Limited Liability Partnership (LLP) Introduction, Advantages & Disadvantages

Limited Liability Partnership (LLP): Introduction, Advantages & Disadvantages

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What is Limited Liability Partnership (LLP)?

A few years back, we have seen a lot of partnership firm where two or more friends or relatives start a business. At the time of crisis, all the partners not taking their responsibility and run away and the story ends on a bad note. To reduce this risk, Limited Liability Partnerships (LLP) Act, 2008 incorporated by the Ministry of Corporate Affairs (MCA) of India. Under a Limited Liability Partnership (LLP), two or more partners form a special partnership and have limited liabilities. And now Limited Liability Partnership (LLP) has gotten quite popular in the last few years.

LLP was introduced to provide a form of business that is easy to maintain and to help owners by providing them with limited liability which means that personal assets of the partners are not used for paying off the debts of the company. There are a number of partners in the firm and hence they are not liable or responsible for others’ misconduct. Everyone is liable for their own acts. LLP is a combination of both partnerships and corporations. It has the feature of both these forms. All Limited Liability Partnership is governed under the Limited Liability Partnership Act, 2008. However in India LLP was introduced in April 2009. After re-engineering of the process in the recent past, it is streamlined with the implementation of new forms and an integrated application. The new process is implemented with effect from 2nd October 2018.

This format would be quite useful for small and medium enterprises in general and for the enterprises in services sector in particular, including professionals and knowledge-based enterprises.

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  1. LLPs are common in professional business-like law firms, accounting firms, and wealth managers.
  2. Limited liability means that if the partnership fails, creditors cannot go after a partner’s personal assets or income.
  3. Having business partners means spreading the risk, leveraging individual skills and expertise, and establishing a division of labor.
  4. Limited Liability Partnerships (LLPs) allow for a partnership structure where each partner’s liabilities are limited to the amount, he/she invested in the business.

Advantages of Limited Liability Partnership (LLP):

Easy Formation: – The formation process of an LLP is easy as compared to a company formation process. The process is neither complicated nor time-consuming. The minimum amount of fees for incorporating an LLP is ₹ 500 and the maximum amount which can be spent is ₹ 5600.

Limited Liabilities of Partners: – This is one of the best advantages in today that every partner are having their limited liability which means partners are not liable to pay the debts of the company from their personal assets. No partner is responsible for any other partner misbehaves or misconduct.

Flexibility: – The operation of the partnership and distribution of profits is determined by written agreement between the members. This may allow for greater flexibility in the management of the business.

Easy transferability of ownership: – There is no restriction upon joining and leaving the LLP. It is easy to admit as a partner and to leave the firm or to easily transfer the ownership on others.

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LLP deemed to be a legal person: – The LLP is deemed to be a legal person. It can buy, rent, lease, own property, employ staff, enter into contracts, and be held accountable if necessary.

Perpetual succession: – The life of the Limited Liability Partnership is not affected by death, retirement or insolvency of the partner. The LLP will get winded up only as per provisions of the act of 2008.

Exemption in Taxation: – Limited Liability Partnership is exempted from various taxes such as dividend distribution tax and minimum alternative tax by the Government of India. The rate of tax on Limited Liability Partnership is less than as compared to the company.

No audit required: – Every business has to appoint an auditor for checking the internal management of the company and its accounts. However, in the case of LLP, there is no mandatory audit required. The audit is required only in those cases where the turnover of the company exceeds ₹ 40 Lakhs and where the contribution exceeds ₹ 25 Lakhs.

Disadvantages of Limited Liability Partnership (LLP):

  • Management cannot be separated from owners.
  • LLP cannot raise fund through IPO from the investors.
  • As LLP is introduced in India in 2009, people still trust more on company or partnerships.
  • Sometimes partners do not consult with each other while taking business-related decisions.
  • There is no provision neither in Company Act nor LLP Act to convert LLP ion to Private Company.
  • Many people do not consider LLP as a credible business. Perhaps it has less recognition among the people.
  • Though interest and ownership can be transferred but it usually takes long procedure. Various formalities are required to comply with the provisions of the act.

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