Limited liability Partnerships are one of the most common company types that are mostly preferred by individuals due to many reasons. As the name suggests, it is a partnership firm that involves two or more individuals that consists a significant feature of a limited liability. Before establishing an LLP, Limited Liability Partnership Registration Process must be followed. The provisions of Indian Partnership Act, 1932 are not applicable to an LLP and it is regulated by the contractual agreement between the partners. LLP is one of those companies that serves the advantage of a limited liability and at the same time provides flexibility of partnership at a low compliance cost.
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Why Limited Liability Partnerships make a desirable business option for startups
Limited liability Partnerships have certain characteristics that make them a good option for startups.
Some of the features of LLP that separates it from other company types are as follows-
- The partners are all separate entities and one partner is not responsible for the misconduct of another partner.
- Body corporate and legal entity that is separate from its partners.
- Perpetual succession
- Requirement of at least two designated partners
- At least one of them being resident in India
- All the partners shall be the agent of the Limited Liability Partnership but not of other partners.
- Requirement of at least 2 members.
Advantages of Limited Liability Partnership
After understanding about some of its distinct features, we must understand some advantages of LLP and why it is a suitable option for startups.
- The feature of Limited liability in a LLP
It is significant to understand this crucial aspect of LLP which makes it different. The advantage of a limited liability is one major reason why individuals opt for LLP in comparison to other companies.
The liability of the partners of the company is limited to the amount contributed by them in the business. In a limited liability, in situation of the partnership firm incurring losses or if it closes down, the partners personal income or assets is not affected. They will only have to bear the losses depending on their contributions.
- The risk factor in the LLP business
Many risks encompasses at the initial stages of any business, but the presence of partners helps in the equal distribution of the risk which is a major benefit of any partnership firm.
- Establishes division of labor
The division of labor enforces labor laws that look after the conditions of employment and wages, which includes overtime, payroll deductions, benefits, hours of work, etc.
- Managed by experienced professionals
The individuals engaged in LLPS are mostly experienced in their respective fields. They know various methods on how to manage the business which makes it easier to earn profits
- Ensure lower costs
The major objective of LLP is to ensure that the costs are as low as possible. The partners pool in resources and capital in such a way that costs are kept at certain level.
Steps required for LLP Registration
-
- Name Reservation
- Filing an E-form 2
- Filing of Partnership Agreement in Form 3
- Filing an application for PAN & TAN
- Creation of a Bank Account
- Filing of statement of account & solvency in form 8
- Annual Return in form 11, the due date of which is 30th May of every year
- Income Tax Return Filing in form ITR 5, the Due Date of which is 30th September every year
- Name Reservation
The first step is to search for a unique name for the LLP business and reserve it. E-form must be filed by the designated partners to check the availability of the LLP name. The name is then reserved by the Ministry for the applicant for the time duration of 90 days. If the LLP incorporation does not get any response of the application he sent within 90 days, it would be deemed as rejected and will be made available for others.
- Filing an E-form 2
The applicant files an e-form 2 for the incorporation of the LLP by mentioning all details of the Nominated and Designated partners in it. The consent of all the partners is significant, including Designated Partners for the particular role.
- Filing of Partnership Agreement in E-form 3
The applicant files an e-form 3 for the LLP Agreement within 30 days of the LLP incorporation. As per Section 23 of the Limited Liability Partnership Act 2008, LLP agreement is mandatory.
- Filing an application for PAN & TAN
The next step is filing and acquiring PAN and TAN as it is mandatory for the partners and it serves as an identity proof.
- Creation of a Bank Account
Opening a current account is mandatory for the business as all the profits are going to be transferred into that particular account. The account is created under the company name.
- Filing of significant statements
The last step is to fill up statement of account & solvency in form 8 along with Annual Return in form 11, the due date of which is 30th May of every year. Lastly, Income Tax Return Filing in form ITR 5 must be filled, the due date of which is 30th September of every year.
Audit Requirements for LLP Registration
LLP must comply with the provisions of the LLP Act 2008 & Income-tax Act, 2008.
According to the LLP Act, 2008, an audit must be conducted as per the following circumstances:
- Once the annual turnover exceeds Rs 40 lakhs or
- Contribution exceeds Rs 25 lakh
According to the Income-tax Act, 1961, an audit must be conducted as per the following circumstances:
If the annual turnover exceeds Rs 1 crore
Documents required for LLP Registration
From All Designated partners/ Partners
- PAN or Passport or ID Card
- Copy of Aadhar card of all the partners
- Copy of latest Bank Statement
- Copy of utility bills including telephone or mobile Bill
- Voter’s ID/Passport/Driver’s License
- Passport-sized photographs of all directors and shareholder
For Proposed Registered office (Residential or commercial)
- Registered Address Proof
- NOC from owner
- In case of rented property, verified copy of Notarized Rental Agreement
- Utility bills such as telephone, gas, water or electricity bill of the registered office as a residential proof of the business place. It must not be older than 2 months.
Why do the startups opt for Limited Liability Partnership?
Startups are generally established by one individual in certain situations and sometimes two or more individuals. In most cases, the financial contributions in the business are kept minimal as the more capital invested in the business, the more risky it is, as there is no guarantee of the business earning profits.
A very important advantage of LLP that makes it a desirable option for startups is non-requirement of audit process up to Rs 40 Lakhs. Audit processes cost a lot and is also time consuming, thus startups can save themselves from the process.
LLP’s are also exempted from certain taxes such as Wealth tax, Surcharge, and Dividend Distribution Tax.
As discussed above, with the various benefits LLP provides, startups will take the decision of setting LLP as compared to any to other business type.
Let us compare it with the two most common business types-
Sole Proprietorship – This business type has only one individual who manages and runs the business. But the biggest disadvantage of this business type is unlimited liability, which is not the case in LLP. Also, the owner of a sole proprietorship has to bear all the losses of the business.
Corporation –Setting up a company has many advantages, but is not as flexible as a partnership firm. Corporations have many compliances which must be followed. Whereas, LLP has minimal compliances which results in minimal costs.
In order to set any business, it is significant that it is registered as per the rules and regulations. Limited Liability Partnership Registration Process has certain steps that must be followed for a successful registration.
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