By CA. Aakash Kalra
- November 30, 2019
1. What is a LLP?
LLP is a hybrid structure. It is a partnership firm with the benefits of a limited liability and separate legal entity of a corporate structure. This provides the benefit of perpetual succession i.e. continuity in its existence irrespective of introduction, retirement or death of partners. It is capable of entering into contracts and holding property in its own name like company. Features of LLP are as follows:
- Limited Liability of partners: LLP liable to the fully with regard to its assets but liability of the partners is limited to the contribution agreed in the LLP.
- Shield to individual partners from joint liability: No partner is liable on account of the independent or unauthorised actions of other partners thereby giving protection from other partner’s wrongful business decisions or misconduct.
- LLP agreement as chartered document: Mutual rights and duties of the partners in a LLP are governed by an agreement between the partners or between the partners and the LLP as the case may be.
- Structure compliant with foreign The LLP structure is available in countries like United Kingdom, United States of America, various Gulf countries, Australia and Singapore. On the advice of experts who have studied LLP legislations in various countries, the LLP Act is broadly based on UK LLP Act 2000 and Singapore LLP Act 2005. Both these Acts allow creation of LLPs in a body corporate form i.e. as a separate legal entity, separate from its partners/members.
2. Structure of a LLP:
3. Benefits of having a LLP?
LLP provides the benefits of company while retaining the features of a Partnership firm. Under LLP business is run under the ownership of LLP, however partners run the business on becoming Designated Partner of a LLP similar to directors in the company.
- Separation of ownership and management: Partners being the owners of LLP contribute capital however affairs of LLP are controlled by Designated Partners as per who are responsible for the affairs of the LLP. Minimum two Designated Partners are required in a LLP who are allotted DPIN (Designated Partner Identification number).
- Exemption from double taxation of Profits: Like company, the profits of LLP are taxed in the hands of LLP, however the same are not subject to double taxation in the hands of partners. Accordingly, effective tax on profits remain 30% (plus surcharge and cess) irrespective of profits being distributed to partners.
- Perpetual succession: Like company, LLPs get the benefit of perpetual succession, which holds good the fact that death or retirement of partners does not impact the existence of LLP.
- Less restrictions as compared to companies: Unlike companies, LLPs re subject to less stringent norms with respect to the operations, governance, filings and compliances. Further, the deposit guidelines applicable on PLCs are not applicable on LLPs.
- Suitable for Foreign investments: LLPs are considered considered for foreign investments a compared to Partnership, sole proprietorships. With the recent amendment in laws, govt has extended various benefits to LLPs in sync with companies.
4. Are LLPs good enough to ignore corporate structures?
In simple words, though the hybrid structures are conducive to business, however some of the important features for running and expansion of large businesses are missing in LLPs like:
- No difference between ownership and management: Even though LLPs have separate legal entity, but the partners are directly responsible for the management unlike Companies in which management is in the hands of directors who ma or may not be the shareholder of the company.
- Not conducive for fund raising: LLPs are not conducive structure for fund raising as compared to companies. Every addition of partner in LLP require change in Partnership agreement. Further, instruments for fund raising are limited to capital or loans as compared to companies which has varied options like debentures, preference shares etc.
- Law is not fully evolved in India: As compared to corporate laws, laws and regulations for LLPs are comparatively new and are being considered for amendment by the finance ministry. In order to provide LLPs equal status with companies various amendments with respect to incorporation forms, and norms along with compliance requirements need to be carried out.
- Not conducive for holding investments: LLPs are not permitted to hold investments unlike CICs are specially permitted by RBI. Accordingly, any LLP holding only investments will be considered as non-compliant with RBI guidelines.
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