If you have to ask experts: Why are LLPs becoming the choice of business operations for startup enthusiasts?
The answer will include various reasons such as low formation cost, lesser compliance and restrictions, and, most importantly, greater flexible options that only a Limited Liability Partnership offers.
1. What is a Limited Liability Partnership?
Partnership firm is a simplified form of business and it is least organised as it is governed by terms and conditions mutually agreed in partnership deed. However, Limited or Private Limited Company are related complicated as it is governed by provisions of Companies Act, 2013 and also involves lots of compliances and filing of documents with Registrar of Company (RoC).
Limited Liability Partnership is a form of business that integrates features of both partnership firms and Companies. LLP requires more compliance than a partnership firm but less than a private limited company.
Further, in the case of a partnership firm, liability of partners are unlimited. However, in case of a company, liability of shareholders is limited to their share capital. LLP contains one of the key features of a company which is “Limited Liability”.
This type of business model was available for a longer time in first world countries such as The Uk, The US, Singapore, and Australia. But, this concept is quite new in India. The Indian government has incorporated this through the Limited Liability Partnership Act of 2008. Since then, it has become quite popular in India also, especially in the SME sector.
2. Top 5 Reasons Why LLPs are Growing Faster Than Ever
Here are 5 reasons that will show you why LLPs are thriving in recent times. Have a look.
2.1 Operational Flexibility
LLP form of business model allows partners to embrace an organization’s internal structure while limiting the liability to their separate capital contribution. This unique appeal of LLPs has lured many entrepreneurs to set-up their business by following this model.
LLPs are bridging the gap between the Indian Partnership Act 1932 and the Companies Act, 2013 by bundling the best of both worlds. LLP opens another business channel by offering diligence of the corporate world without exposing partners to individual liabilities.
2.2 Choice of Clauses in Agreement
Partners need to choose the clauses in an LLP agreement. This agreement governs the duties, rights, and obligations towards business for the partners. For example, you can add transfer rights and inheritance clauses that can be beneficial to your family during such eventualities.
A clause like accessing the records and books of the firm to inspect them thoroughly can also be included in the agreement. This type of full-disclosure agreement creates clarity between stakeholders of the business.
Download draft format of LLP Agreement.
2.3 Relaxations in Documents Filling
Any business entity requires to file relevant documents like SAS (Statement of Accounts and Solvency), Annual Declaration, and communications between partners related to changes. You need to submit these documents within a specific period else; it will attract heavy fines.
Filing of agreements and documents with the government increases the authenticity of documents.
2.4 Limited Compliance
LLPs have a lesser number of compliance to follow when compared to a Private Ltd Company. For example, unlike Companies, an LLP doesn’t have to hold meetings between its stakeholders at regular intervals. In fact, keeping records of past meetings is also not necessary for designated partners.
2.5 Unlimited Number of Correspondent Partners & Tax Benefits
Limited Liability Partnership Act, 2008 states that any number of direct partners can be included in an LLP. This no capping in partner rule gives a business the possibility of acquiring maximum investments from the market. Typically an LLP with more credible partners has better chances of securing investment.
Also, taxation is pretty simple for LLPs. LLPs need to pay tax on their profit. But the LLP partners don’t need to pay tax separately for their individual profit, thus addressing the double taxation issue.