Having a traditional partnership firm is a common practice followed by a lot of people. People find this a lucrative option to avoid various laws and regulations, but taking the entire liability on your head is just not desirable. Instead of getting lured by high profits, considering future prospects is very important. Two people working together to make money without any legal agreement makes them stand at high risk.
Is there any business structure that minimizes the risk but still functions as a corporate entity without much compliance?
This situation is where LLP comes into practice.
Wondering what exactly an LLP is, why people prefer it, how it functions?
Let’s dive down into it.
What is a limited liability partnership?
A limited liability partnership (LLP) is a hybrid corporate entity with a company’s benefits of limited liability and a partnership’s flexibility. The partners have limited liability and are independent of the actions of other partners.
The firm has a separate legal entity and can enter into agreements in its own name. The LLP can continue its existence irrespective of changes in partners and hold property in its own name. It has perpetual succession as that of a company, and its existence is not dependent on its partners.
There is Mr. X, who wants to set up a new corporation. He is a person with a mind full of ideas and knowledge but has a lack of funds. He found his two friends who were satisfied with the idea and decided to contribute funds.
So, they wished to start an entity, but they have their personal assets at stake in a partnership, so everyone tried to back out.
Then they got to know about the LLP form of business structure. Mr. X got every type of benefit that they want, and the risk factor was reduced significantly.
And this is the reason they selected the LLP business structure for their venture.
Characteristics Of LLP
An LLP has characteristics of both a general partnership and a company.
- It’s a body corporate and legal entity separate from its members.
- It has at least two designated members
- It has a perpetual succession. It continues to exist even after the founding partners leave the organisation. All it requires is it to have at least two partners.
- The members have a limited liability limited to their agreed contribution in the LLP.
- It has the the organisational flexibility of a partnership.
- Its accounting and filing requirements are similar to that of a company.
Advantages and disadvantages Of LLP
LLP as a business structure comes with its own set of advantages and disadvantages.
Some of the advantages of forming an LLP are:
- Separate legal entity: This means that it can have assets in its name and sue and be sued. Moreover, one partner is not responsible or liable for other partner’s misconduct or negligence. The LLP is treated as separate from its partners.
- LLP agreement: The mutual rights and duties of partners among themselves and those of the LLP and its partners are governed by the agreement between partners or between the LLP and the partners. It ensures that the partners are free to decide their own set of provisions.
- Flexibility: Unlike a company, an LLP form of business structure provides flexibility without imposing detailed legal and procedural requirements. This saves a lot of cost in terms of services or consulting.
- Limited liability: The partners’ liability is limited to the extent of their contribution to the LLP. The personal assets of the partner are protected from any liability of LLP.
- Cost-saving: The registration and incorporation fees for an LLP are much lower, and limited legal compliances save a lot indirectly.
Every coin has two sides. The easier it is to form an LLP, it also attracts various disadvantages as well.
Some of the disadvantages are:
- Venture capital funding restrictions: Usually, startups are incorporated as an LLP. But since the LLP structure requires no formation of a board of directors, it discourages investors.
- Penalties: As a legal business structure, LLP is required to fulfil and comply with certain provisions, non-compliance of which may result in penalties.
- Irregularities: Since there is greater flexibility while forming the agreement, this also calls various irregularities. Sometimes partners might benefit from this and might include provisions that are not in the firm’s interest.
- Regular Returns:An LLP is required to mandatorily file an income tax return even if it has not carried out any significant transactions each year. The government needs to keep track of the number of LLPs functioning, which calls for this provision.
- Huge documentation: An LLP must maintain hefty records of its names of partners, any changes thereof, fees and payment proof, etc.
- Termination Risk: An LLP must have at least two members. If it falls short of two members at any time, the LLP may have to be dissolved.
LLP in USA v/s UK v/s India:
India has borrowed this form of business structure from overseas countries such as the USA, the UK, Australia, and other gulf countries. In all these countries, an LLP is allowed to be formed as a separate legal entity.
LLP In The UK
The act applicable is the UK LLP Act,2000. Registration of LLP is with Companies House. LLP is to be registered with the suffix “Limited Liability Partnership” or “LLP/LLLP”. Foreign Nationals can be a partner in an LLP, and both the partners can be from any nationality.
Tax liability is not subject to any corporate income tax, but the profits are distributed to the members who pay personal income tax on their income from the partnership. The Secretary of State has statutory powers to direct a limited liability partnership to change its name in certain circumstances.
LLP In The USA:
There is no separate law governing an LLP, but LLP provisions are added in the uniform partnership act in 1996. In the United States, each state has its own law governing their formation. Although found in many business fields, but in the US, LLP is a prevalent form of organization among professionals, particularly lawyers, accountants, and architects.
In some US states, namely California, New York, Oregon, and Nevada, LLPs can only be formed for such professional uses. LLP profits are allocated among the partners for tax purposes, avoiding the problem of “double taxation” often found in corporations.
LLP In India
The limited liability partnership act, 2008 governs LLPs. It is the most preferred form because of the less regulation and procedures required to comply. Every LLP shall have a registered office. An incorporation document subscribed by at least two partners, also known as designated partners, shall have to be filed with the Registrar in a prescribed form.
All the process related to registration and winding up comes under the ministry of corporate affairs who appoints a registrar of the companies. For the purpose of taxation, an LLP is treated as a partnership firm. The LLP Act has a mandatory requirement that one of the LLP partners must be an Indian.
Examples of an LLP
LLP is one of the most sought-after business structures found all over the world. Here are some examples to elaborate on the concept.
Handoo and Handoo LLP
This is the first LLP registered in India after the enactment of the LLP act 2008. It works in the field of legal consultancy. The partnership firm created history by registering its name as first LLP and its charismatic, enthusiastic work and a great contribution to the legal field.
BDO USA LLP
BDO USA, LLP is the United States Member Firm of BDO International, a global accounting network and the world’s fifth-largest accounting network. BDO delivers assurance, tax, and financial advisory services to clients throughout the country and worldwide.
Recently BDO in the UK, German, and the US has won its largest-ever international audit client, replacing KPMG as auditor of software giant SAP.
This shows how an LLP can function on a large scale.
Go On, Tell Us What You Think!
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An inquisitive individual who loves exploring, Aayushi is a finance enthusiast into the field of chartered accountancy and the founder of a club skill mania.