Advantages of Limited Partnership: Reasons to Form Limited Partnership Firm

Narendra Kumar

27 Jan, 2021

A Limited Liability Partnership is a partnership in which liabilities of some or all partners are limited. An LLP also allows for pass-through taxation so the profits and/or losses flow directly into the partner’s tax^[1] returns, which benefits partners who have a specialized or limited interest in the company. In this article, read the reasons to form a limited partnership firm through the Advantages of Limited Partnership in India along with the process of registering it.

LLPs are actually flexible in that they permit partners to choice select how they wish to invest within the company, which is advantageous to individual partners.

Advantages of Limited Partnership in India

Also, an LLP has a devolved organization structure which makes it more suitable for a business where all owners want the same organization rights.

Separate legal entity

An LLP is a separate legal entity. This means that it has assets in its own name and can sue and be sued. Additionally, 1 partner is not responsible or liable for another partner’s misbehaviour or neglect.

No owner/manager distinction

An LLP has partners, who own and manage the business. This is different from a private limited company, whose directors may be different from shareholders. 

No limit on owners of the business

An LLP requires a min two partners while there is no limit on the max number of partners; this is in contrast to a private limited company wherein there is a constraint of not having in excess of 200 members.

Flexible agreement

The partners are free to draft the agreement as they please, with regard to their rights and duties.

Limited liability

The liability of the partners is limited to the extent of his/her contribution to the LLP. Unless fraud has been detected, the personal assets of the partner are protected from any liability of the LLP.

Fewer compliance requirements

An LLP is very easier &economical to route than a private limited company as there are just 3 compliances in a year. Instead, a private limited company has a many of compliances to accomplish& conduct an audit of its books.

Easy to wind-up

It’s not only easy to begin; it’s also easier to wind-up an LLP, as associated with a private limited company. Though it still takes 2 to 3 months to complete this procedure, it can take over a year to close a private limited company.

No requirement of minimum contribution

There is no min capital requirement in LLP. An LLP can be formed with the least possible capital. The particulars of Minimum Capital contribution are Private Company – 1, 00,000, Public Company – 5, 00,000; no such mandatory requirement & moreover, the contribution of a partner may consist of tangible, movable or immovable or intangible property or another benefit to the LLP.

Lower Registration Cost

The cost of registering LLP is low as compared to the cost of incorporating a private limited or a public limited company.

No requirement of compulsory Audit

Every company which is limited, whether it is private or public, regardless of their share capital, are obligatory to get their accounts audited. But in case of LLP, there is no such mandatory requirement.

This is perceived to be a significant compliance benefit. A Limited Partnership is obligatory to get the audit through only in the situation when the contributions of the LLP exceeds ₹ 25 Lakhs, or the annual turnover of the LLP exceeds ₹ 40 Lakhs

Taxation Aspect on LLP

For income tax provision, LLP is treated on equivalence with partnership firms. Therefore, LLP is accountable for payment of income tax & share of its partners in LLP is not accountable to tax. Thus no dividend distribution tax is payable.

Regulation of deemed dividend in accordance with income tax law is not applicable to LLP. However, according to section 40(b) Interest to partners, any payment of salary, bonus, commission or remuneration allowable as a deduction.

Thus, there are numerous benefits to be had from trading through an LLP which are subsumed as under –

• Limited liability protects the member’s personal assets from the liabilities of the business. LLP’s are a separate legal entity to the members.
• The operation of the partnership and distribution of profits is determined by written agreement between the members. This may allow for greater flexibility in the management of the business.
• The Limited Partnership of LLP is deemed to be a legal individual. It can purchase, rental, lease, own property, employ staff, enter into contracts, & be held accountable is
• Corporate ownership. LLP’s can appoint two companies as members of the LLP. In an LTD company, at least one director must be a real person.
• Designate and non-designate members. One can function the LLP with alternate states of membership.
• Protecting the partnership name. By registering the LLP at Companies House you prevent another partnership or Company Registration the same name.

Know the complete Advantages of a Limited Partnership and visit our Enterslice website.

Read our article:Procedure for Change in Partners of LLP