limited liability partnership

Limited Liability Partnership (LLP)

Introduction

The LLP is identified as a separate legal entity from the individual partners, it continues to expand the characteristics of an unincorporated partnership even closer to those of a more formally structured corporate entity. As a result, this type of organizational structure provides General Partners with certain levels of limited liability, particularly when it comes to claims of negligence.

One of the main reasons for its progression is that it can be easily formed and maintained. It also facilitates owners in limiting their liabilities. Did you know that an LLP company integrates the limited liability of a private limited company with the flexibility of a partnership firm?

Under a Limited Liability Partnership, individual partners are protected from joint liability created by another partner's misconduct because no partner is responsible for the unapproved actions of other partners. LLP organizational structure is preferred by professionals, micro, and small businesses that are family-owned or closely held. The LLP is governed by the limited liability partnership act of 2008, however, it was introduced in India in April 2009.

Table of Contents

• Eligibility Checklist
• Benefits of a Limited Liability Partnership
• Disadvantages of a Limited Liability Partnership
• Documents Required for Registration of a Limited Liability Partnership (LLP)
• Capital Required to start a Limited Liability Partnership (LLP)
• Registration Process of a Limited Liability Partnership in India
• Compliances of a Limited Liability Partnership (LLP)
• Frequently Asked Questions (FAQs)

Eligibility Checklist

• A minimum of two partners is required.
• For all designated partners, DSC is required.
• All designated partners must have a DPIN.
• The LLP's name should not be confusingly similar to any other LLP or trademark.
• The LLP's partners make a capital contribution.
• LLP The partners have reached an agreement.
• Proof of the LLP's registered office.

Benefits of a Limited Liability Partnership

● Simplicity
Starting and running a business as an entrepreneur is simple. LLP agreements are custom-made to address the needs of the partners. There are very few formalities in the aspects of law compilation, annual conferences, and resolution when particularly in comparison to any other Private Limited Company (Pvt. Ltd.).

● There is no requirement for a minimum amount of capital
With limited funds, a limited liability partnership (LLP) can be formed. Capital can take the form of a tangible, movable investment such as land or industrial equipment, or it can take the form of an intangible asset. A private company's (Requirements for Registration of a Private Company) and a public company's (Prerequisites for Registration of a Public Company ) reserve requirements are Rs. 1,00,000 and Rs. 5,00,000, respectively, whereas the LLP has no such government-mandated financing needs.

● Reduced Registration Fees
When compared to other types of businesses, the cost of establishing an LLP is low (Public or Private).

● There is no requirement for an annual audit
LLPs are not required to have their accounts audited. Any other business (public or private) must have its financial statements audited by a competent accountancy firm. LLP is obligated to audit their account in the following example:

• When the LLP's contributions exceed Rs. 25 lakhs, or
• When the LLP's annual turnover exceeds Rs. 40 lakhs

● Dividend Distribution Tax (DDT) does not apply
If LLP partners withdraw profits from the company, they are not subject to an additional tax liability in the form of Dividend Distribution Tax (DDT). In the case of a company, the owners must pay DDT at a rate of 15%. ( surcharge & educational cess). As a result, the profit of an LLP is now in the hands of its partners, who can conveniently withdraw it.

Disadvantages of a Limited Liability Partnership

1. Penalties for non-compliance are severe
An LLP is simple to set up and manage, but the penalties for failing to adhere to the rules are severe.Even if the LLP has not engaged in any business activity, it is required to submit an annual Income Tax Return and an MCA (Ministry of Corporate Affairs) return. For LLPs, this is a source of worry.

2. There is no way to invest in equity
Because there is no concept of equity investment, the partners must make all the investments. As a result, the business cannot be scaled up.

3. Requirement of an Indian Partner
When establishing an LLP, it is required by law to have an Indian partner. In India, no foreign national or non-resident alien can form an LLP on their own.

4. Greater Income Tax Rates.
The tax rate for an LLP is 30%, regardless of the total turnover. In addition, if the income exceeds INR 12 crore, a surcharge of 12% is applied.
This rate is significantly higher than the corporate tax brackets. An LLP with a lower turnover rate would be required to pay a significant portion of its earnings.

