LLP has its own advantage when compared to the traditional partnership and the Private Limited, as it picks the best of these two structures in one solid viable package.It tackles various challenges that an entrepreneur faces when using a traditional partnership structure.
The main focus of any Startup is to keep the recurring cost at a bare minimum and yet run the company without any hiccups.
In this article we take positive things of LLP and delve on its pros and cons thereby understand the LLP Offerings:
1. No minimum capital contribution required
LLP could be formed without any minimum capital contribution as opposed to the Private Limited companies’ requirement of Rs. 1 Lac. Even the contributions could be made in installments which makes the small entrepreneurs/startups avail these benefits and forge ahead.For instance that the partners can bring minimum capital say Rs. 5000 /Rs. 10000/Rs. 20000/- because there is no
restriction provided under the LLP Act to bring a minimum capital contribution at the time of incorporation.
2. Liability is Limited
The liability of each partner is limited to the extent of his/her contribution/share as opposed to the soleproprietorship or the traditional partnership firm where the personal assets of the proprietor or partners could be at risk in the event of a failure of the business. Thus this mode helps the partners to be free from personal liabilities or becoming bankrupt (except in cases of fraud by any partner). Its quite safe compared to the unlimited liability which offered by partnership firm.
3. Separate legal entity
LLP has its separate existence from its partners. LLP can sue and be sued in its own existence. Due to its status, the entry and exit of the partners don’t affect the LLP. As it incorporates various stakeholders (i.e. Suppliers, Customers etc.), it offers the flexibility while dealing & signing legal contracts and in many other things.
4. Economics & Working
Statutory filing fees as well as the cost of formation is less compared to forming a Private limited company. Apart from stamp duty for executing LLP agreement the registration fees are less than required for incorporation for a private limited company. Partners are not subjected to hold 4 mandatory board meetings as required in once in a year by Companies Act. The partners can meet as per their convenience or need basis. Partners can specify about the meetings details & schedule in the LLP agreement.
Choice of agreement clauses
Rights, duties and obligations of the partners in the LLP are governed by the LLP agreement, partners have the choice to define the clauses as per their needs , for e.g. – inheritance transfer rights clauses can be added which then makes easy in such eventualities .
The LLP Act 2008 provides the rights to the partner to share profits and losses of the LLP and to receive distributions in accordance with the LLP agreement which are transferable either wholly or in part. The partners may lend money to and transact other business with the LLP.
It may include rights such as access to books, records of LLP firm and to inspect them and also one can add this clause in the agreement that bares any activities that may result in a conflict of interest situation. It also gives the flexibility to each of the parties hereto shall be entitled to carry on their own, separate and independent business and can include a clause of remuneration to be paid to the partner.
The compliances required to be made under LLP Act are lesser as compared to Private Limited Company.E.g. there is no provision of holding any meeting or even it’s not mandatory to keep the records of the meetings of partners/ designated partners.
All LLPs are compulsorily required to get their accounts audited by a CA, if the turnover in any financial year exceeds Rs. 40,000,00 (40 Lakhs) or the Capital contribution exceeds Rs. 25,000,00 (25 Lakhs).
The Profit will be taxed to the LLP separately & not to the Partners which avoids double taxation issues.
Mergers & Amalgamations
The provisions of Compromise, arrangement or reconstruction of LLPs are available which makes it is also possible – to merger two or more LLPs, just like a company or between LLP and a Private Company.
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 may introduce any number of partners (no maximum limit) which enhances the possibility of getting maximum number of investors for a business.
Quick round off of the other advantages
– Foreign nationals can be the partners in an LLP.
– LLP can invest in a Private Limited company/ Public company and become a shareholder of that company.
– Corporate body can be a partner of an LLP.
– Less Government intervention.
– Easy to dissolve or windup.
– No restriction on entering into contracts with other parties & vendors.
– Having the flexibility of perpetual succession- partners may come and go which will not affect the LLP in any manner.
– Ideal for professional servicing rendering company.
Basic Requirements for Registration
At least 2 persons (natural or artificial) are required to form a LLP out of which one should be resident in India. In case any Body Corporate is a partner, than he will be required to nominate any person (natural) as its nominee for the purpose of the LLP.
Following can become a partner in the LLP.
» Company/Body Corporate incorporated in and outside India
» LLP incorporated in & outside India
» Individuals resident in & outside India
*Please note that there should be atleast one Designated Partner, resident in India.
