Why LLP is better for a Startup ? MyOnlineCA.in explain you in details :-
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 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, as one of the major costs are related to accounting & compliance when compared to Pvt Ltd.
In this article we take positive things of LLP and delve on its pros and cons thereby understand the LLP offerings.
- 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.
- Liability is Limited
The liability of each partner is limited to the extent of his/her contribution/share as opposed to the sole proprietorship 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.
- 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.
- 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. However, mandatory audit of accounts is not required until 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.
Source : Meenal Abhyankar on marketexpress.in