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Structuring your Startup as a LLP - To Do or Not To Do

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Every startup wants an entity that has maximum return and minimum liability. An LLP or a limited liability partnership is such an entity in which few or all the partners have liabilities limited to the capital contribution they put into the business. The personal assets and income of a partner are protected from legal action by the creditors. LLPs are basically a flexible legal and tax entity that allows the partners to benefit from economies of scale by working together and leveraging individual expertise while also reducing their liability for the actions of other partners.

In India, such partnerships are governed by the Limited Liability Partnership Act, 2008, and it makes it mandatory for at least one of the partners of LLP to be Indian. There is no requirement of minimum capital under this Act. It is mandatory for the LLPs to audit their accounts only if the contributions of the LLP exceed INR 25 lakhs, or their annual turnover exceeds INR 40 lakhs.
 

Registration

The Registrar of Companies is responsible for registering and controlling the LLPs. 

  1. In order to incorporate an LLP, the digital signatures are to be obtained from the respective partners. 
  2. An application should be made to obtain the Director Identification Number (DIN) or Designated Partner Identification Number (DPIN). 
  3. A Digital Signature Certificate (DSC) has to be acquired from a licensed Certifying Authority, and the same has to be registered on the portal of the Ministry of Corporate Affairs.
  4. Thereafter, a new user's registration should be made, and the person should apply for the name of LLP by filing Form 1. Any of the partners or designated partners may submit the form by appending the digital signatures and paying the required fee. 
  5. Form 2 relating to the incorporation of LLP has to be filled up after the approval of the name. Registration fees prescribed in Annexure A of the LLP Rules, 2009, should be paid. 
  6. The Registrar will then register the LLP within 14 days after perusing all the relevant documents and compliance with relevant provisions of the LLP Act. A certificate of incorporation will be issued as per Form 16. 
  7. After this, the person has to apply for a Permanent Account Number before the National Securities Depository Limited (NSDL).
  8. An agreement has to be filed within 30 days of the incorporation of LLP along with the information in Form 3 and Form 4. 


Advantages of an LLP Company

There are a lot of advantages in setting up an LLP company. 

  1. The organization and management of the internal business is easier and more flexible. 
  2. There is no maximum limit on the number of partners an LLP may have.
  3. The LLP agreements can be tailor-made in accordance with the needs of the partners.
  4. The funds can also be raised and utilized depending upon the needs of the partners. 
  5. No minimum capital limit required. 
  6. The cost of formation is lower as compared to other entities such as private limited company, OPC, etc. 
  7. No additional tax liability, such as dividend distribution tax is payable by the partners in LLP if they want to withdraw the profits. In the case of LLP, the provision of 'deemed dividend' under income tax law is not applicable, and no dividend distribution tax is payable as under section 40(b). LLPs are not required to audit their accounts compulsorily unless their contribution exceeds INR 25 Lakhs, or the annual turnover exceeds INR 40 Lakhs. LLPs only have to submit the Statement of Annual Return & Statement of Accounts and Solvency due to which they face a lower burden of compliance. 

Those who reac this Article also consulted a Startup Expert on LLP 


Disadvantages

However, there are also certain disadvantages in registering as an LLP. One should know them before taking a decision.

  1. In an LLP, funds cannot be raised from the public. Since it does not have the concept of equity or shareholding like a company, angel investors, HNIs, venture capital, and private equity funds do not invest in an LLP as shareholders.
  2. An LLP has to rely on funding from promoters and debt funding.
  3. It is mandatory for an LLP to file an income tax return and MCA annual return each year irrespective of their activity.
  4. In case of failure to file Form 8 or Form 11 (LLP Annual Filing), a penalty of Rs.100 per day, each form is applicable, and there is no cap on this amount.
  5. All the LLPs are taxed at a rate of 30%, even if they have different turnovers. 

Limited Liability Partnerships or an LLP is an alternative form of a legal entity that operates based on an agreement and offers flexibility without imposing detailed legal and procedural requirements. 

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