A foreign investor wishing to establish a business in India must consider multiple factors before deciding which type of business entity to choose. The Limited Liability Company (LLP) is gaining popularity with the many benefits it provides to the entrepreneur. LLP is a business entity that combines the limited liability of a company and the flexibility of a partnership.
LLP registration in India requires the LLP to operate in an industry where 100% FDI is allowed
We have listed the characteristics of an LLP that should help you make an informed decision.
The partner’s liability is limited
One of the main reasons to register an LLP is limited liability. Limited liability means limited exposure to financial risk on the part of a company’s investors. Limited liability ensures that the partner’s liability in the LLP is limited to the amount of principal invested in the LLP.
For example, if Sam invested Rs 50,000 to start an LLP in India. The maximum liability you may have is Rs 50,000. In other words, your potential loss of cans cannot exceed Rs 50,000. You will not be liable for any liability beyond these initial Rs 50,000.
Another important feature of an LLP is that the act of one partner does not affect the other partner. For example, if one partner borrowed some money on behalf of the LLP without the other partner’s knowledge, the other partners cannot be held liable.
Transfer and departures
LLP has a meaning of perpetual succession, the LLP can continue its existence regardless of changes in the partners. Partners can come and go, but the LLP still exists. A partner in an LLP can resign and assign their profit share to someone else and exit the LLP. Exit formalities can be completed by executing a simple supplemental agreement.
Limited partnerships must hold board meetings 4 times a year, at least once every quarter. You also need to hold an annual general meeting and keep the minutes of those meetings. LLPs do not have to adhere to such compliance unless otherwise specified in the LLP Agreement.
LLP does not need to audit your accounts unless your turnover exceeds Rs. 40 Lakes or the capital contribution is more than Rs 25 Lakes in any financial year.
LLPs have no Dividend Distribution Tax (DDT), while private limited companies in India are required to pay DDT at 16.609% (including surcharge and education tax) on dividends paid to shareholders.
The income tax rate for LLP is 30%. The profits shared by the partners after the payment of taxes are exempt from tax.
Let’s see an example
Jack and Jill start an LLP with a 50% profit sharing between them. In one financial year, the LLP made a profit of Rs 10,00,000. The corporation tax is Rs 3.00,000 (30% of profits). The balance of Rs 7,00,000 was 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.
LLP and private limited partnerships are legal persons and a separate legal entity from their partners and shareholders. The Limited Liability Company, similar to a private limited company, is capable of entering into contracts and holding property in its own name.
LLP is organized and operated on the basis of an agreement. The LLP agreement will have the mutual rights, duties and obligations of the partner in relation to each other and other legally binding provisions.
Compensation and interest on capital
Partners may be paid as working partner, as long as the LLP arrangement allows.
LLP partners are also eligible to charge interest on invested capital up to 12% per annum. The partners can also take interest on the loan made to the LLP, as long as the interest rates are within the limits specified in the income tax law.