Documents Required for Registration of a Limited Liability Partnership (LLP)

• PAN Card/ ID Proof of Partners – At the time of LLP registration, all partners have to provide their PAN. The PAN card acts as a fundamental form of identification.
• Partner Address Proof – The partner can submit any one of the following documents: voter's ID, passport, driving license, or Aadhar Card. The name and other details on the address proof and the PAN card should be equivalent. If the spelling of your own name, your father's name, or your date of birth differs between your address proof and your PAN card, you should correct it before submitting it to RoC for approval.
• Partner's Residence Proof – A recent bank statement, phone bill, mobile bill, electricity bill, or gas bill should be submitted as proof of residency. Such a bill or statement should not be older than 2-3 months and should include the name of the partner as it appears on the PAN card.
• Photograph – Partners must also provide a passport-size photograph with a white background, preferably.
• Passport (for Foreign Nationals/ NRIs) – Foreign nationals and NRIs must submit their passports as a condition of becoming a partner in an Indian LLP. Foreign nationals and NRIs should have their passports notarized or apostille by the relevant authorities in their home country; otherwise, the Indian Embassy in that nation can sign the documents.
• Foreign nationals and NRIs must also provide proof of address, which can be a driver's license, bank statement, residence card, or any other government-issued identity proof with an address. If the documents are not in English, they will be preceded by a notarized or apostilled translation copy.
• Proof of Registered Office Address: During registration or within 30 days of incorporation, proof of registered office must be submitted.
• If the registered office is rented, the landlord must sign a lease agreement and provide a no-objection certificate. The landlord's consent to the LLP's use of the space as a registered office will be recorded by a no-objection certificate.
• Furthermore, any utility bill, such as gas, electricity, or telephone bill, must be submitted. The bill should include the full address of the premise as well as the name of the owner, and it must be less than two months old.
• Digital Signature Certificate: Since all documents and applications will be digitally signed by the authorized signatory, one of the specified partners must also choose a digital signature certificate.

Capital Required to start a Limited Liability Partnership(LLP)

There is no minimum capital requirement provided by law for an LLP. An LLP can be formed and as little money as possible. Moreover, a partner's input can be in the form of real, movable, immovable, or immaterial property, and other advantages to the LLP.

Registration Process of a Limited Liability Partnership in India

Step 1: Step 1: For digitally signing a variety of forms, such as company registration documents, compliance-related records (Form 3/ Form 8/ Form 11), income tax filings, and GST returns, a Digital Signature Certificate (DSC) is necessary. It is preferred that all Designated Partners obtain DSC. Only class 3 DSCs are currently issued, and a class 3 DSC with a 2-year validity costs between INR 1500 and INR 2000.

Step 2: The terms Director Identification Number ( DIN) and DPIN are interchangeable. DIN is an 8-digit number that is used to identify a specific partner or director. The incorporation form can be used by up to two partners to obtain a DIN (Form FiLLiP). Form DIR-3 could be used to obtain additional DINs.

Step 3: The following steps are required to create an account on the MCA website: You must first create an account on the MCA website in order to use the RUN-LLP online form or to upload e-forms. Visit: https://www.mca.gov.in/content/mca/global/en/foportal/fologin.html do to create an account.

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Step 4: Reserve Unique Name – LLP (RUN-LLP) is an online application form for reserving a name for a limited liability partnership (LLP). In the form, you can propose two names for the LLP. When deciding on an LLP name, make sure to follow the LLP Name Guidelines. The name should not offend the Central Government, nor should it be confusingly similar to any existing partnership firm, LLP, corporation, or trademark.
Visit https://www.mca.gov.in/mcafoportal/showCheckCompanyName.do to undertake a free name search https://www.mca.gov.in/Ministry/pdf/RUNLLPHelp.pdf contains more information on LLP name guidelines. If the name is too similar to an existing company or LLP, you'll have to get a No-Objection Certificate (NOC) from them and attach it to your application.

Step 5: FiLLiP (Filling Incorporation Form) is the LLP's incorporation form. This form can also be used to request name approval. However, it is recommended that the name be approved first using RUN-LLP and then the FiLLiP form for incorporation. In the FiLLiP form, information such as the LLP's address, details of partners and designated partners, the LLP's business activity, contribution by partners, consent of partners, and so on must be provided. The subscribers' sheet, or any supporting documents, should be attached. Even if the owner of the proposed LLP's registered address is one of the partners, a letter of authorization from him is required.
The amount of fees to be paid along with the FiLLiP form is calculated by the overall contribution made by all partners. The fee is INR 500 for contributions up to INR 1 lakh, and INR 5,000 for contributions surpassing INR 10 lakhs.

Step 6: Form 3: LLP Agreement Drafting and Filing The LLP is formed after the Registrar examines the information and documents provided in the FiLLiP form. The LLP Identification Number is printed on the Certificate of Incorporation (LLPIN). The next step is to complete the LLP Agreement. Stamp Paper must be used to print the LLP Agreement. The amount of Stamp Duty will vary depending on the Stamp Act of the state in which the LLP is formed and the number of partners' contributions. The LLP agreement must be uploaded to the MCA Portal in Form 3 online. Within 30 days of the date of incorporation, Form 3 should be filed.

