LLP Advantages

There are a number of reasons why many entrepreneurs prefer to go in for a LLP registration over a Private Limited Company incorporation. LLPs are considered easier to set up and are comparatively hassle-free in day to day operations. It also has a lower compliance burden if there is minimal activity. Hence, many Entrepreneurs see it as advantageous to begin their organization in this manner. In this article, we look at the various advantages and disadvantages of an LLP in India.

No requirement of minimum contribution

There is no minimum capital requirement in LLP. An LLP can be formed with the least possible capital. Moreover, the contribution of a partner can consist of tangible, movable or immovable or intangible property or other benefits to the LLP.

No limit on owners of the business

An LLP requires a minimum of 2 partners while there is no limit on the maximum number of partners. This is in contrast to a private limited company wherein there is a restriction of not having more than 200 members.

Lower registration cost

The cost of registering LLP is low as compared to the cost of incorporating a private limited or a public limited company. However, the difference in the cost of registering an LLP vs Private Limited Company has come down in recent days.

No requirement of compulsory Audit

All companies, whether private or public, irrespective of their share capital, are required to get their accounts audited. But in case of LLP, there is no such mandatory requirement. This is perceived to be a significant compliance benefit. A Limited Liability Partnership is required to get the tax audit done only in the case that:-
– The contributions of the LLP exceeds Rs. 25 Lakhs, or
– The annual turnover of the LLP exceeds Rs. 40 Lakhs

Taxation Aspect on LLP

For income tax purpose, LLP is treated on a par with partnership firms. Thus, LLP is liable for payment of income tax and share of its partners in LLP is not liable to tax. Thus no dividend distribution tax is payable. Provision of ‘deemed dividend’ under income tax law, is not applicable to LLP. Section 40(b): Interest to partners, any payment of salary, bonus, commission or remuneration allowed as deduction.

Dividend Distribution Tax (DDT) not applicable

In the case of a company, if the owners to withdraw profits from the company, additional tax liability in the form of DDT @ 15% (plus surcharge & education cess) is payable by the company. However, no such tax is payable in the case of LLP and profits of an LLP can be easily withdrawn by the partners.

LLP Disadvantages

An LLP also has various disadvantages when compared to a private limited company as under:

Penalty for Non-Compliance
Even if an LLP does not have any activity, it is required to file an income tax return and MCA annual return each year. In case an LLP fails to file Form 8 or Form 11 (LLP Annual Filing), a penalty of Rs.100 per day, per form is applicable. There is no cap on the penalty and it could run into lakhs if an LLP has not filed its annual return for a few years.

In case of a proprietorship or partnership firm, there is no requirement for filing an annual return. Hence, only penalty under the Income Tax Act would be applicable.

Inability to Have Equity Investment
An LLP does not have the concept of equity or shareholding like a company. Hence, angel investors, HNIs, venture capital and private equity funds cannot invest in an LLP as shareholders. Thus, most LLPs would have to rely on funding from promoters and debt funding.

Higher Income Tax Rate
The income tax rate for a company with a turnover of upto Rs.250 crores is 25%. (Further reduced in 2019 for new companies involved in manufacturing). However, LLPs are taxed at a 30% rate irrespective of the turnover.

The main difference between a partnership and a limited liability partnership (LLP) is the level of liability protection provided to the partners.
Partnership Firm
Two or more people can own and operate the partniship firm business together. The partners share the profits and losses of the firm and are personally liable for its debts and obligations.

Limited Liability Partnership Firm
LLP is a type of Partnership where the partners have limited liability for the debts and obligations of the business. If the company incurs debts or legal action, the partners’ assets are not at risk. LLPs are typically used in professional services such as accounting, law, and consulting.

Maintainance of Books of Account :
All LLPs must maintain proper books of account relating to its affairs each year on cash or accrual basis. The book of accounts must be kept as per double entry system of accounting at the registered office. In case of LLPs with a turnover of more than Rs.40 lakhs or capital of over 25 lakhs, the accounts must be audited by a Chartered Accountant.

Any LLP that does not comply with the provision of the Act can be punishable with a fine of not less than Rs. 25,000 and to a maximum of Rs. 5,00,000. Further, the designated partner could be punished with a penalty of Rs. 10,000 and Rs. 1,00,000 for non-compliance.

Annual Return Filing:
An LLP will have to file 2 types of MCA annual return each financial year, namely Form 8 & Form 11.

Form 8
Form 8 must be filed within 30 days from the end of 6 months of the financial year along with some prescribed fee. This must be digitally signed by 2 designated partners and it must be certified by a chartered accountant/company secretary/cost accountant. Form 8 has two parts:
Part A – Statement of Solvency
Part B – Statement of Accounts, Statement of Income & Expenditure
The penalty for not filing this form would be Rs. 100 per day until it is compiled.

Form 11
Form 11 contains details of the number of partners, total number of partners, total contribution received by all partners, details of body corporate as partners and summary of partners. All LLPs should file this form within 60 days from the closure of the financial year with the prescribed fee. Hence, the due date for filing LLP Form 11 is 30th of May each year.

An LLP cannot be wound up or closed until all the annual returns are filed. Hence, it is important to file LLP Annual Return on or before the due date to avoid penalty.