Limited Liability Company
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Limited Liability Partnerships have gotten quite popular in the last few years. In this article, we will focus on the process and steps along with the elements essential for the incorporation of an LLP (limited liability partnership). The guidelines are provided by the Limited Liability Partnership Act (LLP Act), 2008.
There are various benefits of LLP which shall include: –
- Renowned form of business: Though the concept of Limited Liability Partnership has been recently introduced in India but it is very known concept in other countries of the world especially in service sector.
- Easy to Form: It is very easy to form LLP, as the process is very simple as compared to Companies and does not involve much formality. Moreover, in terms of cost the minimum fees of incorporation is as low as Rs 800 and maximum is Rs 5600.
- Body Corporate: 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 entity in the eyes of law. LLP will know by its own name and not the name of its partners.
- Liability: A LLP exists as a separate legal entity from your personal life. Both LLP and person, who own it, are separate entities and both functions separately. Liability for repayment of debts and lawsuits incurred by the LLP lies on it and not the owner. Any business with potential for lawsuits should consider incorporation; it will offer an added layer of protection.
- Perpetual Succession: An incorporated LLP has perpetual succession. Notwithstanding any changes in the partners of the LLP, the LLP will be a same entity with the same privileges, immunities, estates and possessions. The LLP shall continue to exist till its wound up in accordance with the provisions of the relevant law.
- Flexible to Manage: LLP Act 2008 gives LLP the at most freedom to manage its own affairs. Partner can decide the way they want to run and manage the LLP, in form of LLP Agreement. The LLP Act does not regulated the LLP to large extent rather than allows partners the liberty to manage it as per their will and fancies..
- Easy Transferable Ownership: It is easy to become a Partner or leave the LLP or otherwise it is easier to transfer the ownership in accordance with the terms of the LLP Agreement.
- Separate Property: A LLP as legal entity is capable of owning its funds and other properties. 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.
- Taxation: Another main benefit of incorporation is the taxation of a LLP. LLP are taxed at a lower rate as compared to Company. Moreover, LLP are 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.
- Raising Money: Financing a small business like sole proprietorship or partnership can be difficult at times. A LLP being a regulated entity like company can attract finance from PE Investors, financial institutions etc.
Tax benefit
The Profit will be taxed to the LLP separately & not to the Partners which avoids double taxation issues.
Lesser compliances
The compliances that must be made under the LLP Act are less than the limited liability company. For example, there is no provision to hold a meeting, in fact, it is not even mandatory to keep records of the meetings of the designated partners/partners.
All LLP accounts are required to be controlled by a CA. However, no mandatory checking of the accounts is required until the billing in any financial year exceeds Rs. 40,000.00 (40 Lakh) or the capital contribution exceeds Rs. 25,000.00 (25 Lakh).
Right to manage the business
Unlike corporate shareholders (in case of Private Limited), the partners have the right to manage the business directly hence have better controls on all the activities.
No limit on maximum number of partners
LLP can present any number of partners (without a maximum limit) which increases the possibility of obtaining the maximum amount of investors for a company. The need for a new business organization offering an alternative option to resort to an association under the Association Act with unlimited personal responsibility, on the one hand, and rigid governance based on corporate regulation, on the other, had heard for a long time. LLPs seem to allow professional experience and entrepreneurship to organize and operate in a flexible, innovative and efficient way.
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Features
One man’s Capital
The capital required by a sole proprietorship form of business organisation is totally arranged by the sole proprietor. He provides it either from his personal resources or by borrowing from friends, relatives, banks or other financial institutions.
One-man Control
The controlling power in a sole proprietorship business always remains with the owner. The owner or proprietor alone takes all the decisions to run the business. Of course, he is free to consult anybody as per his liking.
Less Legal Formalities
The formation and operation of a sole proprietorship form of a business organisation require almost no legal formalities. It also does not require to be registered. However, for the purpose of the business and depending on the nature of the business, the sole proprietorship has to have a seal. He may be required to obtain a license from the local administration or from the health department of the government, whenever necessary.
Advantages
Easy to Form and Wind up
A sole proprietorship form of business is very easy to form. With a very small amount of capital, you can start the business. There is no need to comply with any legal formalities except for those businesses which required license from local authorities or health department of government. Just like formation, it is also very easy to wind up the business. It is your sole discretion to form or wind up the business at any time.
Better Control
In sole proprietorship business, the proprietor has full control over each and every activity of the business. He is the planner as well as the organiser, who co-ordinates every activity in an efficient manner. Since the proprietor has all authority with him, it is possible to exercise better control over the business.
Flexibility in Operation
The sole proprietor is free to change the nature and scope of business operations as and when required as per his decision. A sole proprietor can expand or curtail his business according to the requirement. Suppose, as the owner of a bookshop, you have been selling books for school students. If you want to expand your business you can decide to sell stationery items like pen, pencil, register, etc. If you are running an STD booth, you can expand your business by installing a fax machine in your booth.
Limitations
Limited Capital
In sole proprietorship business, it is the owner who arranges the required capital of the business. It is often difficult for a single individual to raise a huge amount of capital. The owner’s own funds, as well as borrowed funds, sometimes become insufficient to meet the requirement of the business for its growth and expansion.
Limited Size
Insole proprietorship form of business organisation there is a limit beyond which it becomes difficult to expand its activities. It is not always possible for a single person to supervise and manage the affairs of the business if it grows beyond a certain limit.
Unlimited Liability
In case the sole proprietor fails to pay the business obligations and debts arising out of business activities, his personal properties may have to be used to meet those liabilities. This restricts the sole proprietor from taking risks and he thinks cautiously while deciding to start or expand the business activities.
