In this article, Nritika Sangwan, pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata gives reasons why a Startup should be an LLP.
In recent years, there has been a noticeable increase in the number of entrepreneurs opting for Limited Liability Partnerships (LLPs) despite it being a fairly new development in the field of business. There are numerous reasons that are responsible for such a trend; some of which include low cost of formation, less restriction and compliance, and most importantly, the flexibility that an LLP offers when compared to other business structures. In this article, the author has attempted to analyze the flexibilities of LLPs vis-a-vis other corporate entities after briefly discussing the concept and salient features of LLPs.
What is an LLP?
Before I move on to talk about the flexibilities that an LLP offers, it is imperative to understand what a Limited Liability Partnership actually is. A Limited Liability Partnership is an amalgamation of a company and a partnership which incorporates the favorable features of both. It integrates the organizational and operational flexibility of a Partnership (with the benefits and protection of limited liability) and separate legal identity of a Company. Compliance requirements are higher for an LLP when compared to a partnership but they are much lesser when compared to a limited liability company.
This form of business model has been available in countries such as the US, the UK, Singapore, Australia etc. for a long time but is a fairly new model in India. In India, the Limited Liability Partnership Act, 2008 was notified on 31st March 2009. This structure has become quite popular since its inception in SMEs, professional service companies and any small business that may aim at reducing its tax and compliance liabilities.
Concurrently, many investors and lenders still remain wary about this business structure and prefer to deal with private or public limited companies. As a consequence, it becomes difficult for an LLP to raise significant capital. In this context, we must remember that partnership in companies can be converted into an LLP and vice versa, without any significant tax liability.
Salient features of an LLP
- It can continue to exist regardless of the changes in the partners, that is to say, that it has a perpetual succession just like a company. If the shareholders change in a company, it does not affect the existence and legal status of the Company. Likewise, the change in partners does not imply any change in the legal status of an LLP.
- An LLP can enter into contracts and own properties in its own name
- An LLP is a separate legal entity and is liable to the extent of its assets; however, the liability of the partners is limited to their contribution agreed in the LLP. This is similar to a Company, where a shareholder is liable for the debts of the Company only to the extent that the share capital to which he contributed may be used to pay the creditors. LLP creditors cannot, under normal circumstances, claim the personal assets of the Partners of the LLP incase the LLP is unable to pay its debts.
The flexibility of operations:
The flexibility of the LLP structure and its unique appeal has helped many entrepreneurs take advantage of its inherent positivity and make it the first choice of their Startup. An LLP allows its partners to adopt an internal organization similar in form to that of a traditional company while limiting their liability to the extent of their individual capital contributions. LLPs are projected to bridge the gap between sole proprietorships and partnership firms under the Indian Partnership Act, 1932 and companies under the Companies Act of 1956, providing another channel for businesses and the rigors of corporate governance without being exposed to personal responsibility for the acts or omissions of other members. These flexibilities are discussed in detail under the following heads:
Registered office and address for communication
It has been provided in the Limited Liability Partnership Act that the document may be served on an LLP or a Designated Partner by sending it by mail or by any other method (to be prescribed by the Rules) to the registered office and any other specifically declared address by the LLP for the purpose in the form and manner prescribed in the rules. Thus, the LLP will have the option to declare another address (other than the head office) to obtain statutory notices/letters etc. of the Registrar by submitting Form 2.
Choice of agreement clauses
The partners have the right and the choice to determine the clauses of the LLP agreement which govern the rights, duties, and obligations of the partners in the LLP as per their requirements, for e.g. – inheritance and transfer rights clauses can be added which then makes easy in such eventualities.
The LLP Act 2008 provides the rights to the partner to share profits and losses of the LLP and to receive distributions in accordance with the LLP agreement which is transferable either wholly or in part. The partners may lend money to and transact other business with the LLP.
It may include rights such as access to books, records of LLP firm and to inspect them and also one can add this clause in the agreement that bares any activities that may result in a conflict of interest situation. It also gives the flexibility to each of the parties hereto shall be entitled to carry on their own, separate and independent business and can include a clause of remuneration to be paid to the partner.
LLPs for a particular venture
Since LLPs are governed by the LLP agreement, it is possible for LLPS to provide suitable clauses in such agreement to fix time limits for the duration of the LLP in the LLP agreement.
In such cases, after the realization of the objectives of the venture, the LLP could either be wound up, or the provisions for striking off of the name of the LLPs can be used, instead of the winding up provisions.
Illustration: ABC LLP is established only to conduct four batches of a management course (of 3 months per batch) over a one year period. After the 4 batches are completed, the LLP can either be 1. Wound up or 2. Its name could be struck off the register of LLPs bringing its existence to an end if the LLP agreement states that the existence of the LLP is to come to an end after one year of operation.
Rule 24 of the LLP rules, 2009 provides that I. any LLP whose turnover does not exceed 40 lakh rupees in any financial year, or II. Whose contribution does not exceed 25 lakh rupees, is not mandatorily required to get its accounts audited. If these limits are crossed for an LLP, it must get its account mandatorily audited.
