Limited Liability Partnership (LLP)
Limited Liability partnership (LLP) has become a preferred form of organization among entrepreneurs as it incorporates the benefits of both partnership firm and company into a single form of organisation.
The concept of the Limited Liability Partnership (LLP) was introduced in India in 2008. An LLP has the characteristics of both the partnership firm and company. The Limited liability Partnership Act, 2008 regulates the LLP in India. Minimum two partners are required to incorporate an LLP. However, there is no upper limit on the maximum number of partners of an LLP.
Among the partners, there should be a minimum of two designated partners who shall be individuals, and at least one of them should be resident in India. The rights and duties of designated partners are governed by the LLP agreement. They are directly responsible for the compliance of all the provisions of the LLP Act, 2008 and provisions specified in the LLP agreement.
Features of LLP
- It has a separate legal entity just like companies.
- The liability of each partner is limited to the contribution made by the partner.
- The cost of forming an LLP is low.
- Less compliance and regulations.
- No requirement of minimum capital contribution.
The minimum number of partners to incorporate an LLP is 2. There is no upper limit on the maximum number of partners of LLP. Among the partners, there should be a minimum of two designated partners who shall be individuals, and at least one of them should be resident in India.
The rights and duties of designated partners are governed by the LLP agreement. They are directly responsible for the compliance of all the provisions of the LLP Act 2008 and provisions specified in the LLP agreement.
If you want to start your business with a Limited Liability Partnership, then you must get it registered under the Limited liability Partnership Act, 2008.
Advantages Of LLP
Separate legal entity
An LLP has a separate legal entity, just like companies. The LLP is distinct from its partners. An LLP can sue and be sued in its own name. The contracts are signed in the name of the LLP, which helps to gain the trust of various stakeholders and gives the customers and suppliers a sense of confidence in the business.
Limited liability of the partners
The partners of the LLP have limited liability. The liability of the partners is limited to the contributions made by them. This means that they are liable to pay only the amount of contributions made by them and are not personally liable for any loss in the business. If an LLP becomes insolvent at the time of winding up, only the LLP assets are liable for clearing its debts. The partners have no personal liabilities, and thus they are free to operate as credible businessmen.
Low cost and less compliance
The cost of forming an LLP is low compared to the cost of incorporating a public or private limited company. The compliances to be followed by the LLP is also low. The LLP needs to file only two statements annually, i.e. Annual Return and a Statement of Accounts and Solvency.
No requirement of minimum capital contribution
The LLP can be formed without any minimum capital. There is no requirement of having a minimum paid-up capital before going for incorporation. It can be formed with any amount of capital contributed by the partners.
Disadvantages Of LLP
Penalty on non-compliance
The compliance that is to be followed by LLP is minimal. But, if these compliances are not completed on time, then the LLP will have to pay a heavy penalty. Even if the LLP does not have any activity in the year, it is required to file returns with the Ministry of Corporate Affairs (MCA) annually. If it fails to file the returns, then a heavy penalty will be imposed on the LLP.
Winding up and dissolution of LLP
A minimum of two partners is required to form an LLP. If the minimum number of partners is below two for six months, then the LLP will be dissolved. It may be dissolved if the LLP is unable to pay its debts.
Difficulty to raise capital
The LLP does not have the concept of equity or shareholders like a company. Angel investors and venture capitalists cannot invest in the LLP as shareholders. This is because the shareholders must be partners in the LLP and have to take up all the responsibilities of a partner. Thus, angel investors and venture capitalists prefer to invest in a company rather than an LLP making it difficult for the LLPs to raise capital.