Note: LLPs must apply for PAN and TAN after receiving a certificate of incorporation, as opposed to companies, which receive PAN and TAN along with incorporation. Other registrations, such as professional tax registration (PTEC & PTRC) and GST registration, may be required after incorporation and can be completed afterward.

Compliances of a Limited Liability Partnership(LLP)

An LLP is taxed in a similar manner to a traditional partnership firm, with some exceptions. For example, the benefit of presumptive taxation under section 44AD or 44ADA of the Income-tax Act, 1961 ("Income-tax Act") does not pertain to an LLP but will do to a partnership firm.

For LLPs, the effective tax rate would be:

• A Taxable income is limited to INR 1 crore (30*1.04=31.2%).

• B Total taxable income exceeds INR 1 crore (30*1.12*1.04 = 34.944%)

● The entire process of forming an LLP, from obtaining a DSC to filing Form 3, takes about 10 days, subject to individual departments' permission and revert.

● At least two individuals who are designated partners should be among the partners, with at least one of them living in India. The rights and responsibilities of defined partners are governed by the LLP agreement. They are effectively responsible for ensuring that the LLP Act, 2008, and the LLP agreement are strictly followed.

● Even if there has been no activity, an LLP is obligated to file an income tax return and an annual MCA return each year. The penalty has no cap, and if an LLP has just not filed its annual return in a few years, it could cost thousands.

Conclusion

An LLP, like any other business structure, has flaws and specialties. If you're looking for a business framework that enables you to be more adaptable while also restricting your liability, an LLP may well be a good choice. Nevertheless, the disadvantages of an LLP, such as a greater penalty and no tax benefits, make it a less appealing choice for businesses seeking long-term growth. However, it is always a good idea to weigh everything before making a decision about your business structure.

A better option is to seek advice from experts at Free Tax Filer who can aid you in better understanding the viability involved in any business structure.

Frequently Asked Questions (FAQs)

1. Is it necessary to register as an LLP?

Yes, an LLP must be registered with the Ministry of Corporate Affairs (MCA). To be valid, an LLP must be registered under the Limited Liability Partnership (LLP) Act.

2. Is it necessary for LLP to have an MoA and an AoA?

No, the Memorandum of Association (MOA) and Articles of Association (AOA) are important documents for a company that has been registered under the Companies Act of 2013. The LLP, not the MOA or AOA, is governed by the LLP agreement. As a result, an LLP is exempt from drafting the MOA and AOA. It is responsible for drafting the LLP agreement.

3. Is it necessary to appoint directors to an LLP?

An LLP does not have any directors. A limited liability partnership (LLP) does not need to appoint directors or have a board of directors. An LLP's business is managed by its partners. The LLP's working and business decisions are made by the partners. As a result, an LLP must always have at least two partners.

4. What is a DPIN?

The Designated Partner Identification Number (DPIN) is a one-of-a-kind number assigned by the MCA to an LLP's designated partner. The DPIN is similar to a company director's Director Identification Number (DIN). Any person can obtain a DPIN when forming an LLP, or they can apply for one later to become a designated partner of an existing LLP.

5. What are the requirements for becoming a designated partner in an LLP?

By agreeing to it and following the LLP agreement, any individual partner can become a designated partner in an LLP. A designated partner cannot be a corporate body. If the LLP agreement allows it, all partners in the partnership can be designated partners.

6. In an LLP, who can be a partner?

An LLP can have any number of partners, including individuals and corporations. Minors, persons of unsound minds, and insolvents who have not been discharged cannot be partners in an LLP.

7. In an LLP, how many active partners are required?

Every LLP must have at least two designated partners, one of whom must be an Indian resident. If all of the LLP's partners are corporations, at least two of the corporations' individual nominees should act as designated partners. According to the LLP agreement, any partner can be a designated partner.

8. What happens if the number of partners in an LLP drops to one?

If an LLP's number of partners falls to one at any time, the LLP's business can be carried on by a single partner for six months. If the LLP still has only one partner after six months and that partner is carrying on the LLP's business, the single partner will be personally liable for the LLP's obligations. When the LLP's number of partners falls below two for more than six months, the National Company Law Tribunal has the authority to dissolve the LLP.

9. What documents are required for an LLP to register for GST?

Yes, a private limited company or an unlisted company can become an LLP, but the assets must be free of any security interests. Furthermore, if the converted company had a previous agreement or contract, it will remain active and have the same effect in the LLP as it did before.

10. Are there any provisions for converting a corporation to an LLP?

A limited liability partnership (LLP) is a business, and any business must file a GST return. As a result, GST Registration is a must, and a few documents are needed, which are listed below.

● Photographs of partners

● Partners' PAN cards and Aadhar cards, as well as the LLP Registration Certificate.

● Partners' Bank Account Information