Relaxation in filing and applicability of penalties
The statutory provisions require LLP to present documents such as the statement of accounts and solvency (SAS) and the annual declaration (AR) and communications relating to changes between partners, etc. within the period specified in the relevant provisions. The law contains provisions to allow LLPs to present these documents after their deadlines in paying additional fees. It has been established that, in the event that LLPs submit relevant documents after their deadlines with additional commissions up to 300 days, no action will be taken against them. In the event that a delay of at least 300 days occurs, the LLP will be required to pay the normal deposit fees, additional costs and will be processed. The law also contains provisions for the capitalization (settlement between the defendant and the department without any type of competition) of offenses punishable only by a fine.
The compliances that must be made under the LLP Act are less than the limited liability company. For example, there is no provision to hold a meeting, in fact, it is not even mandatory to keep records of the meetings of the designated partners/partners.
All LLP accounts are required to be controlled by a CA. However, no mandatory checking of the accounts is required until the billing in any financial year exceeds Rs. 40,000.00 (40 Lakh) or the capital contribution exceeds Rs. 25,000.00 (25 Lakh).
The Profit will be taxed to the LLP separately & not to the Partners which avoids double taxation issues.
Mergers & Amalgamations
The provisions of Compromise, arrangement or reconstruction of LLPs are available which makes it possible to merge two or more LLPs, just like a company or between LLPs and a Private Company.
Right to manage the business
Unlike corporate shareholders (in case of Private Limited), the partners have the right to manage the business directly hence have better controls on all the activities.
No limit on maximum number of partners
LLP can present any number of partners (without a maximum limit) which increases the possibility of obtaining the maximum amount of investors for a company. The need for a new business organization offering an alternative option to resort to an association under the Association Act with unlimited personal responsibility, on the one hand, and rigid governance based on corporate regulation, on the other, had heard for a long time. LLPs seem to allow professional experience and entrepreneurship to organize and operate in a flexible, innovative and efficient way.
Comparative analysis of LLPs with respect to other business structures
|Criteria||LLPs||Sole proprietorship||Partnership||Private Limited Company||One Person Company|
|Liability||Liability of the Partners is limited. Only the amount contributed by the Partners to the firm can be used to pay off the debts of the Partnership firm.||The sole proprietor is personally liable and responsible for payment of the debt that the business incurs and cannot pay from the profits. Creditors may sue the sole proprietor personally to satisfy the debt.||Liability of Partners is unlimited. Even the personal assets of the partners can be annexed to pay off the debts of the Partnership firm.||If a Pvt. Ltd Company faces loss under any circumstance then its shareholders are liable to sell their own assets for payment. The personal, individual assets of the shareholders are not at risk.||The sole shareholder has limited liability.|
|Taxation||LLP profits are taxed at 30% plus surcharge and cess as applicable. The Profit will be taxed to the LLP separately & not to the Partners which avoids double taxation issues.||
Taxes are applicable individually depending on the total income of the Proprietor
|Partnership profits are taxed at 30% plus surcharge and cess as applicable.||Private Limited Company profits are taxed at 30% plus surcharge and cess as applicable.||One Person Company profits are taxed at 30% plus surcharge and cess as applicable.|
|Existence||The existence of an LLP is not dependent on the Partners. Could be dissolved only voluntarily or by an Order of the Company Law Board.||The existence of a Proprietorship business is dependent on the Proprietor.||The existence of a Partnership business is dependent on the Partners. Could be up for dissolution due to death of a Partner.||The existence of a Private Limited Company is not dependent on the Directors or Shareholders. Could be dissolved only voluntarily or by Regulatory Authorities.||The existence of a One Person Company is not dependent on the Director or Nominee Director. Could be dissolved only voluntarily or by Regulatory Authorities.|
|No. of Members||A minimum of two persons is required to start an LLP. An LLP can have an unlimited number of Partners||Can have only one person as a member||A minimum of two persons is required to start a Partnership. The maximum number of partners can be only 20.||A minimum of two persons is required to start a Private Limited Company. A Private Limited Company can only have a maximum of 200 shareholders or members.||Can have only one person as a member|
|No. of Compliances and Expenses||Every LLP would be required to file (i) an annual return in Form 11 with ROC. (ii) A statement of Accounts and Solvency in Form 8.||Less when compared to an OPC as there are only a few legal compliances that must be met||There are numerous compliances for a Partnership. Some of which are:
(i) Registration of firm in Form I with a time limit of 1 year. (ii)Change in Firm Name or Principal Place or Nature of Business in Form II with a time limit of 90 days. (iii) Closing and Opening of Branches in Form III with a time limit of 90 days.
|A private limited company would have to file audited financial statements with the Ministry of Corporate Affairs each year. When it comes to compliance relating to the Ministry of Corporate Affairs, Pvt. Ltd. Companies are at a disadvantage when compared to LLPs||One may need to hire a lawyer or company secretary for compliances, therefore it becomes more expensive when compared to sole proprietorship|
There are a number of reasons why many entrepreneurs prefer to go in for a Limited Liability Partnership with a Private Limited Company. It is considered easier to set up, as a rule, is comparatively hassle-free in the day to day operations, has significantly lower burdensome compliance requirements and costs, and therefore many see it as advantageous to begin their organization in this manner. Owing to flexibility in its arrangement and operation, it is expected that LLPs would also be a suitable vehicle for small enterprises and for investment by venture capitalists.