from personal liability for business debts, while LLP partners are generally not liable for each other's actions. Both entities are flow-through for tax purposes, with partners taxed individually on profits. The choice between LLP and LLC often depends on management preferences and liability considerations for professionals.
Difference between Limited Liability Partnership and company
Aspect |
LLP (Limited Liability Partnership) |
Company (Private/Public) |
Legal status |
Separate legal entity |
Separate legal entity |
Governing law |
Governed by the LLP Act, 2008 |
Governed by the Companies Act, 2013 |
Liability |
Limited to the extent of the partner’s contribution |
Limited to the extent of shares held (for shareholders) |
Ownership |
Owned by partners (designated partners) |
Owned by shareholders |
Management |
Managed by designated partners |
Managed by Board of Directors |
Number of members |
Minimum 2 partners, no maximum limit |
Minimum 2 (private company) or 7 (public company), maximum 200 (private) |
Compliance requirements |
Moderate compliance requirements (annual filing mandatory) |
Higher compliance requirements (mandatory audits, annual filings) |
Registration |
Mandatory registration under LLP Act, 2008 |
Mandatory registration under Companies Act, 2013 |
Transfer of ownership |
Requires consent of all partners as per the LLP agreement |
Shares can be freely transferred (subject to restrictions in private companies) |
Perpetual succession |
Yes, LLP continues regardless of changes in partners |
Yes, company continues regardless of changes in shareholders |
Taxation |
Taxed as a partnership; no dividend distribution tax |
Subject to corporate tax rates; dividend distribution tax may apply |
Profit distribution |
Distributed according to the LLP agreement |
Distributed as dividends according to shareholding |
Audit requirement |
Mandatory only if turnover exceeds a specified limit |
Mandatory, regardless of turnover |
Suitable for |
Professional services, small businesses needing flexibility |
Larger businesses, companies looking for growth and investment |
What is an example of an LLP?
An example of an LLP is a law firm where partners share profits and liabilities. Each lawyer's personal assets are protected from the firm's debts, providing a level of security while maintaining a collaborative business structure.
What is the difference between a Limited Partnership and an LLP?
Liability
In a limited partnership, at least one partner has unlimited personal liability, while all LLP partners enjoy limited liability protection.Management
LLPs typically allow all partners to actively participate in management, unlike limited partnerships where some partners may have limited involvement.
LLP registration process
Registration of a Limited Liability Partnership (LLP) involves several steps.
- Obtain Digital Signature Certificate (DSC) from a government-recognized agency for designated partners to electronically sign online documents.
- Apply for Designated Partner Identification Number (DPIN) through Form DIR-3, providing Aadhaar and PAN documents; only natural persons can apply.
- File Form RUN-LLP to seek approval for the LLP's proposed name, ensuring uniqueness and lack of resemblance with existing entities.
- Incorporate LLP by filing Form FiLLiP with the Registrar, an integrated form covering DPIN allotment if necessary, and payment of fees per Annexure ‘A’.
- File LLP Agreement within 30 days of incorporation using Form 3, outlining partners' rights and obligations, printed on non-judicial stamp-paper (varying by state).
- Adhering to these steps ensures proper LLP registration, offering limited liability benefits to registrants.
LLP forms
Form Name |
Purpose of the Form |
FiLLiP |
Use for LLP incorporation |
RUN LLP |
Reserve a name for the LLP |
Form 3 |
Provide information about the LLP agreement |
Form 8 |
Submit the Statement of Account and Solvency |
Form 11 |
File the Annual Return of Limited Liability Partnership (LLP) |
Form 24 |
Apply to the Registrar of Companies for striking off name of LLP |
Conclusion
In conclusion, a Limited Liability Partnership (LLP) offers a unique blend of flexibility and limited liability protection, making it an attractive business structure for various industries. Understanding the benefits and differences between an LLP and other business entities is crucial for entrepreneurs seeking a balance between personal liability protection and operational flexibility.
Explore the impact of LLPs on taxation, including aspects related to GST, by visiting this page on GST.
