Introduction: Limited Liability Partnership (LLP)
LLP stands for Limited Liability Partnership and is a concoction of a corporation and a partnership, LLPs are gaining tremendous popularity among investors because it provides several advantages that have helped boost the need and want to create more LLPs among entrepreneurs.
Table of Contents
- Introduction: Limited Liability Partnership (LLP)
- What Is An LLP?
- Features Of An LLP
- List Of Forms Regarding An LLP
- Formation Of An LLP
- Taxation Benefits
- Remuneration To Partners Of An LLP In Accordance With The Income Tax Act
- Statutory Compliance For LLP
- Annual e-filling for an LLP
- Advantages Of Forming An LLP
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By creating an LLP, the biggest upside is that an LLP virtually guarantees that the partners' assets or any belonging of the partners are not liquidated to pay off any obligations incurred by the firm. Even if the firm has numerous partners, none of the partners would be held accountable for the activities of others, thus, relieving them of taking any unnecessary accountability for the actions of the others.
What Is An LLP?
LLP is a tax and legal entity and allows partners of an LLP to benefit by taking the advantage of economies of scale and reducing their accountability and liability for any action taken by any one particular partner. The liability of a partner is limited in the sense that a partner may lose any assets acquired in the partnership but will not lose any assets the partner had acquired outside of the partnership. Generally, the partnership is the first target for any lawsuit, even though a specific partner could be held liable if they had alone done something illegal, for example, if a partner was a party to a lawsuit in which the partner was held to be conducting malpractices and illegal business activities outside the knowledge of other partners, only the responsible partner will be held liable and the other partners may lose certain belongings of the partnership but will not lose their assets like their personal car or their desktop.
One might question, LLCs and LLPs both offer protection to their owners and partners but what is the difference?
There are subtle similarities and subtle differences. A limited Liability Partnership is a structure of formal nature and requires formal written partnership agreements and usually has to comply and file annual reporting requirements. LLPs and LLCs offer different layers of protection to their partners and owners and have a difference in management requirements as well. LLCs offer more flexibility in management and who can manage the business. LLCs offer protection from debts or claims on the business while in LLPs a partner is not held accountable or liable for the other partner’s mistakes and conduction of illegal business.
Features Of An LLP
- LLPs differs from a partnership with respect to succession i.e. an LLP will continue to exist even after the death of the partners, retirement, or stepping down of partners.
- Section 3 of the LLP Act, 2008 gives an LLP the status of a legal entity.
- Being a legal entity, the LLP is entirely liable for the assets it owns and possesses however and the partners do not have unlimited liability.
- The independent actions of one partner will not affect the other partners and the partner who had taken separate actions will be held accountable and liable.
- The duties and powers vested with each partner are legally binding in accordance with the agreement by them. If an agreement like this is not in existence or created, all the rights, powers, and duties are equally divided by each of the partners in an LLP.
- Only 2 partners are required to start an LLP and there is no embargo on how many partners could form an LLP.
Read Our Blog: Registration Process for Limited Liability Partnership
List Of Forms Regarding An LLP
- To obtain a Designated Partner Identification Number while registering your LLP, Form 7 is required. The form can be downloaded from the official website of the Ministry of Corporate Affairs. A registration fee of Rs. 100/- is to be paid when submitting the form duly filed.
- To register a name for your LLP, Form 1/RUN-LLP is required. The form may be used to rename the existing name of your LLP or to register a name for a newly formed LLP. A fee of Rs. 10,000/- has to be paid when submitting the form duly filed.
- The Digital Signature Certificate of the partners of LLP has to be registered if they have not registered.
- For incorporation of any LLP, Form 2/FiLLiP is required. A duly filed form must be sent to the respective State Registrar and must be acknowledged by him.
- Form 3 is required in regard to outlining the duties of each partner who is a part of the LLP agreement.
- Form 4 is required, when there is a change of partners or in the case of altering, removing or adding partners to the LLP.
- IT returns shall be filed with the help of Form 11.
- In the case of changing office address, Form 15 is to be submitted.
Formation Of An LLP
- Fill and submit Form 7 and pay a fee of Rs. 100/-. Issue a Designated Partner Identification Number which will serve as an identity card for you.
NOTE: Obtain a Digital Signature Certificate, the following steps will require it. (For more information, read our blog on the same theme)
- After you have obtained a Digital Signature Certificate, register the name of your LLP by submitting Form 1 and paying a fee of Rs. 200/-
- Fill and submit Form 2 to incorporate the LLP, it is pertinent to note that an LLP agreement should be made by this stage.
- In accordance with the LLP agreement as per section 2(o) of the LLP act of 2008, fill and submit Form 3.
Read Our Blog: Limited Liability Partnership (LLP) Registration
- The taxes are not levied on the income of the partners
- Under section 40B, no dividend distribution tax is payable
- Remunerations of partners, including commission, bonus, and interest are allowed as a deduction.
Remuneration To Partners Of An LLP In Accordance With The Income Tax Act
Remuneration is one of the most important things for an LLP. Everything from base salary to commissions is included in remunerations. Some of the key takeaways to understand about the deductible amount under the IT act are:
- The remunerations can only be deducted if the working partner has received the remuneration.
- Share of profits is not included in the same section as remunerations and the remunerations received by the partners are taxed as Business Income.
- The share of profit returns are exempted for both non-working and working partners as per section 10(2A) of the Income Tax Act.
- Income received on capital invested is taxed as business income.
Statutory Compliance For LLP
LLP is easier to maintain with respect to a private limited company. It is not necessary to have an auditor for your LLP until and unless your LLP has a paid-up capital of over Rs. 25 Lakhs/- or has crossed Rs. 40 Lakhs in turnovers.
LLPs have to comply with requirements like filing of annual returns, minutes of a meeting of partners, books of accounts, etc., and should be filed in the prescribed format of form 11.
Annual e-filling for an LLP
The LLP should file its solvency and statement of accounts on or before the 30th of October of every financial year. Even if the LLP has not undertaken any business in the specific financial year, the annual return for LLP shall be filed and is due on the 30th of May. When e-filing, a form could be downloaded which needs to be manually filed up i.e. offline, and be submitted for further processing. However, there is an option of filing the details online with the help of the data available in the LLP system.
Read Our Blog: LLP Annual Compliance
Advantages Of Forming An LLP
- Even if you have a meager budget, an LLP could be formed.
- Even though the partners do not have unlimited liability, the partners still enjoy less risk because even if the LLP comes under tremendous debts, the personal assets of the partners will not be dissolved.
- Shareholders have lesser power than the board of the LLP with respect to the management of the company thus, making it easier for the board to govern the LLP.
- LLP’s life will continue even after the death of the partner, retirement, or even stepping down of a partner hence, ensuring the smooth functioning of the firm.
- LLPs enjoy many tax benefits which are not enjoyable in a Pvt. Ltd. Company.
Forming a Limited Liability Company has many benefits over a Pvt. Ltd. Company whether it be tax benefits or management of a company. LLP is fairly easy to form and even for young entrepreneurs, LLP could be formed with a meager capital of Rs. 500-5600/- which makes it extremely easy for entrepreneurs to invest time and capital in their business. The process of forming an LLP is fairly easy compared to other corporate legal entities.
This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not corpseed, and have not been evaluated by corpseed for accuracy, completeness, or changes in the law.
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