What is an LLP ?
Limited Liability Partnership or LLP is basically a partnership between two or more partners similar to a private limited company. Each business partner is provisioned with limited responsibility, which means they are not completely responsible for the whole business, the details about the responsibilities will be drafted in the LLP agreement.
What is an LLP Agreement?
LLP agreement is a contract made between the members or partners of an LLP to establish a fair relationship between them and to protect their investment.
Who a Partner and the Designated Partner is…?
A partner in an LLP is a person who invests capital in the LLP, whereas the responsibility of legal compliance vests with the designated partners of the LLP
LLP requires a minimum of two designated partners, similar to Directors in case of companies. The designated partners take care of day to day operations, compliances and dealings of the LLP.
Remember, forming an LLP helps us to protect personal assets and also improves your credibility as all the details of an LLP can be verified online at the Ministry of Corporate Affairs official website – that’s mca.gov.in
What are the requirements to start an LLP ?
To start one – all we need is a minimum of two business partners and one of them should be an Indian resident. Keep in mind – Someone who’s stayed in India for a minimum of 182 days in a year would be considered a resident of India.
We also can have as many partners as we like as there is no such restriction on the maximum number of business partners unlike a private limited company wherein there is a restriction of not having more than 200 members.
How is an LLP different from a Partnership firm ?
There are many differences but we will look at the most important factors.
LLP is governed by the Ministry of Corporate Affair’s Limited Liability Partnership Act of 2008. The difference is it limits liability and has perpetual succession.
A partnership firm is governed by Indian Partnership Act, 1932.
It has unlimited liability and does not have a perpetual succession of business, meaning the business exists as long as the partners are alive.
So to build a company for the next 100 years, you should be choosing an LLP or a private limited company.
An LLP is formed with a minimum of 2 designated partners. When it comes to compliance, there are a few relaxations when you compare it with the compliance of a Private Limited company
The very first step is to get the Digital Signature Certificate or DSC for the Designated Partners. DSC is simply an electronic signature in a USB token. This is going to be used for signing the applications and company-related documents later. So keep it safe and be extra careful before you share this with anyone as DSC is good as your physical written signature on a paper.
The next step is to obtain the Director Identification Number or DIN, which is a unique number allotted to every Director of a company from the Ministry of Corporate Affairs. The DIN is going to be mapped with your PAN card and it is going to be only issued once. Just a reminder for you – It is a punishable offense to hold more than 1 DIN.
Then an application to reserve the proposed LLP is made. You can provide 2 alternative names with the application. Please remember that the registrar of companies has complete discretion in the approval of the proposed LLP.
The name of the LLP will be in the form of “COMPANY NAME Service LLP”.
Once the name is approved, you will have 20 days to file your application of incorporation of LLP or another application is to be made by paying an additional fee.
The next step is to file for the formation of LLP. The documents are uploaded to the government portal on MCA.gov.in with the DSC of the Director and the professional.
On verification, the Registrar of Companies (ROC) will issue a Certificate of Incorporation and the LLP can commence business by opening a bank account.
The Partners of the LLP then have 30 days time to file the LLP Agreement of the LLP with the MCA. In case of not filing the LLP agreement within 30 days, a fine will be applicable.
When you can go to visit a bank to open a bank account, you will need a copy of Certificate of Incorporation, LLP Agreement along with a copy of PAN card of LLP.
Advantages along with the disadvantages
1.When we look at the rules – an LLP will require a minimum of 2 designated partners.
2.An LLP agreement is personalized according to the requirements of partners involved.
There is no Minimum required capital unlike a private limited company. You can even start an LLP with just 1 Rupee as capital.
3.There is no such restriction on the maximum number of business partners in contradiction to a private limited company wherein there is a restriction of not having more than 200 partners.
4.Registration cost is less.
5.In LLPs, it is not mandatory to audit the accounts. But it is necessary to audit the accounts in the following circumstances
*when LLP exceeds the contribution of Rs.25 Lakhs.or
*when LLP exceeds the annual turnover of Rs.40 Lakhs.
6.The last point to remember is an LLP can always be converted to a private limited company and vice versa.
Disadvantages of LLP:
1.Public disclosure of financial accounts is the main disadvantage of an LLP.
The accounts may also declare income of partners which you may not wish to be made public.
2.Secondly 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.
3.An LLP must have at least two members. If one member chooses to leave the partnership the LLP may have to be dissolved.