Why Start-ups should choose LLP over the Partnership?

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Why Start-ups should choose LLP over the Partnership?

Despite being a relatively new development in the field of business, there has been a noticeable increase in the number of entrepreneurs opting for Limited Liability Partnerships (LLPs) in recent years. There are numerous reasons for this trend, including the low cost of formation, fewer restrictions and compliance, and, most importantly, the flexibility that an LLP provides when compared to other business structures. 

This format would be very useful for small and medium-sized businesses in general, and for businesses in the services sector in particular. LLPs are the preferred business structure around the world, particularly in the service industry or for activities involving professionals. 

Table of Contents

An introduction to the LLP

A Limited Liability Partnership is a hybrid of a corporation and a partnership that combines the best aspects of both. It combines the organizational and operational flexibility of a Partnership (along with the benefits and protections of limited liability) with the distinct legal identity of a Company. Compliance requirements for an LLP are higher than for a partnership but much lower than for a limited liability company.

This type of business model has long been available in countries such as the United States, the United Kingdom, Singapore, Australia, and others, but it is a relatively new model in India. On March 31, 2009, the Limited Liability Partnership Act, 2008 was notified in India. Since its inception, this structure has grown in popularity among SMEs, professional service firms, and any small business seeking to reduce its tax and compliance liabilities.

Reasons to Use an LLP

  • Simple registration procedure: If an individual wants to get into business, they should definitely incorporate their startup as an LLP. The registration process for LLP incorporation is simple and straightforward. The requirements for registering an LLP are simple and straight forward. When compared to the formation of a company, the cost of registering an LLP is also very low. Similarly, the average amount of time required is low The most basic requirement is that the company have a registered office in India. A minimum of two partners is required. At least one of the two must be a resident of India.
  • There is no maximum number of partners. There is no maximum number of partners that an LLP can have. Only the bare minimum, i.e. 2, has been specified.
    Accepting a larger number of partners as business owners will be advantageous. It will be beneficial to the start-up’s business functions and processes. Partners can easily allocate different activities among themselves based on their experience. It would result in increased business expertise and efficiency. This will eventually lead to the Start-up’s growth and expansion.
  • There is no minimum capital requirement: Incorporating an LLP does not necessitate a significant amount of capital. In fact, there is no requirement for minimum capital investment to form an LLP. You can begin with as little as Rs. 10,000 in your pocket. In other words, you don’t need to be concerned about capital when forming an LLP.
  • Unique Legal Entity: A limited liability partnership (LLP) is a separate legal entity from its partners. It can own assets and enter into contracts in its own name. Other parties can sue and be sued by an LLP. The partners cannot be sued for any of the LLP’s dues or defaults.
  • LLP audits are not obligatory: Every LLP is not required to audit its books of accounts and other records. Only LLPs must have their accounts audited by a qualified Chartered Accountant whose-
    • Annual Turnover of more than Rs. 40 lakhs, or
    • Contribution in excess of Rs. 25 lakhs in a fiscal year
    • Lesser Statutory Obligations

Most importantly, incorporating a startup as an LLP saves a significant amount of money. It will save time when it comes to complying with regulatory and statutory requirements. You can instead focus your efforts on the core activities of your startup. You do not, for example, need to be concerned about statutory requirements such as holding board meetings, general meetings, filing resolutions, and so on.

Furthermore, each LLP is only required to file two forms with the Registrar-General each year-

  • Form 8 – Account Statement & Solvency
  • Annual Return (Form 11)
    • Increased Credibility: Except for the LLP agreement, the registrar allows the general public access to an LLP’s documents. For example, one can assess an LLP’s credibility by reviewing its most recent financial statements. This is not possible in the case of a partnership firm. Further more, due to transparency in operations, an LLP’s credibility is enhanced. As a result, it makes it easier for banks and financial institutions to raise funds. It also assists you in seeking investment for your startup from a variety of investors.
    • Perpetual Succession Capability: An LLP has perpetual succession under the provisions of the LLP Act, 2008. The LLP can exist until it is wound up or struck off the register. The policy of perpetual succession does not apply to a general partnership firm. An LLP can continue to operate even if its partners change. It can also have properties in its name.
      This is due to the fact that an LLP is a separate legal entity from its individual partners.
      Furthermore, an LLP can be wound up either voluntarily or through a tribunal order.
    • There are no restrictions on lending to partners: According to the Companies Act, it is strictly prohibited for a company to make any loan to its directors, either directly or indirectly. An LLP, on the other hand, does not fall into this category. There is no provision in the LLP Act that prevents an LLP from making loans to its partners. However, it is required that the LLP agreement allows for the partners to be granted loans. Furthermore, it is critical to follow the terms and conditions of the loan as outlined in the agreement
    • It is simpler to operate: In comparison to a corporation, running an LLP is much simpler. The LLP agreement serves as the foundation. The partners must carry out the duties and responsibilities outlined in the agreement. They are given complete authority over the business and its day-to-day operations. However, the LLP agreement must also be considered. Above all, the statutory requirements have been reduced.
    • Limitation of Liability: Partners’ liability in an LLP is limited to the amount of their contribution. Most importantly, one partner is not affected or held liable for another partner’s wrongdoings or negligence. The partner who commits the default is personally liable for his actions. Neither the LLP nor the other partners are obligated to bear the loss caused by a partner’s negligence.

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For a start-up in India, there was a need to provide a business format that combined the flexibility of a partnership with the benefits of a limited liability company at a low compliance cost. The Limited Liability Partnership is a type of alternative corporate business vehicle that provides the benefits of limited liability for the company while also allowing its members the flexibility of organising their internal management on the basis of mutual agreement, similar to a partnership firm.

This format has proven to be quite useful, particularly for start-ups in India, small and medium-sized businesses, and businesses in the services sector in particular. LLPs are most commonly used as a business vehicle, particularly in the service industry or for activities involving professionals.

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CS Urvashi Jain is an associate member of the Institute of Company Secretaries of India. Her expertise, inter-alia, is in regulatory approvals, licenses, registrations for any organization set up in India. She posse’s good exposure to compliance management system, legal due diligence, drafting and vetting of various legal agreements. She has good command in drafting manuals, blogs, guides, interpretations and providing opinions on the different core areas of companies act, intellectual properties and taxation.

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