Many business owners believe that registering their companies as Limited Liability Partnerships (LLPs) is a better option than incorporating their businesses as Private Limited Companies.
This preference can be attributed to a variety of different factors. It is regarded as simpler to establish an LLP, and its day-to-day operations are not as complicated as other business structures. If there is very little activity, this option also has a lighter compliance burden.
As a result, a significant number of entrepreneurs believe that it is beneficial to launch their company in this fashion. In this post, we will discuss the numerous benefits as well as the drawbacks of having an LLP in India.
Advantages of LLP:
No minimum payment is required:
In LLP, there is no requirement for a minimum amount of capital. It is possible to form an LLP with the smallest amount of capital possible.
In addition, a partner's contribution to the LLP can take the form of tangible, movable, or immovable property as well as intangible assets or other benefits to the business.
No minimum payment is required:
When two or more people create a partnership to engage in economic activity, the resulting entity is referred to as a Limited Liability Partnership (LLP). When compared to a sole proprietorship, the liability of each partner is restricted to his or her proportionate share of the earnings in a partnership.
Additionally, an LLP can have additional partners who do not contribute capital, unlike a sole proprietorship.
Affordable registration cost:
When compared to the expense of creating a private or public limited company, the cost of registering a limited liability partnership (LLP) is far more affordable for registration.
In recent times, however, there has been a narrowing of the price gap between registering a limited liability partnership (LLP) and a private limited company (PLC).
There's no need to do an audit:
It is necessary for any and all businesses, whether they are public or private, and regardless of the amount of share capital they have, to have their financial statements audited. On the other hand, limited liability partnerships are not subject to this compulsion.
This is thought to provide a substantial benefit for ensuring compliance. Only in the following circumstances is a Limited Liability Partnership (LLP) obligatory for the completion of the tax audit:
- The LLP has contributions that are greater than Rs. 25 Lakhs.
- The LLP has an annual turnover that is greater than Rs. 40 Lakhs.
Tax Aspect of an LLP:
LLPs are taxed like partnerships. Thus, LLP must pay income tax, while partners' shares are not. No dividend distribution tax is due.
LLP is exempt from the income tax "deemed dividend" provision. Section 40(b): Interest to partners, salary, bonus, commission, and remuneration deductions.
Dividend Distribution Tax (DDT) is not applicable:
If a firm's owners take money out of the business, the company owes more in taxes in the form of DDT at 15% (plus surcharge & education cess).
However, a Limited Liability Partnership (LLP) is exempt from this type of tax, and its partners can freely take out their share of the business's income.
Disadvantages of LLP:
Penalty for not following the rules:
An annual income tax return and MCA annual return must be filed by an LLP regardless of its activity level. If a limited liability partnership (LLP) fails to submit Form 8 or Form 11 (LLP Annual Filing), the business would be fined Rs.100 per day, per form.
If an LLP has not submitted its annual return for several years, the penalty might reach into the lakhs if it is assessed.
Being unable to invest equity:
In contrast to a corporation, a limited liability partnership (LLP) does not use the terms "equity" or "shareholding." As a result, non-traditional investors like angels, HNIs, venture capitalists, and private equity funds are unable to become shareholders in an LLP.
As a result, the majority of LLPs would be forced to rely on investment from promoters as well as debt funding.
Higher rate of income tax:
25% is the rate of income tax that applies to businesses that have annual revenues of up to Rs. 250 crores. (A further reduction will take effect in 2019 for new companies that are engaged in manufacturing.) On the other hand, LLPs are subject to taxation at a rate of thirty percent, regardless of their annual revenue.
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