Before taking any decision in respect of incorporating a LLP for carrying any business, it is necessary to analyze the benefits and drawbacks of the LLP, which are outlined below: Easy to register: The process to register LLP is simple and easy with less number of formalities.
Reasonable Government Fees: The minimum government fees of incorporation of LLP comes out to be Rs 800 and maximum being Rs 5400.
Limited Liability: Advantage for opting for LLP business structure is Limited Liability. The liability of the partners would be limited to their agreed contribution in the LLP.
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.
Unlimited Partners: There can be unlimited number of Partners in LLP
Flexible to Manage: LLP Act 2008 gives LLP the atmost 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 to Transfer 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.
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 surcharge on income tax. Moreover, it is also not required to pay tax on profits distributed to partners whereas Company is required to pay tax on dividend distributed to its shareholders.
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.
Draw Backs –
Regulated form of Business: LLP is regulated form of business, as the LLP Act 2008 provides various provisions relating to management of affairs of the LLP which includes taking the permission of regulatory authority for undertaking certain actions.
Audit and Financial Disclosure: It is necessary for LLP to get its accounts audited annually and to prepare its balance sheet and profit and loss account in accordance with the prescribed guidelines. Lot of information as to the financial condition of the business is required to be disclosed and moreover, all such documents are available for public inspection, therefore it is not possible to maintain financial secrecy of the business.
Long Closing Proceedings: It is generally not easy to close the company as compared to other forms of business, the procedure to close is long and involves compliance of various formalities, at times it takes 1-2 years to completely wind-up the company. Moreover in certain cases, it is necessary to take the permission of the High Court to close the Company.
Transfer of Interest: It is not easy to transfer the interest in LLP as compared to company; various formalities are required to comply with in accordance with the terms and conditions of the LLP Agreement.
Amendment in LLP Agreement: LLP is governed by the terms and conditions as prescribed in the LLP Agreement and which if not properly drafted will result in disputed among the partners , delay in executing decision, requirement of amending the Agreement or executing a new one, in case the new partners are admitted.
Lack of Recognition: LLP is recently introduced in India and is therefore not recognized under various laws for the purpose of carrying various business and moreover due to being relatively new concept , there is still no clarity on various issues related to it , which might create problems in its smooth functioning.
LLP Advantages and Disadvantages
Advantages of LLP
2. As above mentioned an LLP is a separate legal entity so partner has limited liability, personal assets of the partner are separated to an LLP
3. Every year an LLP is required to comply with the rules and regulation of registrar of companies, an LLP has a duty to comply with a registrar of the firm, if we compare to a private limited company then an LLP has an advantage there are fewer compliances required as compare to the private limited company. An LLP is required to file an annual statement and financial statement to the registrar of companies.
4. There are no requirements of compulsory audit in LLP, so it is a great advantage for an LLP because it is mandatory for a private limited company. If the contribution of an LLP exceeds rupees 25 lakhs or the annual turnover exceeds rupees 40 lakhs then only an LLP is required to file audit.
5. An LLP has one more advantage is there are no limits on partners, you can add partners as many you can, there is no limit on partners. During incorporation of an LLP, only two or more person required then you can add partners as many you want.
6. An LLP can be incorporated easily; you can file your incorporation form online through the online portal of the Ministry of Corporate Affairs. This year MCA launched LLP-RUN so a process of Registration of an LLP is now easier so you can incorporate your business as an LLP if there are two or more partners in your business then you can file for incorporation form.
7. Dividend Distribution Tax is not applicable to the LLP. A partner can easily withdraw profits of an LLP. Whereas, in the case of a company, the owners have to pay DDT at 15%.
8. An LLP has perpetual succession, it never dies, and it will continue even after the death of a partner, it will exist till its wound up, so it is an advantage for any business.
9. The registration cost of an LLP is very cheap as compared to the company.
10. Winding up of an LLP is very easy.
Disadvantages of an LLP
2. There is a huge fine imposed on LLP if there is no filing of compliances. There is less compliance required for an LLP, but in case of failure of filing compliances, an LLP will be liable for a huge fine. If we compare to partnership firm, then a partnership firm requires less compliances as compare to an LLP.
3. Decision making is not good enough in an LLP as there are many partners so it takes times to reach a conclusion and there are many times conflict arises during Decision making.
4. Transfer of ownership is not an easy task in an LLP because if any partner wants to transfer his ownership, then he has to take permission from all the partners of the Limited Liability Partnership Firm.
5. You cannot convert an LLP to a private limited company, so it has a big disadvantage of an LLP