Limited Liability Partnership (LLP) is a balanced structure, carrying benefits conventional partnership and still limiting personal liabilities of the partners. It is regulated as a contractual agreement between the partners under the Limited Liability Partnership Act, 2008. It has quickly become a popular choice for services and professional firms like Chartered Accountants, recruiting firms, consulting businesses, etc.
LLPs are similar to Private Limited Companies with respect to compliance and operational requirements. Recognized as a separate legal entity than the partners, it can contract or involve in any legal proceedings in its own name. That enables the partners of an LLP to separate business liabilities or debts being recovered from their personal assets. Compliance requirement here is greater than regular partnership firms. However, Compared to a private limited company structure, it is easier to incorporate and maintain.
As a drawback, ownership transfer of a Limited Liability Partnership is not as easy as of a company. Neither an LLP can issue ESOP. For the reason, LLP is not the most ideal choice for startups who want to hyper-grow, seek seed investor or venture capital funding, or issue share capital to its employees.
The process of LLP Registration in India is revamped by the Ministry of Corporate Affairs. A quicker process of LLP incorporation is made available on 2nd October 2018 as part of the ease of doing business initiative by the government. Experts at SBM Cconsultants have helped hundreds of entrepreneurs with LLP registration process.
Because an LLP can enter into a contractual relationship in its own capacity, it offers a great advantage to the partners for limiting their personal risk. Liability of financial contribution of any partner is restricted to the capital contribution as per the LLP agreement. Many new age businesses prefer LLP registration over partnership so that their personal assets remain safe in case of loss, or even insolvency. Further, one partner is not held responsible for the actions of negligence or misconduct of any other partner.
LLP Agreement, deed among partners of an LLP, clarifies operating structure including rights and responsibilities of the partners. Typically, LLP would select a “Designated Member” who would control day-to-day operations. It can have individuals or existing businesses as members. Further, this structure allows to clearly define roles of the partners and their respective responsibilities. It could also help in protecting partner’s interest in case of loss because of an unlawful act of any other partner.
Registration of LLP creates a separate legal identity than its partners. Governed by the LLP Act of 2008, it allows the business to contract with other entities, take legal action, own assets and borrow funds in the name of an LLP itself. It is a major advantage that is not available to a regular partnership firm.
A key benefit of registering an LLP over a private company is lesser compliance requirement. It doesn’t have a mandatory audit requirement until a certain level of turnover or contribution. Unlike companies, compliances related to board meetings, statutory meetings, etc. do not apply to LLPs. Professional services for compliance are typically available at cheaper rates than that for companies, making it cost effective to maintain an LLP.