While starting a business the entrepreneurs have to face the dilemma of deciding the form of business they want to establish when there are more than 2 members. While forming a partnership firm the business would be devoid of the separate legal entity and other characteristics which are present in a company. And if the entrepreneurs decide to incorporate a company then they would have to do away with the characteristics present in a partnership. This tussle resulted into a new form of business organization known as “Limited Liability Partnership” (LLP). LLPs are governed under the Limited liability Partnership Act, 2008. It can be said that LLP is a hybrid of Partnership and Private Limited Company as it encompasses features of both.
There are certain compliance and procedural matters which are required to be taken care of for the smooth completion of formation of an LLP.
- Two or more persons associating to carry on a lawful business with a view to earn profit must subscribe their names to the incorporation document. This incorporation document is to be filed in such a manner and with such fees as may be prescribed by the registrar of the state in which the registered office is located of the LLP. Further, a statement is to be filed by an advocate, company secretary or chartered accountant or a cost accountant who is engaged in the formation of the LLP with respect to all the statutory requirements being complied with. In case of a foreign direct investment (FDI) in LLP, permission is to be taken from the RBI.
- To start the LLP formation procedure, a copy of PAN card of the partners and their address proof are required. The documents pertaining to the registered office of the LLP can be submitted after obtaining the name approval from the registrar of companies. It is to be noted that the name of every LLP shall have Limited liability partnership or LLP at the end of it and it should not be undesirable or identical to the name of a Partnership firm, LLP, body corporate or similar to a Registered Trademark .
- Every designated Partner is required to obtain a DIN from the Central Government. If a person already has a DIN, the same can be used for forming LLP. It acts as a unique identification for the designated Partner.
- All the designated Partners of the proposed LLP need to have a Digital Signature Certificate (DSC) for the purpose of signing all the forms like eForm 1, eForm 2, and eForm 3, etc., which are required for the purpose of incorporating the LLP and filed electronically through the internet. The DSC will be useful in filing various forms which are required to be filed during the course of subsistence of the LLP with the Registrar of LLP. There are certain benefits of registering LLP apart from the basic benefits like easy to form, perpetual succession, separate legal entity and limited
Some other benefits are as follows:
- Flexible to Manage
The Partners of an LLP have utmost freedom in managing the affairs of their LLP. In form of LLP Agreement the Partners can decide the way they want to run and manage the LLP. The Act does not regulate the LLP to a large extent, but allows partners the liberty to manage their LLP as per their will and fancies.
- Easy Transferable Ownership
One can easily 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.
Usually, LLPs are taxed at a lower rate as compared to a Private Limited Company. Furthermore, LLP is also not subject to Dividend Distribution Tax, so there will not be any tax while you distribute profit to your partners.
- Attract finance
An LLP can easily attract finance from PE Investors, financial institutions, etc. Unlike a sole proprietorship or partnership, seeking funds by an LLP is not difficult at all.
- No obligatory Audit Requirement
An LLP having its annual turnover and contribution exceeds Rs. 40 Lakh and Rs. 25 Lakh, respectively, is required to get its account audited annually by a chartered accountant. It comes off as a great reinforcement to small businessmen.
- Limits Personal Liability
The personal liability of an individual partner is limited under the LLP. It means that a partner cannot be held liable for the errors, omissions, incompetence, or negligence of another Partner and employees or other agents of the LLP.
An LLP has a less burden of compliance as compared to a private limited company.