Why a startup should choose a Limited Liability Partnership (LLP) ?
by Yash Srivastava
Posted on Tue, 01 December, 2020, 03:54 AM IST
[Image by unknown via Logical Tax]
A Limited Liability Partnership (LLP) is an amalgamation of a company and a partnership, which incorporates the favorable features of both. It integrates the organizational and operational flexibility of a Partnership (with the benefits and protections of limited liability) and the separate legal identity of a Company. LLP has its own advantage when compared to the traditional partnership and the Private Limited, as it picks the best of these two structures in one solid viable package. It tackles various challenges that an entrepreneur faces when using a traditional partnership structure. In recent years, there has been a noticeable increase in the number of entrepreneurs opting for LLPs despite it being a fairly new development in the field of business.
There are numerous reasons that are responsible for such a trend; some of which include low cost of formation, less restriction and compliance, and most importantly, the flexibility that an LLP offers when compared to other business structures. Moreover, it is easier to dissolve or wind up along with the flexibility of perpetual succession. Owing to flexibility in its arrangement and operation, it is expected that LLPs would also be a suitable vehicle for small enterprises, professional service rendering companies, and for investment by venture capitalists in the future ahead. Here are such 9 benefits in detail:
1. Separate legal entity
LLP has its separate existence from its partners. LLP can sue and be sued in its own existence. Due to its status, the entry and exit of the partners don’t affect the LLP. As it incorporates various stakeholders (i.e. Suppliers, Customers, etc.), it offers flexibility while dealing & signing legal contracts and in many other things.
2. Low Capital Requirement
LLP could be formed without any minimum capital contribution as opposed to the Private Limited Companies. The contributions could even be made in installments, which help the small entrepreneurs/start-ups avail these benefits and move ahead.
3. Liability is Limited
The liability of each partner is limited to the extent of his/her contribution/share as opposed to the sole proprietorship or the traditional partnership firm where the personal assets of the proprietor or partners could be at risk in the event of a failure of the business. Therefore, this mode helps the partners to be free from personal liabilities or becoming bankrupt (except in cases of fraud by any partner). It is a safer approach when compared to a traditional partnership firm.
4. Economical Management
Statutory filing fees, as well as the cost of formation of an LLP, is less, as compared to forming a Private limited company. The stamp duty for executing the LLP agreement, the cost of registration of an LLP is less than the incorporation cost of a Private Limited Company. Apart from the benefit of being taxed as a separate entity, an LLP’s effective tax rate vis-à-vis a company is less due to the absence of additional tax burdens such as Dividend Distribution tax, tax on receipt of dividend, etc.
5. Choice of agreement clauses
Rights, duties, and obligations of partners in LLP are governed by the LLP agreement; partners have the choice to define the clauses as per their needs, for e.g. – inheritance transfer rights clauses can be added as and when needed.
6. Lesser Compliances
The compliances required to be made under the LLP Act are lesser as compared to a traditional partnership or a Private Limited Company. E.g. partners are not subjected to hold mandatory board meetings as required once a year by the Companies Act. The partners can meet as per their convenience or need basis. Moreover, it is considered easier to set up and even a corporate body can be a partner of an LLP. It is comparatively hassle-free in the day to day operations, has significantly lower burdensome compliance requirements and costs.
7. Mergers & Amalgamations
The provisions of compromise, arrangement, or reconstruction of LLPs are available regulating the merger of two or more LLPs, just like a company or between LLP and a Private Company.
8. Right to manage the business
Unlike corporate shareholders (in the case of Private Limited), the partners have the right to manage the business directly hence have better control over all the activities.
9. No limit on the maximum number of partners
LLP may introduce any number of partners (no maximum limit) which enhances the possibility of getting the maximum number of investors for a business. This is akin to the benefits that an entity derives from a Private Limited Company model wherein 2 to 15 directors can be added to the business.
For a step by step process on registration and important aspects of an LLP agreement, read "How to set up a Limited Liability Partnership (LLP)?"
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