MYTHS ABOUT  LIMITED LIABILITY PARTNERSHIP (LLP)

Introduction

 

A Limited Liability Partnership (LLP) is a form of business entity which allows individual partners to be shielded from joint liability created by another partner’s business decision or misconduct. In an increasingly litigious market environment, the prospect of being a member of a partnership firm with unlimited personal liability is, to mention the smallest amount, risky and unattractive. Indeed, this is often the chief reason why partnership firms of execs, like accountants, haven't grown in size to successfully meet the challenge posed today by international competition. This makes an LLP a best-suited vehicle for partnerships among professionals like lawyers and accountants. An LLP enters into contracts in its own name within the same way as an Ltd., but its members have the advantage of indebtedness almost like the shareholders of a corporation. Thus, within the event of a business failure or a tortuous complex of disputes and claims, the liability would be limited to the partner responsible. There would be no recourse to connect the private assets of the opposite members, except the member who was personally liable for negligent.

 

THE TAX LIABILITY IN CASE OF LLP IS HIGHER THAN THAT OF PARTNERSHIP

 

When one talks of the tax implications on an LLP, it's observed that the Income-tax Act provides for an equivalent taxation regime for an LLP as applies to a partnership firm there's taxation within the hands of the LLP and exemption from tax within the hands of its partners. LLP being treated as a firm for taxation purposes has the subsequent

 

tax advantages over a corporation under the Income-tax Act:

(i) it's not subject to Minimum Alternate Tax; although certain LLPs (availing profit /invest linked deduction) are covered under AMT which is like MAT

(ii) it's not subject to Dividend Distribution Tax (DDT) regarding dividend distributions by the LLP. On the opposite hand, effective DDT rate of 20.36% applies to the distribution of dividends by a corporation.

 

LLPs have tons of advantages of a corporation – it's its own separate corporate identity, its partners’ liability is restricted to its contribution, it's a perpetual existence, etc. Further, for tax, it's treated as a partnership firm. Hence, distribution from LLPs to its partners isn’t taxed.

 

Considering the tax rates mentioned in Table 1, an LLP will generally be a far better vehicle just in case of pay-out exceeding 25%. within the case of a lower pay-out, the corporate is going to be better. just in case of a replacement manufacturing company eligible for the reduced rate of 15%, a corporation is going to be more lucrative in most of the cases, with few exceptions where the pay-out ratio exceeds 60-65%. Although LLPs are subject to an alternate Minimum Tax of 18.5%, LLPs should be beneficial considering tax-free distribution. Even a minor change within the LLP constitution will end in the lapse of the attributable LLP losses. within the case of companies, an only substantial change in shareholding will cause the losses getting lapsed. Considering the tax aspects aside from ETR, an LLP seems beneficial compared to a corporation.

 

NO-COMPLIANCE' FOR LLP

 

The returns should be filed periodically for maintaining compliance and escape heavy penalty under the law for non-compliance. An indebtedness Partnership has only a couple of compliances to be followed per annum which is amazingly low as compared to the compliance requirements placed on the private limited companies. However, the fines seem to be quite large. Whilst non-compliance might only charge a personal Ltd. INR 1 lakh in terms of penalties, it'd charge an LLP up to INR 5 lakh.

 

During the extra 120 days, prosecution under section 454(8) for non-compliance of the order of the adjudicating authority in thus far because it relates to delay associated within the filing of any document, a press release reciprocally, etc.

 

HIGH LEVEL OF COMPLIANCE

 

LLPs offer tax advantages, can accommodate a vast number of partners and are credible of being registered with the Ministry of Corporate Affairs (MCA). At an equivalent time, they need fewer compliances than private limited companies and also are significantly cheaper to start and maintain. regardless of whether the corporate has done business or not, an LLP has got to file returns per annum. The returns need to be filed within the sort of Form 11 which is to be submitted to the registrar within 60 days after the top of a fiscal year. Tax Audit of the accounts is mandatory for an LLP with an annual turnover of Rs 100 lakh or more. (up to FY 2019-20). However, from 2020-21, it might be applicable for turnover above 500 Lakhs. tax returns need to be filed under ITR 5. and therefore, the tax rate for an LLP is 30%.

 

LIMITED RETURNS FOR PARTNERS

 

Limited Liability Partnership (LLP), the returns should be filed periodically for maintaining compliance and escape heavy penalty under the law for non-compliance. A Limited Liability Partnership has only a couple of compliances to be followed per annum which is amazingly low as compared to the compliance requirements placed on the private limited companies. indebtedness Partnerships aren't required to audit their books of account except where their annual turnover is quite INR 40 lakhs or if the contribution is quite INR 25 lakh.

