limited liability partnership

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Before taking any decision in respect of incorporating a LLP for carrying any business, it is necessary to analyze the benefits and drawbacks of the LLP, which are outlined below:

Benefits -

Easy to Form: It is very easy to form LLP, as the process is very simple as compared to Companies and does not involves much formalities. Moreover, in terms of cost the minimum fees of incorporation is as low as Rs 800 and maximum is Rs 5600.

Liability: A LLP exists as a separate legal entity from its partners. Both LLP and its partners are separate entities and both functions separately. Liability for repayment of debts and lawsuits incurred by the LLP lies on it and not on the partner. Any business with potential for lawsuits should consider incorporation, it will offer an added layer of protection.

Perpetual Succession: An incorporated LLP has perpetual succession. Notwithstanding any changes in the partners of the LLP, the LLP will be a same entity with the same privileges, immunities, estates and possessions. The LLP shall continue to exist till its wound up in accordance with the provisions of the relevant law.

Flexible to Manage: LLP Act 2008 gives LLP the atmost freedom to manage its own affairs. Partner can decide the way they want to run and manage and put the same in form of terms and conditions in the LLP Agreement . The LLP Act also in most cases provides that the said provision will applicable, only in case nothing is provided in the LLP Agreement.

Easy Transferable Ownership: It is easier to become or leave the partnership of the LLP or otherwise it is easier to transfer the ownership in accordance with the terms of the LLP Agreement. Ceasing of old partners and coming of new partners , will automatically leads to change in ownership of LLP.

Separate Property: A LLP as legal entity is capable of owning its funds and other properties. The LLP is the real person in which all the property is vested and by which it is controlled, managed and disposed off. The property of LLP is not the property of its partners.

Taxation: LLP is not required to pay surcharge on income tax. Moreover , it is also not required to pay tax on profits distributed to partners whereas Company is required to pay tax on dividend distributed to its shareholders.

Raising Money: Financing a small business like sole proprietorship or partnership can be difficult at times. A LLP being a regulated entity like company can attract finance from PE Investors, financial institutions etc.

Capacity to sue: As a juristic legal person, a LLP can sue in its name and be sued by others. The partners are not liable to be sued for dues against the LLP.

No Mandatory Audit Requirement: In LLP, only in case of business, where the annual turnover/contribution exceeds Rs 40 Lacs/Rs 25 Lacs are required to get their account audited annually by a chartered accountant. This provides great relief to small businessmen.

Partners are not agent of other Partners: In LLP, Partners unlike partnership are not agents of the partners and therefore they are not liable for the individual act of other partners.


Drawback +

Regulated form of Business: LLP is regulated form of business, as the LLP Act 2008 provides various provisions relating to management of affairs of the LLP which includes taking the permission of regulatory authority for undertaking certain actions.

Audit and Financial Disclosure: It is necessary for LLP to get its accounts audited annually and to prepare its balance sheet and profit and loss account in accordance with the prescribed guidelines. Lot of information as to the financial condition of the business is required to be disclosed and moreover, all such documents are available for public inspection, therefore it is not possible to maintain financial secrecy of the business.

Long Closing Proceedings: It is generally not easy to close the company as compared to other forms of business, the procedure to close is long and involves compliance of various formalities, at times it takes 1-2 years to completely wind-up the company. Moreover in certain cases, it is necessary to take the permission of the High Court to close the Company.

Transfer of Interest: It is not easy to transfer the interest in LLP as compared to company; various formalities are required to comply with in accordance with the terms and conditions of the LLP Agreement.

Amendment in LLP Agreement: LLP is governed by the terms and conditions as prescribed in the LLP Agreement and which if not properly drafted will result in disputed among the partners , delay in executing decision, requirement of amending the Agreement or executing a new one, in case the new partners are admitted.

Lack of Recognition: LLP is recently introduced in India and is therefore not recognized under various laws for the purpose of carrying various business and moreover due to being relatively new concept , there is still no clarity on various issues related to it , which might create problems in its smooth functioning.

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