Introduction:
Limited Liability Partnerships (LLPs) have gained popularity as a flexible and business-friendly legal structure, combining the benefits of limited liability with the organizational flexibility of a partnership. While this structure offers various advantages, it is crucial for LLPs to adhere to legal compliance requirements to operate smoothly within the regulatory framework. In this article, we explore the key aspects of legal compliance applicable to LLPs.
Why should we prefer LLP over Private Limited?
- An LLP generally have simpler formation procedures compared to Private Limited Companies. The compliance requirements for LLPs are often less stringent, making them a more attractive option for smaller businesses or startups with limited resources.
- LLPs offer flexibility in management and decision-making.
- LLPs often have lower compliance costs compared to Private Limited Companies. The regulatory requirements and annual filing obligations may be less burdensome for LLPs
- LLPs do not have a minimum capital requirement, whereas Private Limited Companies may be required to have a certain amount of authorized or paid-up capital.
- LLPs are taxed as a partnership, where profits are taxed at the individual partner’s level. This can be advantageous, especially if the business is not planning to reinvest profits and wishes to distribute them among the partners.
- LLPs do not have share capital, and there are no restrictions on the transfer of ownership interests.
Why should we prefer LLP over Partnership?
- One of the primary advantages of an LLP is that it provides limited liability to its partners. This means that partners are not personally liable for the debts and liabilities of the business. In a traditional partnership, personal assets of the partners can be at risk, exposing them to potential financial losses.
- An LLP is a separate legal entity distinct from its partners.
- In a traditional partnership, there is a concept of joint and several liability, meaning that each partner can be held individually responsible for the entire debt of the partnership. In an LLP, the liability is limited to the extent of the partner’s agreed contribution, and partners are not personally liable for the actions of other partners.
- LLPs typically offer more straightforward mechanisms for the transfer of ownership interests compared to traditional partnerships.
Incorporation and Registration:
LLP Formation: The first step for any LLP is its proper formation. This involves filing the necessary documents, such as the LLP agreement and incorporation form, with the Registrar of Companies (ROC).
The following is the process of incorporation.
1. Check for the company name in RUN form (Reservation Unique Name).
2. Apply for DIN and DSC if not there
3. Fill the FiLLiP Form and Form 9– Consent of the Designated Partner
4. Form 3– LLP Agreement within 30 days from incorporation of LLP.
Registered Office: LLPs must maintain a registered office and notify the ROC of any change in the office’s address within the stipulated time.
LLP Agreement:
Drafting and Filing: An LLP agreement, defining the rights and duties of partners, capital contributions, profit-sharing, and other essential aspects, must be drafted and filed with the ROC.
Amendments: Any changes to the LLP agreement should be duly recorded and filed with the ROC.
Compliance with Taxation Laws:
PAN and TAN: Obtain Permanent Account Number (PAN) and Tax Deduction and Collection Account Number (TAN) for the LLP for tax-related transactions.
Goods and Services Tax (GST): LLPs engaged in business activities subject to GST must register for GST and comply with periodic return filings.
Annual Compliance Requirements:
Annual Return: LLPs are required to file an annual return with the ROC in Form 11 providing details of the LLP’s partners, contribution received by all partners, Details about the body corporate as partners, as well as a brief overview of the partners. All LLPs must file this form within 60 days after the end of the fiscal year, together with the specified fee (i.e. till 30 May).
Income Tax Return: LLPs must file their income tax returns on Form ITR 5. Form ITR 5 can be filed online at the income tax website with the designated partner’s digital signature. In India, the deadline for LLP tax filing is July 31st, assuming no tax audit is necessary. If LLP has tax audit applicability then due date for filing such return will be 30th September.
Statutory Audits:
LLPs with a turnover of more than Rs. 40 lakhs or contributions exceeding Rest. 25 lakhs are required to have their accounts audited. LLPs whose turnover or contribution does not exceed the aforementioned limit can opt for voluntary audit. LLPs are required to appoint an auditor to conduct a statutory audit of their financial statements.
Filing Audit Reports and Financial Statements: Every LLP is obligated to file the auditor’s report along with the Statement of Accounts and Solvency within a period of 30 days from the end of 6 months of the financial year (i.e. till 30th October) in Form 8 with a prescribed fees. This must be digitally signed by 2 designated partners and must be certified by a Chartered Accountant/ Company Secretary/ Cost Accountant with ROC.
Penalty: If there is a delay in filing Form 8 and 11 of LLP, penalty of Rs.100 per day per form is payable from the due date of filing return till the date actual return is filed. In case of late filing income tax return, a penalty of Rs.5000 would be applicable for returns late filed between 1st August and 31st December of the assessment year. A penalty of Rs.10, 000 will be applicable on return filed after 31st December of the same assessment year.
Tax Audits:
Every LLP with a turnover of more than INR 1 crore for a business or INR 50 lakh for a profession is required to have its books of accounts tax audited under Section 44AB of the Income-tax Act. Such audits must be completed and filed by September 30th.
Compliance with Regulatory Authorities:
Sector-Specific Regulations: Depending on the nature of the LLP’s business, compliance with sector-specific regulations may be necessary (e.g., regulatory approvals for certain industries).
RBI Compliance: For LLPs engaged in activities falling under the purview of the Reserve Bank of India (RBI), adherence to RBI guidelines is mandatory.
Data Protection and Cyber security:
Data Handling: LLPs need to comply with data protection laws and ensure secure handling of sensitive information.
Cyber security Measures: Implementing cyber security measures is essential to protect the LLP’s digital assets and ensure the confidentiality of client and partner data.
Tax Rate for LLP:
LLP is taxed at 30% up to an income of 1 crore and a 12% surcharge if the total income exceeds 1 crore.
Conclusion:
Ensuring legal compliance is a cornerstone for the smooth functioning and credibility of LLPs. Regular monitoring, timely filings, and proactive adherence to legal requirements not only prevent legal repercussions but also contribute to building trust among stakeholders. Seeking professional advice and staying updated on regulatory changes are crucial aspects of maintaining legal compliance for LLPs in an ever-evolving business environment.
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The above article is written by Ms. Shruthi Nyavanandi ([email protected]) and reviewed by Mr. Suyash Tripathi ([email protected]).
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