 

Limited Liability Partnerships are required to file their Statement of Account & Solvency within a period of thirty days from the top of six months of the fiscal year and Annual Return within sixty days from the top of the fiscal year.

 

LLP IS IDEAL FOR INVESTMENTS

 

LLP has indebtedness over the Owner, also because the partner, ’s thus making it less risky for the owners and partners to take a position and it also has a private identity from its partners thus making it an “Ideal Partnership”. An LLP must have a minimum of two partners. FDI policy has been amended for LLP and foreign nationals can invest in an LLP without the permission of the Govt. 100% FDI is now permitted under the automated route in LLPs operating in sectors/activities where 100% FDI is allowed, through the automated route and there are not any FDI-linked performance conditions. An Indian Company, having FDI, are going to be permitted to form downstream investment in LLPs as long as both the corporate, also because the LLP is working in sectors where 100% FDI is allowed, through the automated route and there are not any FDI-linked performance-related conditions. Otherwise for the traditional investors wouldn't choose an LLP.

 

PROFIT SHARING AND CAPITAL RATIO In LLP (Limited Liability Partnership)

 

LLPs function as pass-through entities, "meaning the income, deductions and credits earned by the LLP will undergo to the partners, who are responsible for the requisite tax liability,". "This helps avoid a double layer of taxation, at the entity level and again at the individual level, which corporations got to deal with." Partners of an LLP file their share of the profits or losses on individual tax returns.

 

Another benefit to an LLP is that the flexibility and control it provides over how the LLP is managed. The operation of the LLP and distribution of profits is decided by agreement between the partners. this might leave greater leeway within the management of the business.

 

Partners can decide how the business should be run and by whom. LLP partners can comply with delegate daily business operations to a managing partner or a committee of partners, or the partners can divide duties based upon expertise or experience. Another main advantage of incorporation is that the taxation of an LLP. LLP are taxed at a lower rate as compared to Company. Moreover, LLP is additionally not subject to Dividend Distribution Tax as compared to company, so there'll not be any tax while you distribute profit to your partners.

 

An LLP offers flexibility for-profits sharing, i.e., differently amongst different partners.

 

- If the partners so agree, the share Ratio and therefore the Loss Sharing Ratio could also be different i.e., the profits could also be shared during a certain ratio and losses in another ratio.

- The partners may agree that one or more partners would share profits only and will not need to share losses in the least.

The profit-sharing ratio is what a partner takes home. And capital is what a partner contributes to the business. Further, capital decides the ownership. Both factors are independent of every other.

 

NO DISTINGUISH BETWEEN PARTNERS

 

In LLP all the partners share shares of the same share.

 

-each partner has its own set of rules and regulations which are unique to the partnership.

-there are no restrictions on how much money is shared among them and they can choose their own terms.

-the partners have a right to decide what kind of shares they want to share with each other.

 

ALL DATA IS PUBLICLY ACCESSIBLE

 

This confusion is made as that's the case during a Company. However, in LLP the info of partners is reserved. Where name, DIN and other details of Designated Partners are available on the MCA portal, it's reserved for general partners.

 

Further, the LLP agreement is additionally a personal document. the priority is raised because it also outlines the interior agreement between partners.

 

The documents like annual returns, budget and other forms are made public. The banks, FIs and other parties to a contract build the business credibility supported these documents. Hence, if you discover public documents as a demerit for you, you ought to rather consider it as a plus point.

 

REGISTRATION IS VERY EXPENSIVE

 

If you think that LLP is expensive to line up as compared to a general partnership, it's not true. The registration cost heavily depends on the professional’s services and changes because the govt fee is fairly constant. While it's up to you to settle on knowledgeable, we are taking into consideration the govt fee for registration. the shape filing fee is almost 750-1000 INR at the present for online LLP registration. the method also requires paying stamp tax for the execution of the agreement. Payable stamp tax is set supported the capital contribution and therefore the concerned State. the essential amount payable is INR 500, however, varies supported these factors.

 

Conclusion

 

Limited liability partnerships protect partners by ensuring that they're not held personally responsible for business debts. As this case demonstrates, if the LLP dissolves before business debts being incurred, parties become personally liable. The case also demonstrates why insurance with provisions for property may be a wise choice. Regarding the ruling, the court’s decision appears fair and just. it's my opinion that had they ruled in favour of C&E it might have set a harmful precedent that might have allowed other companies/partnerships to bypass potential lawsuits by simply dissolving LLP’s before a judgment was rendered.