Advantages of LLP Registration

Advantages of LLP Registration

LegalKart Editor
LegalKart Editor
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Last Updated: Apr 11, 2024

A recent trend has been that many entrepreneurs are opting for Limited Liability Partnerships. However, what exactly is a Limited Liability Partnership? Before answering this question, there’s a need to discuss the reasons for the emergence of LLPs. Earlier, there were only two types of organizations:

  1. Limited Liability Organizations i.e. Companies
  2. Unlimited Liability Partnerships i.e. Partnership/ Proprietorship

Both of these types of organizations have advantages and disadvantages. The owners of a company have limited liability compared to Partnerships/Proprietorships, which are easy to form and operate, whereas, partnerships provide more flexibility and less compliance. The rapid expansion of the service sector created an environment and demand for a new type of organization. As a result, the concept of Limited Liability Partnership was developed, which combines the advantages of both corporations and partnerships.  

Also, read How to Convert Partnership Firm to LLP? Process and Benefits

WHAT IS LLP?

A LLP is a limited liability partnership. This type of entity has the features of both, a private limited company and a partnership. While the compliances are far lesser than that of a private limited company, the liability is limited.

FEATURES OF LLP:

  1. LLP merges the benefits of a company's limited liability with the flexibility of a partnership.
  2. The LLP does not depend upon its partners for its existence. It can continue to exist even if the partners change. It can enter into contracts and hold property in its name.
  3. The LLP is a distinct entity that is liable to the full extent of its assets. Still, the partners' liability is limited to their agreed-upon contribution to the LLP.
  4. Furthermore, no partner is liable for other partners' independent or unauthorized actions, so individual partners are protected from joint liability resulting from another partner's wrongful business decisions or misconduct.

TAXATION OF LLPs IN INDIA

Taxation for LLPs is same as that of partnerships. Tax will be levied on the LLP but the partners will be exempt from tax. Furthermore, because LLPs are taxed similarly to Partnership Firms, no tax is levied on the conversion of Partnership Firms into Limited Liability Partnerships.

The Income Tax Return must be signed and verified by the designated partner or any other partner in the absence of the designated partner.

You may also read Income Tax Verification: The checking of your filed taxes

LLP REGISTRATION PROCESS

A LLP must be registered on the Ministry of Corporate Affairs (MCA) portal. A LLP must be registered under the Limited Liability Partnership (LLP) Act to be a legally valid entity.

Step1- Obtain Digital Signature Certificate (DSC)- Before beginning the registration process, you must obtain the digital signatures of the designated partners of the proposed LLP. All LLP documents are filed online and must be digitally signed.

Step2- Apply for Director Identification Number (DIN)- You must apply for the DIN of all designated partners or those who intend to be designated partners in the proposed LLP. The application for DIN allotment must be made in Form DIR-3.

Step3- Name Approval- The LLP-RUN (Limited Liability Partnership-Reserve Unique Name) form is used to reserve the name of a proposed LLP, which is processed by the Central Registration Center under Non-STP.

Step4- Incorporation of LLP- The incorporation form is FiLLiP (Form for Incorporation of Limited Liability Partnership), which must be filed with the Registrar of the state in which the LLP's registered office is located. The form will be a combined form. Fees in accordance with Annexure 'A' must be paid. If an individual who is to be appointed as a designated partner does not have a DPIN or DIN, this form allows them to apply for one.

Only two people will be able to make an application for allotment. FiLLiP can also be used to make a reservation application. If the applied-for name is approved, this approved and reserved name will be used as the LLP's proposed name.

Step5- File Limited Liability Partnership (LLP) Agreement- The LLP agreement governs the partners' mutual rights and duties and the LLP's and its partners' mutual rights and duties. The LLP agreement must be filed online in Form 3 on the MCA Portal. Form 3 of the LLP agreement needs to be filed within 30 days of incorporation. A stamp paper is needed to print the LLP Agreement. Each state has a different value for Stamp Paper.

You may like reading Service Agreement Vs Contract - How They Compare & Differ?

ADVANTAGES OF LLP

Like a corporation, a separate legal entity-  LLP has its legal entity. The LLP differs from its partners. An LLP has the ability to sue and be sued in its own right.

Limited liability of the partners- The LLP's partners have limited liability. Their liability is to the extent of their contribution. This means that they are only obligated to pay the amount of their contributions and are not personally liable for any losses in the business. If an LLP becomes insolvent at dissolution, only the LLP's assets are liable for debt repayment. Because the partners have no personal liabilities, they are free to conduct themselves as credible businessmen.

Low cost and Low compliance- In comparison to incorporating a public or private limited company, the cost of forming an LLP is low. The LLP's compliance requirements are also minimal.

No requirement of minimum capital contribution- The LLP can be formed without a minimum capital requirement.

DISADVANTAGES OF LLP

Penalty on non-compliance- The compliance that LLP must adhere to is minimal. However, if these compliances are not completed on time, the LLP will be fined heavily. Even if the LLP has no activity during the year, it must file annual returns with the Ministry of Corporate Affairs (MCA). If it fails to file the returns, the LLP will face severe penalties.

Winding up and dissolution of LLP- A LLP must have a minimum of two partners. The LLP will be dissolved if the minimum number of partners falls below two for six months. If the LLP cannot pay its debts, it may be dissolved.

Difficulty to raise capital- The LLP, unlike a corporation, does not have the concept of equity or shareholders. Angel and venture capitalists do not prefer to invest in a LLP.

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