Limited Liability Partnership Firm (LLP)

 

“Smart people learn from everything and everyone, average people from their experiences, stupid people already have all the answers.” – Socrates

Limited Liability Partnership (LLP)  

Meaning of LLP:-

Section 2(n) of Limited Liability Partnership Act, 2008 define the meaning of LLP as- “Limited Liability Partnership” means a partnership formed and registered under this Act;

LLP is hybrid of Partnership Firm and Private Limited Company. In the case of normal partnership firm the liability of partners are unlimited. However in the case of LLP the liability of partners are limited as shareholders/members of Private Limited Company. An LLP has all basic features of a regular partnership firm, except that of same legal entity status and unlimited liability of partners. Consequently, limited liability partnerships have legal existence and identity separate from that of its partners. Furthermore, its partners have limited liabilities.

Section 2(11) of Companies Act, 2013 includes LLP under the definition of Body Corporate. It means LLP is a Body Corporate also.

 

Features of LLP:-

ü There are minimum two members are required to form an LLP and the same/or other members may appointed as a Designated Partners of LLP.

ü LLP agreement is the Constitutional document of LLP like MOA (Memorandum of association of Private Limited/Limited Company).

ü LLP is an alternative corporate business form that gives the benefits of limited liability of a company and the flexibility of a partnership.

ü The LLP can continue its existence irrespective of changes in partners. It is capable of entering into contracts and holding property in its own name.

ü The LLP is a separate legal entity, is liable to the full extent of its assets but liability of the partners is limited to their agreed contribution in the LLP.

ü Further, no partner is liable on account of the independent or un-authorized actions of other partners, thus individual partners are shielded from joint liability created by another partner’s wrongful business decisions or misconduct.

ü Mutual rights and duties of the partners within a LLP are governed by an agreement between the partners or between the partners and the LLP as the case may be. The LLP, however, is not relieved of the liability for its other obligations as a separate entity.

ü Since LLP contains elements of both ‘a corporate structure’ as well as ‘a partnership firm structure’ LLP is called a hybrid between a company and a partnership.

 

Advantage of LLP:-

ü LLP is a form of business model which enables professional/technical expertise and initiative to combine with financial risk taking capacity in an innovative and efficient manner

ü LLP’s are a separate legal entity to the members.

ü 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.

ü 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.

ü Corporate ownership. LLP’s can appoint two companies as members of the LLP. In an LTD company at least one director must be a real person.

ü There is no separate rate of taxation on distributable profit of LLP. However in case of Companies Dividend Distribution Tax is applicable.

ü Designate and non-designate members. You can operate the LLP with different levels of membership.

ü Protecting the partnership name. By registering the LLP at Companies House you prevent another partnership or company from registering the same name.

 

Limitation of LLP:-

ü LLP must have at least two members. If one member chooses to leave the partnership the LLP may have to be dissolved.

ü Profit can not be retained in the same way as a company limited by shares. This means all earned profit is effectively distributed with no flexibility to hold over profit to a future tax year.

ü Public disclosure is the main disadvantage of an LLP. Financial accounts have to be submitted to Companies House for the public record. The accounts may declare income of the members which they may not wish to be made public.

 

Taxation on LLP:-

Income Tax Rate of LLP as applicable for the Assessment Year 2020-2021

ü The LLP is liable to pay income tax @30% on its income. In case the total income exceeds INR 1 Crore, LLP is also liable to pay surcharge @12% on the income tax.  

ü Additionally, health and education cess of 4% is payable on the income tax plus surcharge.  

Alternate Minimum Taxation (AMT)

ü Initially, the concept of MAT, i.e. Minimum Alternative Tax, was introduced only for the companies. However, gradually it was made applicable to all the other taxpayers in the form of AMT, i.e. Alternate Minimum Taxation. Hence it forms a part of the LLP taxation.

ü The provisions of Section 115JEE of the Income Tax Act states that the AMT applies to an Individual, Hindu Undivided Family, Association of Person, Body of Individuals and the artificial juridical person only in case the ‘adjusted total income’ exceed INR 20 Lakhs.  

ü AMT @ 18.50% (plus surcharge and cess as applicable) of the adjusted total income is leviable. 