Following cannot become partner in LLP;
- HUF and its Karta
Contribution means capital in LLP. The contribution can be tangible, movable or immovable or intangible property or other benefit to the limited liability partnership, including money, promissory notes, and other agreements to contribute cash or property, and contracts for services performed or to be performed.
If the Contribution in Cash - No Valuation required
In case the contribution is in intangible form i.e. other than Cash - Valuation required, the value of the same shall be certified by a practicing Chartered Accountant or by a practicing Cost Accountant or by approved valuer from the panel maintained by the Central Government.
The monetary value of contribution of each partner shall be accounted for and disclosed in the accounts of the limited liability partnership in the manner as may be prescribed. The LLP Agreement must specify the contribution intended to be paid by all the members and the form in which it will be paid.
Designated Partner means a partner who is designated as such in the incorporation documents or who become a designated partner by and in accordance with the Limited Liability Partnership Agreement. Every limited liability partnership shall have at least two designated partners who are individuals and at least one of them shall be a resident in India. Provided that in case of a limited liability partnership in which all the partners are bodies corporate or in which one or more partners are individuals and bodies corporate, at least two individuals who are partners of such limited liability partnership or nominees of such bodies corporate shall act as designated partners.
Designated Partner shall be:
a. Responsible for the doing of all acts, matters and things as are required to be done by the limited liability partnership in respect of compliance of the provisionszof this Act including filing of any document, return, statement and the like report pursuant to the provisions of this Act and as may be specified in the limited liability partnership agreement and
b. Liable to all penalties imposed on the limited liability partnership for any contravention of those provisions.
Explanation - for the purposes of this section, the term 'resident in India' means a person who has stayed in India for a period of not less than one hundred and eighty-two days during the immediately preceding one year.
Designated Partners Identification Number (DIN)
Every Designated Partner is required to obtain a DPIN from the Central Government.
DIN is an eight digit numeric number allotted by the Central Government in order to identify a particular partner and can be obtained by making an online application in Form DIR 3 to Central Government and submitting the physical application along with necessary identity and Address proof of the person applying with prescribed fees.
DIN is valid for lifetime.
Digital Signature Certificate
All the forms like eForm 1, eForm 2, eForm 3 etc which are required for the purpose of incorporating the LLP are filed electronically through the medium of Internet.
Since all these forms are required to be signed by the partner of the proposed LLP and as all these forms are to be filed electronically, it is not possible to sign them manually.
Therefore, for the purpose of signing these forms, at least one of the Designated Partner of the proposed LLP needs to have a Digital Signature Certificate (DSC). The Digital Signature Certificate once obtained will be useful in filing various forms which are required to be filed during the course of existence of the LLP with the Registrar of LLP.
Selection of the name for the proposed LLP to be incorporated is one of the important process of the entire incorporation process, ideally the name of the LLP should be such which represents the business or activity intended to be carried on by the LLP. Before selecting the name of the LLP, it is necessary to evaluate the proposed name under the following given criteria:
1. LLP with Similar Name:
The proposed name of the LLP should not be similar to the name of the Company or LLP, which is already registered in India.
Name of Company already registered: Oasis Water Treatments Pvt Ltd
Name of Proposed LLP: Oasis Water Treatment LLP
Whether Proposed Name would be available: No
2. Prohibited Word:
The Ministry of Corporate Affairs of India has prescribed certain words, which should not form part of the name of LLP intended to be incorporated in India, such words are prohibited under The Emblems and Names (Prevention of improper use) Act, 1950. click here to check the list of Prohibited Words
3. Words Based on Approval:
Various government regulatory authorities operating in India like Securities & Exchange Board of India, Reserve Bank of India, has prescribed certain words, which if forms part of the name of the proposed LLP to be incorporated, requires there first hand approval. click here to check the list of Words based on Approvals
4. Names reserved for Foreign LLP/Companies:
In case Foreign LLP/Companies have reserved their name under rule 18 of the LLP Rules 2009, than that name will not be applicable for forming of LLP to persons other than the Foreign LLP/Company
The LLP Agreement forms the basis of the formation of LLP and lays down its founding structure. It is an agreement between the Partners and between the LLP & its partners.
The basic contents of Agreement are:
» 1. Name of LLP
» 2. Name of Partners & Designated Partners
» 3. Form of contribution
» 4. Profit Sharing ratio
» 5. Rights & Duties of Partners
The Registered office of the LLP is the place where all correspondence related with the LLP would take place, though the LLP can also prescribe any other for the same.
A registered office is also required for maintaining the Government records and books of Account of LLP.
