Limited Liability Partnership / merits and demerits
Concept of LLP
Limited Liability Partnership enterprise, the worldwide recognized form of business organization, has now been introduced in India by enacting the Limited Liability Partnership Act, 2008. LLP Act was notified on 31.03.2009. A Limited Liability Partnership, popularly known as LLP, combines the advantages of both the Company and Partnership into a single form of organization. Limited Liability Partnership (LLP) is a new corporate form that enables professional knowledge and entrepreneurial skill to combine, organize and operate in an innovative and proficient manner.
It provides an alternative to the traditional partnership firm with unlimited liability. By incorporating an LLP. its members can avail the benefit of limited liability and the flexibility of organizing their internal management on the basis of a mutually-arrived agreement, as is the case in a partnership
Characteristics of an LLP:
1. LLP is governed by the Limited Liability Partnership Act 2008, which has come into force with effect from April 1, 2009. The Indian Partnership Act. 1932 is not applicable to LLP.
2. LLP is a body incorporate and a legal entity separate from its partners having perpetual succession, can own assets in its name, sue and be sued
3. The partners have the right to manage the business directly, unlike corporate shareholders.
4. One partner is not responsible or liable for another partner’s misconduct or negligence.
5. Minimum of 2 partners and no maximum limit
6. Should be for profit’ business.
7. The rights and duties of partners in an LLP, will be governed by the agreement between partners and the partners have the flexibility to devise the agreement as per their choice. The duties and obligations of Designated Partners shall be as provided in the law.
8. Limited liability of the partners to the extent of their contributions in the LLP. No exposure of personal assets of the partner, except in cases of fraud.
9. LLP shall maintain annual accounts. However, audit of the accounts is required only if the contribution exceeds Rs. 25 lakh or annual turnover exceeds Rs. 40 lakh. A statement of accounts and solvency shall be filed by every LLP with the Registrar of Companies (ROC) every year. Advantages of LLP:
The first LLP was registered on 2nd April, 2009 and till 25th April, 2011, 4580 LLPs were registered. This form of organisation offers the following benefits:
1. The process of formation is very simple as compared to Companies and does not involve much formality. Moreover, in terms of cost, the minimum fee of incorporation is as low as f 800 and maximum is f 5600.
2. Just like a Company, LLP is also body corporate, which means it has its own existence as compared to partnership. LLP and its Partners are distinct entities in the eyes of law. LLP is known by its own name and not the name of its partners.
3. An LLP exists as a separate legal entity different from the lives of its partners. Both LLP and persons, who own it, are separate entities and both function separately. Liability for repayment of debts and lawsuits incurred by the LLP lies on it and not different from the lives of its partners, the owner. Any business with potential for lawsuits should consider LLP form of organisation and it will offer an added layer of protection.
4. LLP has perpetual succession. Notwithstanding any changes in the partners of the LLP, the LLP will remain the same entity with the same privileges, immunities, estates and possessions. The LLP shall continue tom exist till it is wound up in accordance with the provisions of the relevant law.
5. LLP Act 2008 gives an LLP. flexibility to manage its own affairs. Partners can decide the way they want to run and manage the LLP, as per the form of LLP Agreement. The LLP Act does not regulate the LLP to large extent rather than allows partners the liberty to manage it as per their agreement.
6. It is easy to join or leave the LLP or otherwise it is easier to transfer the ownership in accordance with the terms of the LLP Agreement.
7. An LLP. as legal entity, is capable of owning its separate property and funds. The LLP is the real person in which all the property is vested and by which it is controlled, managed and disposed off. The property of LLP is not the property of its partners. Therefore, partners cannot make any claim on the property in case of any dispute among themselves.
8. Another main benefit of incorporation is the taxation of a LLP. LLP is taxed at a lower rate as compared to Company. Moreover, LLP is also not subject to Dividend Distribution Tax as compared to company, so there will not be any tax while you distribute profit to your partners.
9. Financing a small business like sole proprietorship or partnership can be difficult at times. An LLP being a regulated entity like company can attract finance from Private Equity Investors, financial institutions etc.
10. As a juristic legal person, an LLP can sue in its name and be sued by
others. The partners are not liable to be sued for dues against the LLP.
11. Under LLP, only in case of business, where the annual turnover/ contribution exceeds Rs. 40 lakh, Rs. 25 lakh are required to get their accounts audited annually by a chartered accountant. Thus, there is no mandatory audit requirement.
12. In LLP. partners, unlike partnership, are not agents of the partners and therefore they are not liable for the individual act of other partners, which protects the interest of individual partners.
13. As compared to a private company, the numbers of compliances are on a lesser side in case of LLP.
Disadvantages of LLP :
The major disadvantages of Limited Liability Partnership are listed below:
1. An LLP cannot raise funds from public.
2. Any act of the partner without the other may bind the LLP.
3. Under some cases, liability may extend to personal assets of partners.
4. No separation of management from owners.
5. LLP might not be a choice due to certain extraneous reasons. For example, Department of Telecom (DOT) would approve the application for a leased line only for a company. Friends and relatives (Angel investors), and venture capitalists (VC) would be comfortable investing in a company.
6. The framework for incorporating a LLP is in place but currently registrations are centralized at Delhi.
