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. The formation of an LLP requires a minimum of two partners to complete incorporation. 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 the LLP Act 2008 along with the provisions mentioned in the LLP agreement designated partners must ensure full compliance.

Advantages of Limited Liability Partnership

• Separate legal entity : An LLP maintains a distinct legal identity which resembles company status. The organization status of the LLP functions independently from its member contributors. Through its own business name the LLP possesses the rights to sue and become subject to legal action. The LLP uses its name to sign contracts that helps build trust with stakeholders along with encouraging clients and suppliers to feel confident about doing business with them.
• Limited liability of the partners : Among the members of LLP they hold financial responsibility only through their investment. Each partner bears responsibility up to their original partnership capital contribution amount. The contribution amount which partners make serves as their maximum liability because they remain safe from personal financial responsibility for business losses. During an LLP's time of closure, it results in the assets of the establishment being responsible for settling business obligations while partners maintain their limited financial exposure.
• 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 : The formation of an LLP requires no minimum required capital. All types of companies can proceed with incorporation without needing minimum paid-up capital. An LLP can emerge through any level of capital provided by its partners.

Disadvantages of Limited Liability Partnership

• Penalty on non-compliance : The Minimal standards of compliance set for LLP organizations represent their main burden. Late compliance with required tasks leads to substantial penalties imposed on LLP legal entities. Each year even LLPs without business operations must submit annual returns to the Ministry of Corporate Affairs (MCA). The LLP will face severe penalties from the government when it skips its mandatory return filing obligations.
• Winding up and dissolution of LLP : LLPs need at least two partners to establish their operations. A decline in the number of partners below two for six consecutive months will lead to an automatic dissolution of the company.
• Difficulty to raise capital  : The LLP excludes shareholder constructs present in company structures yet differs transactionally from other SSU entities. Venture capitalists along with angel investors are prohibited from becoming shareholders within an LLP structure. Each shareholder needs to serve as LLP partner to gain full partner rights which include all responsibilities associated with partnership. The preference of angel investors along with venture capitalists for investing in companies over LLPs results in capital funding challenges for business entities that use the LLP structure.

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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