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Limited Liability Partnership

Why your startup in India should be an LLP

Soumya Bajpai

| Updated: Apr 02, 2020 | Category: Limited Liability Partnership, Startup

Why-your-startup-in-India-should-be-an-LLP

Startup in India is of three types mainly: Sole proprietorship, Partnership firms and Company (private or public) to set up business structures. Although a new hybrid form of partnership firm and company, known as Limited liability Partnership (LLP), has emerged a few years ago. Every business structure has its own pros and cons as it depends upon the individual circumstances of each business owner as to which will best suited for his business. These include the level of personal liability that one is willing to take for business debts, personal tax position, the level of administration that one wants to do and how one wants his business to be perceived.

Need of LLP

For a startup in India, the need has been felt to provide business a format which would combine the flexibility of a partnership and the good advantages of the limited liability company at a low compliance cost. The Limited Liability Partnership has a format of alternative corporate business vehicle that provides the benefits of limited liability of the company and also allows its members the flexibility of organizing their internal management on the basis of mutually made agreement, same as in the case of a partnership firm.

This format has proven to be quite useful especially for start-up in India, for small and medium enterprises and for the enterprises in the services sector in particular. LLPs are most preferred as a vehicle of business particularly for service industry or for the activities involving professionals.

In fact, an LLP is more similar to operating as a Limited Liability Company. In terms of liability, the LLP is itself liable for debts in running the business, rather that the individual members of the Limited Liability Partnership. As a consequence, LLPs are now recommended for profit running businesses for a startup in India. The individuals or existing businesses can be members of a Limited Liability Partnership.

An LLP is also similar in some ways to standard Partnership firms, except that the individual members have liabilities to any debts which may arise during the running business. Further, there are more administrative duties involved compared to the Partnership business structure.

The rights and responsibilities of all members are usually derived out in a “Deed of Partnership“. The LLP has to select a “Designated Member” who would be responsible for maintaining business and communications with Companies House, preparing accounts and also acts for an LLP during the course of the running business or any time when it is needed.

Salient features of LLP

For considering LLP as startup in India, the following features may be highlighted:

  • There is separate legislation which is Limited Liability Partnership Act, 2008 and thus the provisions of the Indian Partnership Act, 1932 are not applicable to an LLP.
  • LLP is a body corporate and has separate legal entity from its partners.
  • The LLPs have perpetual succession, which means that any changes in partners or members such as death, bankruptcy, exit, transfer, etc. do not affect the existence of LLP and company.
  • Every Limited Liability Partnership must use the words “Limited Liability Partnership” or its acronym “LLP” as the last words of its forma name.
  • Every LLP must have a minimum of 2 designated partners being individuals, at least 1 of them being resident in India and all partners must be an agent of the Limited Liability Partnership but not of other partners.
  • Under LLP, the capital is raised privately from partners or shareholders. LLPs cannot raise or borrow money from the general public.
  • In the LLP, a partner is liable for his actions only to the liability extent of his contribution to the capital.
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Liability

When one looks to minimize their personal liability the person generally does not opt for a sole proprietorship business or partnerships firms because there is a lack of liability protection in these two forms of business. In these two forms, the business has not any separate legal entity from, and thus the personal assets are part of the business. That means if the business or the firm issued for whatever reason, the personal assets of the owner or partners are at stake. In a partnership form of business, even the personal assets are at stake for doings of any other partners as well.

In an LLP, the liability is limited to the extent of one’s contribution except only in cases of intentional fraud or wrongful act of omission or commission by any of the partner. Whereas in the case of a Company, liability is also limited to the amount required to be paid upon each share.

Both LLP and limited company have a separate business entity and this creates a wall between the personal assets and the business liabilities. Thus the personal property is protected and gives the ability to build business credit, get loans and raise capital accordingly.

Taxation

Both the LLP and LLC are taxed at a flat rate of 30% plus Education Cess & Senior and Higher Education Cess. LLPs are liable to pay a surcharge if the total income exceeds Rs.1 Crore. LLPs are required to pay advance tax in three quarterly instalments, whereas, companies are required to pay in four instalments. When it comes to reporting the taxes, the sole proprietorship has an easy way out.

Ownership and control

The forms of Sole Proprietorship business and partnership firms have a limited number or type of people who can invest in the business. If ones seek a large number of investors or international investors, then they must opt for LLP.

If one desires to maintain a direct relationship between ownership and management of the business then limited liability partnerships (LLPs) are preferable over limited Company.

LLP as startup in India

From the point of view of startup in India, LLP is a form of business entity that allows individual partners to be restricted from joint liability of partners in a partnership firm. The Liability of the partners is incurred during the course of business in case of an LLP and it does not extend to personal assets of the respective partners. It is a great relief to the partners, particularly professionals like Chartered Accountants, Company Secretaries, Cost Accountants, Advocates and other various professionals.

These professionals may also form multi-disciplinary LLPs to meet the changing economic environment for startup in India. The hybrid structure of an LLP will facilitate entrepreneurs, service providers and other professionals to organize and operate in an innovative as well as an efficient manner for effectively competing in the global market. The LLP which came into force in the year 2008 has brought a remarkable difference in the existing law related to company laws and startup in India.

Conclusion

LLP is a much better option than any other more for new startups in India. The LLP carries all good advantages of the partnership firm and also covers the unique features of the Private Limited Company. LLP has less cost of compliances and also it has many more taxation benefits in the case of Limited Liability Partnership.  There are various taxes that are exempted in the case of Limited Liability Partnership, such as Wealth Tax, Surcharge, and Dividend Distribution Tax, whereas all these taxes are levied in case of the Private Limited Company.  The benefits of saving money are more in LLP, and therefore advantages of LLP in terms of saving and investing in startup in India.

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Soumya Bajpai

Soumya has done LLB (Hons) and has a 2+years experience in writing. Her main interest is in reading judgments, new enactments and amendments taking around in law. She always strives to bring the best to work that she does.

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