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Limited Liability Partnership

LLP is a well-known business structure emerged as an alternative corporate business form to provide the benefits of limited liability of a company and the flexibility of a partnership. Limited Liability Partnership are the body corporate incorporated under the respective act, which have minimum of two designated partners (Individuals) and the others can be managing partners out of which one must be resident of India. Every Designated partner shall apply and obtain DIN from the central government. Identifying marks of the LLP are personal protection of assets, ease in formation, separate legal structure, perpetual existence, rights and duties of the partners are mutually decided and further regulate through an LLP Agreement. The ideal advantage of LLP is that one partner is not held liable for the other partner own wrongful actions. An Individual seeking interest to start their operations as a start-up structure in India can incorporate a Limited Liability Partnership with substantially relaxed and lesser compliance regime. Unlike other corporate entities, various taxes like Minimum Alternative Tax, Dividend Distribution Tax and Surcharge does not apply to LLP.

Features

  • Legal Status

    Under Company Law, both LLP and Partners have separate legal identity that is distinct from each other. Unlike partners, LLP is not a natural person but though it can purchase or sell properties in its own name, can sue or be sued by/from parties without any restrictions. The ideal advantage of LLP is that one partner is not held liable for the other partner own wrongful actions.

  • Renowned Form of Business

    LLP is recently introduced concept in India and has become popular and most demanded form of business over the world wide especially in service sector. Any individual seeking interest to start their operations as a start-up structure in India can incorporate a Limited Liability Partnership with substantially relaxed and lesser compliance regime.

  • Minimum No of Partners

    Limited Liability Partnership are the body corporate incorporated under the respective act, which have minimum of two designated partners (Individuals) and the others can be managing partners out of which one must be resident of India. Foreign nationals can also be appointed as a partner with the prior approval from Foreign Contribution Promotional Board.

  • Perpetual existence

    A LLP existence is uninterrupted and shall continue for generation to generation even the death or insolvency of partners does not affect the continuity, immunities, estates and possessions of business. A member may come or go but the LLP continues to exist for long, until it is legally dissolved.

  • Protection of Personal Assets

    The liability of partners is limited to the proportion of unpaid portion on capital and which can only be demanded from the partners in case where LLP’s assets are not sufficient to meet the outstanding liabilities at the time of winding up. So, the personal assets of the partners are fully protected with the above exception.

  • Corporate entity can be partner

    Unlike partnership firm which permits only natural persons to be partners of the firm , a Limited liability partnership can have a corporate entity as its designated partner.

Pros & Cons

Pros

  • Unlike other corporate entities, LLP is a ‘firm’ and various taxes like Minimum Alternative Tax, Dividend Distribution Tax and Surcharge are not applicable to an LLP.
  • Cost involved in formation and Statutory filing with ROC by an LLP is lesser in comparison of other corporate entities. Now, even small businesses can think of incorporating their firm as running costs are very low.
  • One can easily become partner or leave the LLP if he/she desire otherwise they can easily transfer the ownership as per the terms and conditions contained in LLP agreement.

Cons

  • Audit for a Limited Liability Partnership is compulsory only if the turnover of any person carrying on business exceed or exceeds Rs. 40 lacs and for the persons carrying on profession exceed Rs. 25 Lacs.
  • Burden of Compliances like TDS Return, Service Tax Return, Income Tax Return, VAT Return, PF/ESI returns, ROC registration, Professional Tax and other statutory registrations etc. for a private limited company are comparatively high as compared to small business entities.
  • Each partner is an agent for the LLP. Hence, the decisions made by him bind all the partners. At times, an incompetent partner may lend the firm into difficulties by taking wrong decisions. Risk involved in decisions taken by one partner is to be borne by other partners also.
  • In case NRI/Foreign National wants to form an LLP in India then at least one partner of the firm should be a resident of India. Thus two foreign partners cannot form a LLP in India.
  • LLP is restricted to fund its business from various sources like public borrowings, External Commercial Borrowings, Foreign Institutional Investors, any bank or financial institution outside India, commercial loans from its foreign partners and any other entity existing outside India.

