This blog discusses the numerous advantages of LLP registration in India. Get a complete picture of the advantages of LLP with its disadvantages and tax benefits to analyse the suitability of LLP incorporation for your business.
Limited Liability Partnership or LLP is one the most popular choice of incorporation for a business among Indian entrepreneurs. The reason for this preference is the variety of benefits of LLP incorporation, not just for the partners but for all other stakeholders as well. These include the key managerial officers, customers, creditors, and regulatory authorities like the ROC. This blog discusses all such benefits of LLP incorporation, and weighs them against its disadvantages, to help you make an informed choice of business structure.
The advantages of LLP comes from its mandatory need for registration. A registered LLP acquires a distinct identity and is able to perform all legal and financial tasks in its own name. Moreover, this new partnership structure offers limited liability to partners and a great level of flexibility in managing its internal and external affairs. The partners share the capital, profits and liabilities of the business in a fixed, mutually agreed ratio among them. However, the biggest advantage of LLP in comparison to a traditional partnership firm is its continued existence.
Limited Liability Partnership or LLP was introduced by the LLP Act of 2008, as an incorporated partnership structure with an added feature of restricted liability for partners. Prior to this, the only legal entity that could be established as a partnership business in India was a traditional partnership firm. In fact, LLP was introduced with the purpose of fixing every problem that was antiquated to the organisational structure of a firm, and offer a hybrid structure which combined its features with that of a Limited Company. This is the reason, it has been in huge demand among Indian entrepreneurs since its very inception.
A Limited Liability Partnership has gained immense popularity in the Startup ecosystem of India, owing to several of its benefits offered to various stakeholders. These include limited liability protection for partners, easy process of incorporation, flexible management structure, enhanced credibility, and easy funding facilities. Let’s understand what these benefits of LLP really entail.
Before the introduction of Limited Liability Partnerships in India, traditional partnership firms failed to restrict the liabilities of partners. As a result, partners were liable to pay-off all the business dues and liabilities from their official as well as personal income. This was a huge disadvantage that India’s partnership businesses faced. To overcome this, the new LLP structure introduced Limited Liability for partners. This was one of the major advantages of LLP as it offered partners protection against unwanted and overburdened expenditure while carrying out business operations.
Another one of the primary benefits of LLP is that its details and documents are officially recorded with government authorities after incorporation. This makes its functioning more transparent and significantly enhances its credibility by reducing the risk of fraudulent activities and forgery. Transparency and Credibility are important factors when seeking investment and credit. Also, these documents and records are available for public viewing and inspection on the MCA website, making them further verifiable by practically any stakeholder of the LLP.
Incorporation is not only a mandatory requirement, but also one the major advantages of LLP. The process itself is extremely quick, easy and affordable. The mode of application filing and documentation is completely online, which further enhances its cost-effectiveness. Unlike Partnership Firms, which may involve cumbersome offline procedures and extensive paperwork, LLPs have a rather streamlined and modern approach to registration. Registration also gives the LLP a distinct identity which enables it to undertake legal and financial activities in its own name.
One of the other key benefits of LLP is the remarkable flexibility it offers in managing the business internally. Unlike a Company, where internal management is governed by the provisions of the Companies Act, LLPs allow partners to define their own rules of internal management within the LLP Agreement. Without the constraints of statutes or laws, LLPs can easily adapt and amend their rules whenever necessary, providing a level of flexibility that sets them apart from other business structures like traditional companies.
Last but not the least, lower compliances also add up significantly to the advantages of LLP incorporation. The legal cost of operating a business involves the expenses made in fulfilling legal formalities and compliances. Since, according to the LLP Act, the LLP has to fulfil an extremely low number of compliances, the legal cost of operating it is also quite minimal. Among its most important legal compliances are the filings of LLP annual returns, annual financial statements, annual statement of solvency, and ITR returns.
The advantages of LLP extend beyond liability protection and flexibility in management. One of the most compelling aspects about its preference is the tax benefits it offers. The tax benefits of LLPs are not just targeted to the business, but also its partners. Here is a detailed list of all the tax benefits an LLP’s establishment has to offer:
In Limited Liability Partnerships (LLP), partners enjoy the advantage of no Dividend Distribution Tax (DDT). Unlike traditional companies, LLPs allow partners to receive their share of profits without the additional tax burden of DDT, making profit distribution more tax-efficient.
LLPs that qualify as recognized start-ups can take advantage of tax benefits under Section 80IAC of the Income Tax Act. This exemption can result in substantial tax savings for eligible LLPs, encouraging innovation and entrepreneurship.
LLPs engaged in providing goods and services can benefit from the Goods and Services Tax (GST) system. They have the opportunity to claim Input Tax Credits (ITC), which simplifies GST compliance and reduces the overall tax liability for the LLP.
While Limited Liability Partnerships (LLP) offer a range of benefits, it’s important to consider the potential drawbacks before choosing this business structure. Understanding the disadvantages can help you make an informed decision that aligns with your business goals and needs. We have explained the most prominent disadvantages of LLP below for your reference.
While LLPs offer various advantages, they have limited fundraising options compared to other business structures like private limited companies. LLPs cannot issue shares to raise capital, which is a common method for attracting investors in companies. This limitation may hinder their ability to secure substantial investments for business expansion and development. If your business requires significant capital infusion from external sources, the fundraising restrictions of an LLP can be a drawback.
LLPs are often characterised by their informality in governance and decision-making processes. While this informality can promote flexibility, it can also lead to increased risks. The absence of strict formalities can result in misunderstandings and disputes among partners, potentially affecting the smooth operation of the business. In contrast to more structured business entities, the lack of formal rules can be a disadvantage for some businesses.
LLPs are subject to specific compliance requirements, and failure to meet these obligations can result in high penalties and legal consequences. Non-compliance with statutory regulations, such as filing annual returns or financial statements, can lead to financial penalties and the loss of certain benefits associated with LLP status. The strict enforcement of compliance in LLPs can be seen as a disadvantage, especially for businesses that struggle to meet these requirements consistently.
While LLPs enjoy pass-through taxation, where profits are taxed at the individual partner’s tax rate, this can also be a disadvantage in some cases. If partners fall into higher income tax brackets, they may face relatively high tax rates on their share of the LLP’s income. This can reduce the attractiveness of LLPs from a tax perspective for individuals in higher income brackets.
One significant disadvantage of LLPs is the requirement to publicly disclose certain records and documents. LLPs must make their annual financial statements, LLP Agreement, and other key documents available for public inspection. This level of transparency may not be desirable for businesses that wish to keep their financial and operational details more private. The public disclosure aspect can be a concern for those who value confidentiality.
As we conclude this blog, we hope that you now have a better understanding of all the benefits of LLP, and the reason that made these structures popular since the day of their inception. If you still have any questions, do not hesitate to contact our startup advisors, who will be glad to help you resolve all your doubts and queries. Moreover, we also provide LLP registration services, and if you are looking forward to incorporating your LLP in India, you can subscribe to our wholesome and reasonably priced packages of LLP Registration.