At the time of incorporation, it is necessary to submit proof of ownership or right to use the office as its registered office with the Registrar of LLP.
Process of Registration
a) Minimum Partners Requirements :-
Minimum – 2 Partners
*FOR NRI- One of the them must be resident of India.
b) Minimum Capital Requirements-
Any Amount, no requirements for the minimum capital amount.
c) Need office required for registration purpose?
Ans- Yes, Just for Communication purpose .
*If you have office then give office address .
*if you work from Home then give residential address.
d) Process Involved in LLP ?
Step 1- Apply for your Partners DIN
Step 2- Apply for your Partners DSC
Step 3- Application to Government for Name Availability of the proposed LLP
Step 4- Verification of Documents and Forms by Government.
Step 5- Filing of Incorporation Documents and Forms by Government.
Step 6- Certificate of Incorporation
Step 7- Drafting of LLP Agreement
Step 8- Filing of LLP Agreement
e) Time take to incorporate a LLP ?
A Limited Liability Partnership Completed in 14-20 days. The time taken for incorporation will depend on submission of relevant documents by the client and speed of Government Approvals. To ensure speedy incorporation, please choose a unique name for your LLP and ensure you have all the required documents prior to starting the incorporation process.
f) Initial Documents Required ?
For all Partners required Documents
• ID Proof and Address Proof for all Partners.
• PAN Card Mandatory
• latest utility bill (electric bill/telephone bill) for the property to be used for registered office (not older than 2 months)
• latest tax receipt/ownership deep of the property (not older than 2 months
g) Government Charges and other legal expense for Incorporate LLP ?
- Director Partner Identification Number ( DPIN/DIN)- Costing for DIN 1000 Rupees on 2 Partners. It is valid for Lifetime. Its just like UserId for the Partner.
- Digital Signature (DSC)– Costing vary from 2000 Rupees on 2 Partners. Its made by Sify, Emudra and some other companies and used for signing and filing forms during registration
- Application for Name Reservation- Costing is 500 Rupees. Its filed for reserve your LLP Name.
- Government Charges including Stamp Duty Costing around 750 Rupees.
- Preparing LLP Agreement by professional costing around 250 Rupees.
- Preparing LLP Partner Consent by Professional costing around 250 Rupees.Total Government Expenses around 5000 Rupees.
h) Professional Charges which take by Professionals(CA/CS/CWA) in Market ?
Professional Charges to Incorporate a LLP In India is vary, mostly between 10000 to 20000.
i) Can you register it yourself without help of professional ?
No, because a a professional is needed. During the filing of Documents and Forms, they need to be authorized by a Chartered Accountant/Company Secretary/Cost Accountant DSC.
j) Annual Compliance for LLP after Incorporation ?
2 Statements filed each year .
1) Statement of Account and Solvency
2) LLP Annual Return
k) Tax Rate on LLP Profits ?
LLP will be treated as Partnership firm for the purpose of tax and therefore will be taxed on the line of partnership firm. The effective tax rate is 30.90% on Profit.
l) Why LLP is adopted by Startups in India-
Advantages to Form LLP in India-
Easy to Form: It is very easy to form LLP, as the process is very simple as compared to Companies and does not involves much formalities.
Liability: A LLP exists as a separate legal entity from its partners. Both LLP and its partners are separate entities and both functions separately. Liability for repayment of debts and lawsuits incurred by the LLP lies on it and not on the partner. 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 almost freedom to manage its own affairs. Partner can decide the way they want to run and manage and put the same in form of terms and conditions in the LLP Agreement . The LLP Act also in most cases provides that the said provision will applicable, only in case nothing is provided in the LLP Agreement.
Easy Transferable Ownership: It is easier to become or leave the partnership of the LLP or otherwise it is easier to transfer the ownership in accordance with the terms of the LLP Agreement. Ceasing of old partners and coming of new partners , will automatically leads to change in ownership of LLP.
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.
Taxation: LLP is not required to pay tax on profits distributed to partners whereas Company is required to pay tax on dividend distributed to its shareholders.
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.
Capacity to sue: As a juristic legal person, a LLP can sue in its name and be sued by others. The partners are not liable to be sued for dues against the LLP.
No Mandatory Audit Requirement: In LLP, only in case of business, where the annual turnover/contribution exceeds Rs. 40 Lacs/Rs 25 Lacs are required to get their account audited annually by a chartered accountant. This provides great relief to small businessmen.
Partners are not agent of other Partners: In LLP, Partners unlike partnership are not agents of the partners and therefore they are not liable for the individual act of other partners.