Guide to Limited Liability Partnership

A Limited Liability Partnership or LLP, may be something you’ve heard about if you intend to start a business. An LLP has features from both partnerships and corporations. You will find in this article valuable information about LLPs such as their pros and cons, what is needed legally, tax rules and much more. After reading this article, you will know if a limited liability partnership is the proper business form for you.

What is a Limited Liability Partnership (LLP)

Indian entrepreneurs are choosing Limited Liability Partnership (LLP) more and more often as the preferred way to set up their businesses.The Limited Liability Partnership structure unites critical features from both partnership firms and companies into one entity. Details in its designation show that an LLP represents a partnership structure formed by at least two participants operating under an LLP agreement. Partners of LLPs establish limited participant liability while the entity benefits from perpetual organizational succession like companies.

In the year 2008 India introduced the Limited Liability Partnership (LLP) framework. India's management of LLPs operates through the Limited Liability Partnership Act, 2008. Establishment of LLP involves at least two partners to be incorporated. Despite meeting the LLP requirement, an LLP can maintain its registration without restrictions on the number of partners it accepts. 

Each LLP must designate at least two partners who remain natural persons with one of their members being a resident of India. The designated partners receive their rights and duties through the standard provisions of their LLP agreement. Under LLP Act 2008 in addition to the provisions stated in the LLP agreement, designated partners are supposed to ensure absolute compliance.

Advantages of Limited Liability Partnership

• Separate legal entity : A LLP has its own legal personality that is similar to that of a company. The structure of the organization of the LLP is independent of the member contributors. The LLP has the right to be sued and subjected to legal action through its own name of business. Contracts signed by the LLP with the name of the company assist in creating trust with the stakeholders and motivating clients and suppliers to have faith in the company to engage in business with them.
• Limited liability of the partners : Some of the members of LLP they bear the financial responsibility not as investors but solely as a result of their investment. The liability of each partner is limited to the amount of capital that he/she donated at the time of forming the partnership. The amount of contribution made by the partners is the utmost liability to them since they are not subjected to the personal liabilities of the business. This leads to the assets of the establishment settling the business liabilities during the period of closure of an LLP where partners are not exposed to unlimited liability. 
• Low cost and less compliance : An LLP's formation expenses remain lower than those of establishing either a public limited company or private limited company. An LLP needs to meet limited compliance obligations. Two necessary annual documents compose the LLP's filings: Annual Return together with Statement of Accounts and Solvency.
• No requirement of minimum capital contribution : It does not have a minimum required capital in the formation of an LLP. Any form of company may incorporate without any minimum paid up capital. Any amount of capital contributed by the partners will make the LLP be formed.

Disadvantages of Limited Liability Partnership

• Penalty on non-compliance : Their major burden is the Minimal standards of compliance established on LLP organizations. Failure to adhere to necessary tasks in time will attract huge fines on LLP legal entities. LPPs that are not in operation of business have to provide annual returns to the Ministry of Corporate Affairs (MCA). The government will impose very harsh penalties on the LLP when it does not file its obligatory returns.
• Winding up and dissolution of LLP : LLPs require two or more partners in order to present their operations. It will automatically dissolve the company in case the number of partners decreases to less than two within six consecutive months.
• Difficulty to raise capital  : The LLP omits shareholder constructions found in company structures but it is transactional to other SSU entities. Angel investors and venture capitalists are not allowed to join the shareholders of LLP structure. Every shareholder must be LLP partner to receive full partner rights that would involve all the liabilities of partnerships. Favorable inclination by angel investors and venture capitalists to invest in firm rather than LLPs and the implication of such choices is that business organizations operating under LLP will face problems with capital financing.

How to form a Limited Liability Partnership

• There are a number of steps needed to start an LLP. Before anything else, the partners select a name and check if it exists on the state’s list of business names. Then, they should register their vehicles and pay the required state fees.
• In the second step, they need to write a partnership agreement. The agreement defines what each partner may and may not do and how the business will be managed. Every partner needs to sign the partnership agreement which must be delivered to the state.
• In addition, partners should ensure they have all the licenses and permits needed to run their enterprise. This might consist of a business license, a professional license or a license to run a business at a specific place.

Legal requirements for a Limited Liability Partnership

• LLPs are required to meet certain laws. To begin with, each year the partners are required to file an annual report with the state. The report will mention the business name and address, the partners involved and details of the company’s finances.
• Also, LLPs are responsible for storing documents such as financial statements, the partnership agreement and tax returns. They should be maintained for a predetermined time and the state can ask for copies of them at any time.
• LLPs also have to meet all state or federal laws that relate to their activities. They may cover requirements for getting a license, labour rights or protecting the environment.

What each partner can and must do within a Limited Liability Partnership

• A LLP is regulated by a partnership agreement that lists what each partner may and may not do. The agreement will usually detail the way profits are divided, decisions about controlling the business are made and problems are solved.
• All partners in an LLP are required to work in the company’s best interests. You need to be honest, fair and open when doing so. Both partners must state any personal conflicts of interest and stop any actions that might harm the company.

Taxation of Limited Liability Partnerships

• LLPs do not get taxed twice. Profits from a business are only subject to the partners’ personal income tax rate. All partners are required to report how much they earned or lost as part of their tax expenses.
• LLPs have to pay self-employment taxes which only self-employed individuals are required to pay. The partners owe self-employment taxes for the profit that they earn in the LLP. To prevent penalties and charges, it is necessary for LLPs to have correct financial records and send their tax returns on time.

Conclusion

Ultimately, a Limited Liability Partnership registered with the help of LLP consultants offers businesses many perks such as limited liability and almost no restrictions on managing the business. But it is unlikely to meet the needs of businesses that want to issue equity or become listed on a stock exchange. It’s a good idea to seek advice from a lawyer or accountant before launching an LLP to make sure it will work for you. In this way, you’re able to determine which course of action is best for your business going forward.

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