06/04/2015
Limited Liability
First and foremost benefit of doing business via company is the limited liability conferred upon the company's directors and shareholders. As a sole trader or partnership business, personal assets of the proprietor or partners can be at risk in the event of a failure of the business, but this is not the case for a Company. The unfortunate events like business failures are not always under an entrepreneur’s control; hence it is pivotal to secure the personal assets of the businessman in the event of crises.
Unlike proprietorship and partnership, if a Company becomes insolvent and is wound up, only the assets of the company are used to clear its debts. The Directors or Shareholders of the company have no personal liabilities and are not made bankrupt and are free to carry on business.
Concept and Advantages of LLP
Limited Liability Partnership entities, the world wide recognized form of business organization has now been introduced in India by way of Limited Liability Partnership Act, 2008. A Limited Liability Partnership, popularly known as LLP combines the advantages of both the Company and Partnership into a single form of organization.
LLPs also have many advantages over proprietorships, partnerships and limited companies, as elaborated below.
1) Limited Liability:
First and foremost benefit of trading/doing business via LLP is the limited liability conferred upon the partners. As a sole trader or partnership business, personal assets of the proprietor or partners can be at risk in the event of a failure of the business, but this is not the case for an LLP. Unfortunate events like business failures are not always under an entrepreneur's control; hence it is pivotal to secure the personal assets of the businessman in the event of crises
Unlike proprietorship and partnership, if an LLP becomes insolvent and is wound up, only the assets of the LLP are used to clear its debts. The partners of LLP have no personal liabilities and are not made bankrupt and are free to operate as credible businessmen.
2) No Audit Requirements:
Audit is not required unless capital exceeding Rs. 25 lakh or turnover exceeding Rs. 60 lakh.
3) Legal Entity/Status or Recognition:
An LLP is a legal entity, a juristic person established under the Act. It has its existence separate from its partners. Corporate entity status enables LLP to be taken more seriously than a proprietorship/partnership status does.
Operating as a corporate entity/LLP often gives suppliers and customers a sense of confidence in a business. Larger organizations in particular will prefer in dealing with corporate entities than proprietorship/partnership organizations.
Easy to attract quality workforce and achieve strategic motivation of employees by using flexible and wide range of management designations.
4) Taxation:
LLPs are taxed like general partnership firms. LLPs pay an effective tax of 30.9%. They are exempted from 10% surcharge. LLPs tax payment is lower than that of companies, which pay a 33.99% tax on profits.
The tax will be imposed only on 10% or 40% of the LLP’s income, since the firm will be allowed to pay the balance 90% or 60% to the partners as remuneration. This means, the partners will have to pay tax on the amount paid to them. So, there will be no double taxation of income.
Unlike Private or Public Companies, no requirement for payment of Dividend distribution/Corporation Tax on distribution of income/profits among partners and there is no requirement as to Minimum Alternate Tax.
5) Other Important Advantages:
• Low cost of Formation and compliances.
• Less statutory compliances as compared to Private limited Companies
• Less requirements as to maintenance of statutory records
• Renowned and accepted form of business worldwide
• No requirement of any minimum capital contribution
• No restrictions as to maximum number of partners
• Body corporate can be a partner of an LLP
• Less Government Intervention
• Easy to dissolve or wind-up
Minimum Requirements/Steps
• Minimum 2 Partners
• Minimum 2 Designated Partners
• Atleast 1 of the designated partners shall be an Indian Resident
• If a body corporate is a partner, it has to nominate a natural person as its nominee
• The Partners and Designated Partners can be same person
• There is no concept of share capital, but there has to be some sort of contribution from each partner
• DPIN (Designated Partner Identification Number) for all the Partners
• DSC (Digital Signature Certificate) for all of the Designated Partners
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