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Advantages/Disadvantages

Advantages/Disadvantages

Advantages of LLP:

  • Renowned form of business: Though the concept of Limited Liability Partnership has been recently introduced in India but it is very known concept in other countries of the world especially in service sector.

 

  • Easy to Form: It is very easy to form LLP, as the process is very simple as compared to Companies and does not involve much formality. Moreover, in terms of cost the minimum fees of incorporation is as low as Rs 800 and maximum is Rs 5600.

 

  • Legal Entity/ Status or Recognition: Just like a Company, LLP is also body corporate , which means it has its own existence as compared to partnership. LLP and its Partners are distinct entity in the eyes of law. LLP will know by its own name and not the name of its  partners.

 

  • Liability: A LLP exists as a separate legal entity from your personal life. Both LLP and person, who own it, are separate entities and both functions separately. Liability for repayment of debts and lawsuits incurred by the LLP lies on it and not the owner. Any business with potential for lawsuits should consider incorporation; it will offer an added layer of protection.

 

  • Perpetual Succession: An incorporated LLP has perpetual succession. Notwithstanding any changes in the partners of the LLP, the LLP will be a same entity with the same privileges, immunities, estates and possessions. The LLP shall continue to exist till its wound up in accordance with the provisions of the relevant law.

 

  • Flexible to Manage: LLP Act 2008 gives LLP the at most freedom to manage its own affairs. Partner can decide the way they want to run and manage the LLP, in form of LLP Agreement. The LLP Act does not regulated the LLP to large extent rather than allows partners the liberty to manage it as per their will and fancies..

 

  • Easy Transferable Ownership: It is easy to become a Partner or leave the LLP or otherwise it is easier to transfer the ownership in accordance with the terms of the LLP Agreement.

 

  • Separate Property: A LLP as legal entity is capable of owning its funds and other properties. The LLP is the real person in which all the property is vested and by which it is controlled, managed and disposed off. The property of LLP is not the property of its partners. Therefore partners cannot make any claim on the property in case of any dispute among themselves.

 

  • Taxation: Another main benefit of incorporation is the taxation of a LLP. LLP are taxed at a lower rate as compared to Company. Moreover, LLP are also not subject to Dividend Distribution Tax as compared to company, so there will not be any tax while you distribute profit to your partners.
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  • LLPs are taxed like general partnership firms. LLPs pay an effective tax of 30.9%. They are exempted from 10% surcharge. LLPs tax payment is lower than that of companies, which pay a 33.99% tax on profits.
     
    The tax will be imposed only on 10% or 40% of the LLP's income, since the firm will be allowed to pay the balance 90% or 60% to the partners as remuneration. This means, the partners will have to pay tax on the amount paid to them. So, there will be no double taxation of income. Unlike Private or Public Companies, no requirement for payment of Dividend distribution/Corporation Tax on distribution of income/profits among partners and there is no requirement as to Minimum Alternate Tax. 
     
  • Raising Money: Financing a small business like sole proprietorship or partnership can be difficult at times. A LLP being a regulated entity like company can attract finance from PE Investors, financial institutions etc.

 

  • Capacity to sue: As a juristic legal person, a LLP can sue in its name and be sued by others. The partners are not liable to be sued for dues against the LLP. 

 

  • No Mandatory Audit Requirement: Under LLP, only in case of business, where the annual turnover/contribution exceeds Rs 40 Lacs/Rs 25 Lacs are required to get their account audited annually by a chartered accountant. This provides great relief to small businessmen.

 

  • Partners are not agent of other Partners: In LLP, Partners unlike partnership are not agents of the partners and therefore they are not liable for the individual act of other partners in LLP, which protects the interest of individual partners. 

 

  • Compliances: As compared to a private company, the number of compliances are on lesser side in case of LLP.
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 Other Important Advantages:
       • Low cost of Formation and compliances.
       • Less statutory compliances as compared to Private limited Companies
       • Less requirements as to maintenance of statutory records
       • No requirement of any minimum capital contribution
       • No restrictions as to maximum number of partners
       • Body corporate can be a partner of an LLP
       • Less Government Intervention
       • Easy to dissolve or wind-up

 

Disadvantages:

  • Any act of the partner without the other partner, may bind the LLP.
  • Under some cases, liability may extend to personal assets of partners.
  • Cannot raise money from Public

 

SPECIFIC/ TECHNICAL ISSUES:

As per the LLP Rules, Indian Partnership Act, 1932 shall not be applicable to LLPs. But we are still waiting for clarification from RBI whether LLP will be treated as a Company or Partnership for FDI purposes. Further, Rules and regulations are more stringent in case of Partnerships.