Traditional partnerships are not managed by any kind of limited liability or independent legal entity. When it comes to an LLP, there is more flexibility.
These resources are not available in a conventional partnership. Therefore, if the partners want to have some freedom, converting their partnership to an LLP is a wise decision. To achieve the above process, there is a formal protocol for it.
Limited Liability Partnerships (LLPs) have become more popular in recent years as an alternative to conventional partnerships. This is since LLPs provide further flexibility, limitless partners, and other features. However, the actual reason for the transition is that LLPs provide a significant benefit in terms of limited liability. Since LLPs are a mix of both a partnership and a private limited company, the burden on the partner’s personal assets is alleviated. The needs of small and medium-sized organizations are well-served by this form of organizational structure.
The Limited Liability Partnership (LLP) business structure has more benefits than the conventional partnership. Limited responsibility, uncapped partners, and unending succession are the main inducements for a partnership firm to change its legal structure to an LLP.
SALIENT FEATURES OF LLP
- Body Corporate: A Limited Liability Partnership (LLP), created in accordance with the Limited Liability Partnership Act of 2008, is a type of body corporate. The LLP is a corporate entity; hence its partners’ arrival and departure have no effect on it.
- Perpetual Succession: The word “perpetual succession” can be clearly understood to mean that an LLP continues to exist indefinitely, regardless of whether its partners change over time. This ensures that the partnership will not be hampered by the death, retirement, or insolvency of any of the partners.
- Separate Legal Entity: Because LLP is a separate legal entity, it is treated differently by the law in terms of its corporate identity. Because it can enter contracts and own property in its own name, this quality sets it apart from its partners.
- Agents of the LLP: Unlike a regular partnership, an LLP’s partners merely operate as agents of the LLP, so they are not obligated to follow the lead of their fellow partners. In this way, each partner is shielded from joint culpability resulting from the wrongdoing, negligence, or misconduct of any other partner.
- LLP Agreement: The rights and obligations of the partners as well as the rights and obligations pertaining to the LLP are stated in an agreement between the partners. Additionally, the partners can design the agreement anyway they see fit. If there is no such agreement among the partners, the LLP Act, 2008’s requirements will take precedence.
- Artificial Legal Person: Because LLP was established after a legal procedure, it is regarded as an artificial legal person. Therefore, it enjoys all a natural person’s rights.
- Common Seal: Because LLP is an artificial legal entity (as was previously said), its partners and authorized partners function as its agents. A common seal may be present, which remains in the officer’s custody who has been designated. Furthermore, when attaching the seal, two designated partners must be present.
- Limited Liability: A key component of an LLP is limited liability, which states that each partner’s liability is limited to the amount of their agreed-upon contribution. Each partner is also the exclusive agent of the LLP and not the other partners for commercial purposes.
- Management of Business: The partners of the LLP are responsible for managing the company’s affairs. However, the approved partners will be held accountable for its compliance with the law.
- Only for Profits: The LLP is required to conduct a legal business with the intention of making a profit.
- Partners: Two people are needed to form a partnership firm. Since there is no maximum number of partners in an LLP, the minimum number of partners is two.
- Investigation: When necessary, the Central Government may assign an experienced inspector to investigate the LLP’s commercial concerns.
DRAFTING THE LLP AGREEMENT
While drafting the LLP agreement, it is important to include all pertinent information regarding the partners’ respective roles, responsibilities, rights, obligations, and powers regarding the LLP. Additionally, it describes the range and depth of the LLP’s operations.
As a result, it is essential to the smooth running of the LLP as it outlines all duties related to management, operations, and administrations.
Additionally, it establishes efficient techniques for choosing between numerous business-related options.
- The LLP agreement must first be drafted before it can be prepared.
- The agreement should then be printed on stamp paper with the necessary value. It should be mentioned that the value of judicial stamp paper depends on two factors: the amount of capital invested by each partner and the state in which registration is carried out.
- The partners must put their signatures in the space provided at the bottom of the agreement.
- Two witnesses’ signatures must be included in the area provided on the agreement in addition to the partners.
- Each partner should receive a copy of the deed.
If the conditions of the partnership are changed, a resolution approving the change in the agreement must be passed. Additionally, Form 3 must be presented to the Registrar within 30 days of the alteration along with the required paperwork, including the original and altered agreement.
ADVANTAGES OF LLP
- There is no requirement for a minimum donation: The LLP does not have a minimum capital requirement. The least amount of capital is required to form an LLP. Additionally, a partner’s contribution to an LLP may take the form of tangible, movable, immovable, intangible, or other types of property or benefits.
- Owners of the company are not limited in number: While there is no maximum number of partners for an LLP, it does require a minimum of 2 partners. As opposed to a private limited corporation, which is limited to having no more than 200 members, this has no such restriction.
- lower fees for registration: Compared to the price of forming a private limited or public limited business, the registration fee for an LLP is inexpensive. Nevertheless, the price variation in the cost of forming an LLP versus a private limited company has decreased recently.
