A lot of Startups are emerging in India. So, it is important for them to know which form and structure of entity is the best for them. If you want to enjoy both the features of a partnership firm and a company, you should think of Limited Liability Partnership (LLP). LLP for Startups in India is one of the best way forward to startup.
This format would be quite useful for small and medium enterprises in general and for the enterprises in services sector in particular. Internationally, LLPs are the preferred vehicle of business particularly for service industry or for activities involving professionals. Professionals like Chartered Accountants, Company Secretaries, Lawyers, Doctors, Cost Accountants would generally prefer incorporating an LLP owing to its various benefits.
In this article, we will make you understand what exactly are the reasons and benefits of choosing LLP as a form of entity for your Startup.
Reasons to choose LLP
1. Easy Registration process
If you wish to venture into the business world, then you should definitely incorporate your startup as an LLP. The registration process for LLP incorporation is uncomplicated and not burdensome. The requirements for registering LLP is very basic and easy to understand.
The cost of registration of LLP is also very low as compared to the formation of a company. Similarly, the average time required is also low.
The basic requirement is to have a registered office in India. The minimum number of partners must be 2. Out of the 2, atleast 1 must be a resident of India.
2. No limit on the Maximum number of Partners
There is no maximum limit on the number of partners an LLP can have. Only the minimum number has been specified ie. 2.
Accepting more number of partners as its business owners will prove to be beneficial. It will help the startup in its business functions and processes. According to their experience, partners can easily allocate different activities among themselves. It would lead to more expertise and efficiency in the business. This will eventually lead to the growth and expansion of the Startup.
3. No minimum Capital requirement
Incorporating an LLP does not require you to have a substantial amount of capital in hand. In fact, there is no minimum capital requirement to form an LLP. You can just kick off with even a meagre amount of Rs. 10,000 in hand. In other words, you just need not apprehend about the capital aspect to start an LLP.
4. Distinct Legal Entity
An LLP is an independent and distinct legal entity separate from its partners. It can hold assets in its own name and enter into contracts. An LLP can sue and be sued by other parties. The partners cannot be sued for any of the dues or defaults committed by the LLP.
5. LLP Audit not mandatory
It is not mandatory for every LLP to audit its books of accounts and other records. Only those LLPs are required to get their accounts audited by a qualified Chartered Accountant whose-
a. Annual Turnover exceeds Rs. 40 lakhs, or
b. Contribution exceeds Rs. 25 lakhs in a financial year.
6. Lesser Statutory compliances
Most importantly, incorporating your startup as an LLP will help you save a great deal. It will help you save time in terms of complying with the regulatory and statutory compliances. You can rather fix your attention to the core activities of your startup. For instance, you need not be worried about statutory requirements such as holding board meetings, general meetings, filing resolutions, etc.
Also, every LLP is only required to file 2 forms annually with the Registrar-
a. Form 8 – Statement of Account & Solvency
b. Form 11 – Annual Return
7. Higher Credibility
Except for the LLP agreement, the registrar allows the availability of documents of an LLP to the general public. For instance, one can view the latest financial statements of an LLP and judge its credibility. This is however not possible in case of a partnership firm.
In addition, due to transparency in operations, the credibility of an LLP is higher. Thus it eases the fundraising from banks and financial institutions. Also, it helps you seek investments for your startup from various investors.
8. Ability of Perpetual Succession
Under the provisions of the LLP Act, 2008, an LLP has perpetual succession. The LLP can continue to exist until it is wound up or struck off. A general partnership firm does not have the policy of perpetual succession. An LLP can continue with its business regardless of partner change. Also, it can hold properties in its name. This is because an LLP is an independent and distinct legal entity separate from its individual partners.
In addition, winding up of an LLP can be either voluntarily or by way of an order by the tribunal.
9. No restriction on giving Loan to Partners
As per Companies Act, a company is strictly prohibited from providing any loan directly or indirectly to its directors. However, this is not the case with an LLP. There is no such provision under the LLP Act which restricts an LLP from granting any loan to its partners. But, it is mandatory that the LLP agreement shall allow grant of loan to the partners. Moreover, it is important to fulfill the terms and conditions of providing loan as specified in the agreement.
10. Easy to operate as compared to a Company
It is quite easy to operate an LLP as compared to a company. The LLP agreement is the base. The partners have to oblige with the duties and responsibilities as stated in the agreement. Complete freedom is given to them to conduct the business and manage its day to day affairs. But LLP agreement also has to be considered. Above all, the statutory requirements are also lower.
11. Limited Liability
The liability of partners is limited to the extent of their amount of contribution in LLP.
Most importantly, one partner is not affected or not held liable for the wrongdoings or negligence of another partner. The partner committing the default is held personally liable for his act. Neither the LLP nor the other partners have to bear the loss incurred by the negligence of a partner.
The partners are protected from the debts of the LLP. In other words, the partners will not be responsible personally for the debts of the business. Their personal assets will not be on stake.
Hope you liked this article and must have understood the reasons and benefits of incorporating an LLP. This will surely help you in your decision making.
In case of any further query, you can write us at [email protected] for further clarification.