10 Reasons Why Registering an LLP For Your New Business Makes Sense
Find out why LLP is a better option, and what are its advantages.
Running a business is a mammoth task in itself.
But, a right organization structure opens the path for its potential growth. Generally, Private Company is the most preferred among corporate structures.
However, its maintenance is quite expensive for small and medium scale businesses. But one also finds the partnership firm as an informal one. If you are stuck between these two, the save is the Limited Liability Partnership.
Commonly known as LLP, this structure was introduced back in 2008. LLP is a corporate structure with higher flexibility and lower maintenance cost compared to a company. For these reasons, there has been a noticeable increase in the number of businesses opting for LLP registration in India.
Here are the top 10 reasons why you should consider choosing LLP for your business registration:
- 1 Limited Liability – An Edge over Other Structures
- 2 Independent Actions of Partners
- 3 Run Business with Less Investment and Little Maintenance Cost
- 4 Compliance is a headache? It’s, not with LLP
- 5 Centrally registered and Credible Organisation
- 6 Unique Name and Distinct Identity
- 7 Enjoy Flexibility in Operations
- 8 The Benefit of Multiple Returns to Partners
- 9 Get Taxed as Partnership
- 10 Concerned about Privacy?
- 11 Conclusion
Limited Liability – An Edge over Other Structures
Every entrepreneur works best to mitigate the risk associated with the business. Here, his personal risk is also not barred. Unlike a traditional partnership, the partners’ liability is limited in an LLP. In case of losses or liquidation, partners are liable only for the amount agreed to pay. The partners are able to safeguard their personal assets in such cases. Many new age businesses prefer LLP registration over partnership for this reason.
Independent Actions of Partners
This point is an extension to the first one. Here, I would refer to a scenario in case of a traditional partnership, where the partners are each other’s agents. The action of one partner also holds others responsible. The case is different here. In LLP, one partner is not held responsible for the actions of negligence or misconduct of any other partner. This feature benefits the firm of professionals like Company Secretaries, Lawyers, and Chartered Accountants. And because of this, LLPs are highly popular amongst such professionals.
Run Business with Less Investment and Little Maintenance Cost
The investment needs are minimal in case of LLP. The startup cost could be nearly 5-10 thousand including LLP registration cost. Further, you also need not invest in a huge amount for registering an LLP. The partners could bring capital as low as INR 100. Ideally, the investment amount is decided based on the business activities and scale. The partners are best to agree on the investment amount.
Further, when it comes to corporate bodies, it is perceived to have a higher maintenance cost. This is quite right for the company structure but not for an LLP. Although this cost could be higher than unorganized structures like proprietorship or partnership, its maintenance cost is very minimal when compared to a company.
Compliance is a headache? It’s, not with LLP
Higher compliance and compulsory audit often hold back the entrepreneurs to register a company. This shortfall is resolved with Limited Liability Partnership.
Formalities like meetings and notices are minimal except in case of changes in the formation. Additionally, the fixed cost of audit it eased here. Unlike a company, the audit is applicable when turnover exceeds INR 40 Lakh or the contribution exceeds INR 25 Lakh. However, annual compliance is still applicable in addition to even-based compliance and intimations to RoC (Registrar).
Centrally registered and Credible Organisation
Unlike a traditional partnership, LLP is centrally registered with unique identity across the country. This could benefit you in many ways including the manner credit and operations. Although your business is registered in a specific state, one could easily identify your business for such reason. Due to its registration with MCA, the LLP’s data are publically accessible to some extent. The financial data are accessible here. This is helpful to rely on the business entity for financial agencies or other external agencies like vendors.
Further, the suffix ‘LLP’ itself adds credibility to your business. It helps the consumers and even contracting parties to recognize a credible corporate structure. Bank and financial institutions also tend to choose LLP over other unorganized structure for lending.
Unique Name and Distinct Identity
An LLP name is approved after its name is verified on parameters like uniqueness. The name is also compared to other existing company and LLP name in addition to registered trademarks.
Although reserving name could be quite difficult because of such parameters, it also ensures that your LLP is distinctly recognized among others. As it is compared with the TM database as well, the chances for easy clearance for trademark registration increases.
Enjoy Flexibility in Operations
While a structure like a company could be quite rigid for small businesses in terms of compliance, registering an LLP could be a save for you. Enjoying the corporate identity, you also find sort of flexibility in operations. This is granted by the LLP Agreement executed by partners. The partners could customize the terms of partnership based on their requirements. The profit sharing, capital, rights and liabilities, every clause could not only be customized but changed as and when required. However, such clauses should not override the LLP Act.
The Benefit of Multiple Returns to Partners
Returns and remuneration are the prime concern for any businessman. With LLP, you are entitled to multiple benefits, however with few conditions. A partner could withdraw returns in three heads.
- Remuneration: It is salary, bonus or commission paid to a partner for rewarding his efforts in the business of LLP. It is similar to a salary to an employee. This is rightly payable to active partners of LLP.
- Interest on Capital: Investing funds in business costs the opportunity of earning stable interests from banks or other investments. This opportunity cost is here paid in terms of interest at a fixed rate.
- Share of Profit: Now comes the important part for all partners. Every partner, whether active or not, he is interested in the share of profit from the business. When the business profit is calculated, it is divided amongst partners in a pre-decided ratio called profit sharing ratio.
The taxability of heads is subject to Income Tax law and LLP Agreement. It is necessary to put a clause in LLP agreement for remuneration of partners
Get Taxed as Partnership
Taxation structures are often ignored while choosing a business structure. Talking about LLP, even though it is a corporate structure, it is recognized as a traditional partnership firm under Income Tax. So, if you are choosing a partnership only with the concern of higher tax, think again.
Moreover, there is no double taxation on return to partners. In the case of a company, the profit is taxed in hands of company and DDT is also charged while its distribution. Here, the share of profit is exempt in hands of partners.
Concerned about Privacy?
It is quite common to know that partners do not want their data to be public. Privacy in case of LLP is comparatively high to a company. Every document, form, and application filed with MCA by a company is publically accessible. However, it is not in case of LLP. Your agreement is still private and Hence, the terms and arrangements between the partners.
Documents such as the LLP Agreement and forms filed for details of partners are not publically available. Further, if you are only a normal partner (and not designated partner), your data is not published on master data of LLP. Thus, you could maintain the privacy to an extent.
Limited Liability Partnership is a hybrid organization structure that grants you benefits of both corporate structure and traditional partnership. It is basically a structure in-between. For all above-mentioned reasons, you would likely to register your business as an LLP. LLP is considered an ideal structure for business with lower investment needs, mostly service-based businesses. So, if you are planning to start a business, experts at LegalWiz.in are happy to help! Process for LLP registration is online and also hassle-free when assisted by professionals.
About The Author:
Shrijay is an entrepreneur with excellent business acumen. With a decade-long experience of working with some of the most disruptive eCommerce startups across the globe, Shrijay believes in team building, customer service, and execution to be the most critical processes for building a sustainable business. He currently leads a LegalTech company: LegalWiz.in which helps Startups and SMEs in India to easily comply with the law.
LegalWiz.in offers services for business registration, trademark registration, legal document drafting, GST return filing, and more. LegalWiz.in makes it simple, affordable and transparent for small businesses to avail business professional services.10 reasons why you should consider registering an LLP