Applicable Taxes & Compliances

Limited Liability are subject to tax rate of 30% on tax profits. Tax profits are computed based on certain adjustments over book profit as per Indian Income tax law. The aforesaid tax rate is to be increased by 2% Education Cess and 1% Secondary and Higher Education Cess on tax amount. Various taxes levied on a company, like minimum alternative tax, dividend distribution tax and surcharges are not applicable to an LLP.
Service tax is a tax levied by Government of India on services provided or to be provided excluding services covered under negative list or mega exemptions as defined in service tax law. At present, the consolidated rate of service tax is 15% on the value of services. However service tax liability may arise on reverse charge basis, where service tax is paid by service recipient for prescribed services at prescribed rates.
Value Added Tax is a state level legislation attracts on intra state sale of goods in India and on Inter-state sale of goods Central sales shall apply. It is a type of consumption tax which is imposed on the value of goods and services on each stage of its production and at final sale. Normally, the rate of Vat varies from state to state. The standard rate of VAT is 20% on the selling price.
In India, excise duty is leviable on manufacturing of goods and it is ultimately borne by the consumer as it a consumption based tax. It is governed by The Central Board of Excise and Customs (CBEC) under the Ministry of Finance, Government of Revenue. The Liability to pay excise duty to the government lies with the producer of goods. At present, the rate of excise duty is 12.5% as per the excise law.
Import Export (IE) Code is mandatorily required to be obtained by any person/business entity importing or exporting goods and services to/from India unless specifically exempted. IE Code is a 10 digit unique code issued by Director General of Foreign Trade, Ministry of Commerce and Industries, Government of India to facilitate and identify all import and export to/from India. Private Limited Company engaged in export/import activities is required to obtain IE Code.
It is a tax imposed on the transaction value of goods imported in India and exported outside India. It is governed by The Central Board of Excise and Customs (CBEC) under the Ministry of Finance, Government of Revenue. Custom Duties are usually levied with ad valorem rates on the base value of the transactions in the event of Import/Export of goods.
LLP are also required to obtain Permanent Account Number (PAN), Tax Deduction and Collection Account Number (TAN), Service tax Code, ROC registration, Professional Tax and other statutory registrations as may be applicable. Periodic compliances include TDS Return, Service Tax Return, Income Tax Return, PF/ESI returns etc. as may be applicable.
Labour laws in India are those bodies of laws which define the rights and obligations of workers, union members and employees working in an organization. Labour law covers Industrial relations, health and safety measures at workplace, define Employment standards and interlinks relationship between employees, employers and the government. Labour law is further divided into two broad categories i.e. collective labour law & individual labour law. Individual Labour law covers the rights of employees at workplace or at any contract of work whereas the collective labour laws governs the tripartite relationship between employee, employer and union

Some of the laws included in it are:

Employees Provident Funds and Miscellaneous Provisions Act, 1952

The Act is applicable to every establishment in which twenty or more persons are employed and a factory engaged in any industry specified in Schedule I of Act. Under this act both the employer and employee has to contribute 12% of the basic + Dearness Allowance of the employee’s salary to the EPF and EPS on monthly basis. The objective of this act is to provide financial security and stability in cases where employee no longer fir to work or at the time of retirement.

The Employees State Insurance Act –

Under this act the employer and employee has to contribute 4.75% and 1.75% each of the gross salary to ESIC. Its objective is to provide benefits to employees in case of sickness, injury or related matters. This act is applicable to the employees whose wages are up to 15000 pm.

The Payment of Gratuity Act –

Gratuity is a reward offered by the employer to his employee in the event of termination of his employment provided continuous service for not less than 5 years except in case of death or disablement of employee. Payment of gratuity is mandatory for those employers having more than 10 employees in an organization/factory/plantation/port/shops/mines etc. as per the provisions contained in Gratuity Act, 1972. Gratuity shall be payable @ 15 days wages for every year of completed service.