A foreign investor wishing to set up a business in India must consider many factors before deciding which type of business entity to choose. A Limited Liability Company Partnership (LLP) is growing in popularity with the many benefits it provides entrepreneurs. LLP is a business entity that combines limited liability company and partnership flexibility.
LLP registration in India requires that the LLP must operate in an industry that permits 100% FDI
We’ve listed features on an LLP that will help you make an informed decision.
Limited Partner Liability
One of the main reasons to register for an LLP is limited liability. Limited liability means limited exposure to financial risks by the company’s investors. Limited liability ensures that the liability of the partners in the LLP is limited to the amount of capital invested in the LLP.
For example, if Sam invests Rs 50,000 to start an LLP in India. The maximum liability he can have is Rs 50,000. In other words, the potential loss should not exceed Rs 50,000. He will not be liable for any liability beyond this initial Rs 50,000.
Another important feature of LLP is that the actions of one partner do not affect the other. For example, if one of the partners borrows some money on behalf of the LLP without the other partner’s knowledge, the other partner cannot be held responsible.
Transfer and Exit
LLP has the meaning of perpetual succession, LLP can continue its existence regardless of changes in partners. Partners may come and go but the LLP lives on. The LLP partner can resign and assign his profit sharing to someone else and leave the LLP. Exiting the formalities can be completed by carrying out a simple additional agreement.
Legal Compliance
A limited company needs to hold board meetings 4 times a year, at least once every quarter. It is also necessary to convene an annual general meeting and produce minutes for such meetings. LLP is not required to comply with such compliance unless and as otherwise provided in the LLP Agreement.
An LLP does not need to audit its accounts unless the turnover exceeds Rs. 40 Lacs or capital contribution of more than Rs 25 Lacs every financial year.
income tax
LLP has no Dividend Distribution Tax (DDT) whereas a private limited company in India is obligated to pay DDT @ 16.609% (including surcharges and tuition fees) on dividends paid to shareholders.
The income tax rate for LLPs is 30%. Profits shared by the partners after paying taxes are exempt from tax.
Let’s look at an example
Jack and Jill started an LLP with a 50% profit split between them. In one financial year, the LLP made a profit of Rs 10,000,000. Corporate tax is Rs 300,000 (30% of profit). The balance of Rs 7,00,000 is shared between Jack (Rs 3,50,000) and Jill (Rs 3,50,000). Jack and Jill do not have to pay taxes on their income.
Corporate Body
LLP companies and private limited companies are legal entities and legal entities that are separate from their partners and shareholders. A Limited Partnership, similar to a private limited company, is able to enter into contracts and hold property in its own name.
LLP Agreement
LLPs are regulated and operate by agreement. The LLP agreement will have the mutual rights, duties and obligations of the partners in relation to each other and other legally binding provisions.
Remuneration and interest on capital
Partners are allowed to take remuneration as work partners, provided that the LLP agreement permits.
LLP Partners are also entitled to charge interest on invested capital of up to 12% per annum. Partners may also collect interest on loans made to LLPs, provided the interest rates are within the limits set out in the income tax laws.
