Since the outbreak of the Corona virus and the subsequent imposition of lockdown, the economies of almost all countries have taken a severe beating. The total shutdown phase catapulted closure of several businesses of all scales. In times of closure or liquidation the owners of enterprises especially of sole proprietorships and partnershipfirms are personally liable for repayment of debts that are taken by the firm while the business was in operation. This brings me to the subject of today’s column Limited Liability Partnership (LLP) which is a relatively new form of business entity and one which can be looked up to by entrepreneurs of medium and small-scale enterprises.
What is an LLP?
A Limited Liability Partnership (LLP) is a partnership in which some or all partners have limited liability. In an LLP, one partner is not responsible or liable for another partner’s misconduct or negligence. This is an important difference from that of conventional partnership firm where the partners are jointly and severely responsible for the liabilities of the firm. In an LLP, partners have a form of limited liability like that of the shareholders of a company.
Basics of an LLP
To understand a limited liability partnership, it is best to start with the general partnership. A general partnership is a for-profit entity that is created by a mutual understanding between two or more parties.This is a very technical way of saying two or more people working together to make money. A general partnership can be quite informal. All it takes is a shared interest, perhaps a written contract (though not necessarily), and a handshake.Of course, with the informal nature of a general partnership, there is a downside. The most obvious risk is that of legal liability. In a general partnership, all partners share liability for any issue that may arise.
For example, if Rahul and Priya are partners in a cupcake venture and a bad batch results in people getting sick, they can both be personally sued for damages. For this reason, many people quickly turn general partnerships into formal legal entities like a limited liability Partnership (LLP). An LLP, like Rahul & Priya’ LLP, can stand in for Rahul and Priya as a separate legal entity and protect their personal assets from being part of any lawsuit.
Features of an LLP
The minimum number of partners to incorporate an LLP is 2. There is no upper limit on the maximum number of partners of LLP. Among the partners, there should be minimum two designated partners who shall be individuals, and at least one of them should be resident in India. The rights and duties of designated partners are governed by the LLP agreement. They are responsible for the compliance of all the provisions of LLP Act 2008 and provisions specified in LLP agreement.If you want to start your business with Limited Liability Partnership, then you must get it registered under Limited liability Partnership Act, 2008.
Taxation
In India, the Govt has notified that LLP’s would be taxed in the same form as Partnerships i.e. Tax would be levied on the LLP and the partners would be exempt from Tax. More specifically income Tax at a flat rate of 30% is levied on LLP’s. Computation of taxes as per Income Tax Slab Rates is not allowed as the benefit of Slab Rates is only available to Individuals and HUF’s. Health and Education Cess @ 4% would also be required to be paid on tax. Moreover, in case the income of the LLP is more than Rs 1 Crore in any financial year, Surcharge @ 12% would also be payable.It is pertinent to note that although LLP’s are treated in the same manner as Partnerships, there is only one section which does not apply to LLP’s and applies to Partnership Firms which is Section 44AD. LLP’s cannot claim benefits of Section 44AD by using Presumptive Taxation.
Summary
This concept has been accepted in countries like USA, UK, Australia, and Germany. It is a form of business entity, which allows individual partners to be restricted from joint liability of partners in a partnership firm. At present, this LLP bill is in form of mini companies act. The Liability of the partners incurred in the normal course of business is that of LLP and it does not extend to the personal assets of the partners. This is a great relief to the partners, particularly professionals. These professionals may also form multi-disciplinary LLPs to meet the changing economic environment. The hybrid structure of LLP will facilitate entrepreneurs, service providers and professionals to organize and operate in an innovative and efficient manner for effectively competing in the global market.