An overview on Partnership Firm, LLP and Company

Provisions	Partnership Firm	LLP	Company
Definition	Section 4 of Indian Partnership Act of 1932 defines partnership as “the relation between person who has agreed to share profits of a business carried on by all or any of them acting for all.”	“Limited Liability Partnership” means a partnership formed and registered under this Act; This Act means Limited Liability Partnership Act, 2008.	Section 2(20) "Company" means a Company incorporated under this Act or under any previous  Act.  This Act means Companies Act, 2013.
Liability of Partners/Members	Liabilities of Partners are Unlimited.	Liabilities of Partners are Limited.	Liabilities of Members are limited if Company is registered as Limited by shares or Limited by Guarantee.
Need of Registration	Optional.	Mandatory.	Mandatory.
Applicability of Act	Indian Partnership Act, 1932.	Limited Liability Partnership Act, 2008.	Companies Act, 2013.
Legal entity and Perpetual succession Concept	There is no separate legal entity of Partnership Firm. Perpetual succession is not possible in partnership.	LLP has separate Legal Status. Perpetual succession is possible as partners may come and go in an LLP.	Company has separate legal entity from its members. Members may come and go but the company goes on forever.
Constitutional Document	Partnership Deed	LLP Agreement	Memorandum of Association (MOA) is constitutional documents of Company and Article of Association (AOA) deals with internal Management of the Company.
Minimum Number of Partners/Members	Minimum two partners are required to form a Partnership Firm.	Minimum 2 Designated Partners are required to form an LLP.	There are minimum 2 members are required in the case of Private Limited Company, 7 Members in the case of Public Company and Only one member is required in the case of One Person Company (OPC).
Maximum Number of Partners/ Members	The ceiling limit on number of Partners is 50. Partnership Firm having more than 50 Partners are declared as illegal association.	There is no ceiling limit on number of Partners.	-1 Member in case of OPC. - 200 Members in the case of Private Limited Company - Unlimited Members in the case of Public Company.
Data availability	Any of the information or the data of the Partnership are not disclosed on public platform.	The central Registration with MCA allows availability of Documents to Public except the Agreement between Partners. Also, one can see the last Balance sheet filed with MCA in the Master data of the entity which creates high creditability and reliability among the other parties to the LLP.	The central Registration with MCA allows availability of Documents to Public. Also, one can see the last Balance sheet and creation, modification, satisfaction of charges of the Companies filed with MCA in the Master data of the entity which creates high creditability and reliability among the other parties to the Company.
Uniqueness of Name	There is no restriction for using the name in case of Partnership, furthermore it does not necessarily help to establish distinct image of Partnership.	The name of the LLP is unique and not identical or similar to any other company or LLP, which helps to establish distinctive image.	The name of the Company is unique and not identical or similar to any other company or LLP, which helps to establish distinctive image.

 

List of Documents required for the Formation of Limited Liability Partnership Firm:-

Following are the documents required for the formation of Private Limited Company.

1.     KYC Documents of Proposed Shareholders/Subscribers/Directors

-         Copy of PAN (Id Proof)

-         Copy of Aadhar/Passport

-         Copy of Bank Statement/Electricity Bill/Landline Bill/Gas Bill (Address Proof)

-         Personal Mobile No

-         Personal Email id

-         Passport Size Photograph

 

2.     Proof of Register office Palace

-         Rent Agreement (If Property is Rented)

-         Electricity Bill of Proposed Register office premises

-         NOC (Non Objection Certificate form the Landlord)

 

Author:- Author of this Article is CS Vinay Pandey

About CS Vinay Pandey:-  CS Vinay Pandey is Associate Member of Institute of Company Secretaries of India and Law Graduate from VBSPU, Jaunpur.  He is Co-Founder of Professional Study Point and faculty of Financial Management Paper of CS Professional Programme.

CS Vinay Pandey

(Company Secretary & Writer)

(CS, LLB, B.Com)

cs.vinaypandey@gmail.com  

Mob/Whatsapp: 9911473074

 

Disclaimer: The content of this article is intended to provide a general guide to the subject matter and that the same shall not be treated as legal advice. For any queries, the author can be reached at cs.vinaypandey@gmail.com