- There is no obligation for an audit: No of their share capital, all businesses, whether private or public, are obligated to have their financial records audited. However, there is no such necessity in the case of LLP. This is regarded as having a big compliance benefit.
- Taxation Issues with LLP: LLPs have the same tax treatment as partnership firms for income tax purposes. As a result, LLP is responsible for paying income taxes, while its partners’ shares are not. Consequently, no dividend distribution tax is due. The income tax law’s “deemed dividend” provision does not apply to LLPs. Section 40(b): Any payment of salary, bonus, commission or other compensation is permitted as a deduction, as well as interest to partners.
- Not subject to Dividend Distribution Tax (DDT): In the event of a corporation, an additional tax burden in the form of DDT @ 15% (plus surcharge & education cess) is payable by the corporation if the owners choose to withdraw income from the corporation. However, in the case of an LLP, no such tax is due, and the partners can readily take the income of an LLP.
DISADVANTAGES OF LLP
- Penalty for Failure to Comply: An LLP must submit an income tax return and an MCA annual return every year, even if it is inactive. A penalty of Rs. 100 per day, per form, is imposed if an LLP fails to submit Form 8 or Form 11 (LLP Annual Filing). If an LLP hasn’t submitted its annual return in a few years, the penalty, which has no upper limit, could reach thousands of dollars.
Therefore, HNIs, venture capitalists, private equity firms, and angel investors are not permitted to become shareholders in an LLP. Therefore, most LLPs would need to rely on debt financing and capital from promoters.
- higher rate of income tax: A firm with a revenue of up to Rs. 250 crores are subject to a 25% income tax rate. (Further decreased in 2019 for new manufacturing enterprises.) However, regardless of turnover, LLPs are subject to a 30% tax rate.
- Being unable to invest equity: Unlike a company, an LLP does not have the concept of equity or shareholding. Therefore, HNIs, venture capitalists, private equity firms, and angel investors are not permitted to become shareholders in an LLP. Therefore, most LLPs would need to rely on debt financing and capital from promoters.
DOCUMENTS REQUIRED FOR LLP
- PAN Cards of the Partners Are Required in the LLP Formation Documents
- Proof of the Partners’ Address
- Utility Bill for the LLP’s intended Registered Office
- Landlord’s No-Objection Certificate
- Copy of the lease between the landlord and the LLP
LLP REGISTRATION PROCESS
- Step 1: Obtain a certificate for a digital signature (DSC): You must apply for the selected partners of the proposed LLP’s digital signature before starting the registration process. This is since all LLP paperwork must be digitally signed and are filed online. Therefore, the selected partner must acquire their digital signature certificates from certifying bodies that are approved by the government.
These certified organizations are listed below. Depending on the certifying organization, DSC varies in price. You should also acquire a DSC in the class 3 category, or you can click here and ask a Clear Tax specialist to acquire a DIN on your behalf. Up to 2 DINs are included in the plan if you register your Limited Liability Partnership company with clear Tax, and there is no additional cost.
Get a Director Identification Number by applying (DIN)
All designated partners or those planning to become designated partners of the proposed LLP must submit applications for their DINs. The Form DIR-3 must be used to submit the request for the allocation of a DIN.
- Step 2: Apply for Director Identification Number (DIN): To the form, you must attach the scanned copies of the required documents (often Aadhaar and PAN). The application must be signed by either the Managing Director, Director, CEO, or CFO of the existing company in which the applicant will be appointed as a director, or by a company secretary who works full-time for the company.
- Step 3: Name Approval: The Limited Liability Partnership-Reserve Unique Name (LLP-RUN) form is submitted to reserve the name of the proposed LLP, and it will be handled by the Central Registration Centre under the Non-STP category. However, it is advised that you use the free name search option on the MCA portal before entering the name in the form.
Based on the entered search parameters, the system will produce a list of names of existing companies and LLPs that are very similar. You can avoid choosing names that are like ones that are currently in use by doing this. The name will only be approved by the registrar if it is not deemed unfavourable by the Central Government and does not sound too much like an already-existing partnership firm, LLP, body corporate, or trademark.
- Step 4: Incorporation of LLP:
- The Fillip (Form for incorporation of Limited Liability Partnership) is the document used for incorporation, and it must be filed with the Registrar who has jurisdiction over the state where the LLP’s registered office is located. The form is going to be incorporated.
- The fees listed in Annexure “A” must be paid.
- If the person who will be chosen as a designated partner does not already have a DPIN or DIN, this form also includes instructions for obtaining for one.
- Only two people are allowed to apply for an allocation.
- It is also possible to apply for a reservation using Fillip.
- If the name requested is accepted, the suggested name will be substituted for the approved and reserved name.
- Step 5: File LLP Agreement: The LLP agreement sets down the rights and obligations that each partner has toward the other as well as toward the LLP and its partners.
- LLP agreements must be submitted online through MCA Portal in Form 3.
- The LLP agreement Form 3 must be submitted within 30 days of the formation date.
- It is required to print the LLP Agreement on stamp paper. Each state has a different stamp paper price.