LLP combines the benefits of both partnerships as well as the company’s form of business. The following are the points that cover basic features to give you a better understanding of LLP (Limited Liability Partnership) :
While Unlimited Liability Entities such as partnerships were easy to register but they suffered the disadvantage of unlimited liability. Therefore, there was a need for a single entity that could combine the advantages offered by both these forms of organizations. LLP in India came into existence in the year 2008 with the LLP Act. Since then it has become a preferred form of business.
LLP registration is easier with post-registration compliance less in comparison to a body corporate and unlike partnership where liability is unlimited LLPs limit the liability of partners to the extent of their capital contribution.
Advantages of LLP
The following are the advantages of LLP:-
1. Limited Liability
One of the best advantages of LLP is that the liability of each partner is limited to the extent of his/her contribution/share. In the sole proprietorship or the traditional partnership firm, the personal assets of the owner or partner could be at risk if there is any loss to the business. Therefore LLP helps the partners to be free from personal liabilities. In case of an LLP becomes insolvent and is wound up, only the assets of the LLP are used to clear the debts. The partners have no personal liabilities. Also, they are not made bankrupt and are free to operate as credible businessmen.
2. Separate Legal Entity
LLP has considered as a separate legal entity i.e. it has a separate existence from its partners. LLP can sue and be sued in its own existence. Thus, the entry and exit of the partners do not affect the LLP. It is because it incorporates various stakeholders such as Suppliers, Customers, shareholders, etc. It provides flexibility while dealing and signing legal contracts. Larger organizations will prefer dealing with corporate entities than proprietorship/partnership organizations.
3. The audit is not Compulsory
All limited companies require auditing for their accounts whether the private limited company or public and irrespective of their share capital. But in the case of LLP, it is not mandatory. This is perceived to be a significant compliance benefit. A limited liability partnership requires to get the audit only in the case that:
The contribution of the LLP exceeds Rs. 25 lakhs or
The annual turnover of the LLP exceeds Rs. 40 lakhs
4. Dividend Distribution Tax (DDT) is not applicable
In the case of a company, if the owners have to withdraw profits from the company then an additional tax liability in the form of DDT( Dividend Distribution Tax) @ 15% (plus surcharge & education cess) is payable by the company. But in the case of LLP, no such tax is payable and partners can withdraw profits easily. So, This feature makes it an ideal option for the entrepreneurs.
5. Lower Compliance Burden Resulting in Savings
Private ltd companies require to do a minimum of 8 to 10 compliances approximately per annum. But in the case of a Limited Liability Partnership. it requires to file only the Annual Return & a Statement of Accounts & Solvency.
The private limited company requires at least Rs. 1 lakh as minimum capital contribution whereas there is no minimum capital required to form an LLP. Even the contributions could be made in installments which makes it an ideal option for the small entrepreneurs/startups.
7. Easy to Form
It is very easy to form, as the LLP registrationprocess is very simple. Also, it does not involve much formality as compared to Companies. Moreover, in terms of cost, the minimum fees of incorporation are as low as Rs 800 and the maximum is Rs 5600 which is much lesser than other companies’ registration processes.
8. Easy Transferable Ownership
In LLP, it is easy to become a Partner or leave when the partner wants. Also, it is easier to transfer the ownership by the terms of the LLP Agreement It does not affect the LLP.
Another main benefit of LLP incorporation is the taxation of an LLP. It taxes at a lower rate as compared to Company. Moreover, LLP is also not subject to Dividend Distribution Tax as compared to a company, so there will not be any tax while you distribute profit to your partners.
10. Raising Money
In a small business like sole proprietorship or partnership, it can be difficult to arrange the required capital for them. But LLP can attract finance from PE Investors, financial institutions, etc like other companies.
Thus, in conclusion, the main advantages of LLP being Limited Liability, Low set-up cost, low compliances cost as compared to Private Limited Company, Formal set up as compared to the partnership.