What is LLP? What are the tax concessions available for LLP?


llp-taxStarting a new business can be both exciting and a scary. Before starting a new business, the basic things you must consider as important are location, size, employees, quality control etc.., Nowadays, business rules and regulations changes often. Therefore, you must be aware of the regulations, requirements and aspects of operating a business. Do you want to start an LLP firm in India? If so, this article will help you to learn more about LLP.

What is LLP?

A Limited Liability Partnership (LLP} is a partnership in which some or all partners in a firm have limited liabilities. It is a business form that gives you the benefit of both limited liability of a company and the flexibility of a general partnership firm.

Advantages of a Limited Liability Partnership

Listed below are some of the advantages of a Limited Liability Partnership firm

  • There is no limit on a number of owners can be involved with the Limited Liability Partnership business.
  • Less government intervention.
  • Limited Liability Partnership firm involves less risk as compared to sole trader business. Since there are many owners involved in LLP, the risks are spread out and made much smaller.
  • LLP protects individual partners from personal liability for negligent acts of other partners or employees who are not under their direct control.
  • An LLP is a separate legal entity. It means that the LLP has assets in its own name and can sue or be sued.
  • Easy to establish, manage and run the LLP firm.
  • In the Limited Liability Partnership firm, one partner is not responsible or liable for another partner’s misconduct or negligence.
  • LLP’s can appoint two companies as members of LLP. In an LTD company, at least one director must be a real person.
  • The cost of registering LLP is low as compared to the cost of incorporating a private limited or a public limited company.
  • LLP is liable for the payment of income tax but the share of its partners in LLP is not liable to tax.
  • Only few compliance requirements (complicated formalities such as rules and regulations) are involved in an LLP. In an LLP firm, there are just three compliances per year whereas in case of a private limited company there are a lot of compliances to fulfil.
  • LLP is not only easy to start but also it is easier to wind up compared to a private limited company. It takes 2-3 months to complete the winding up process in LLP but it can take over a year in case of a private limited company.
  • The audit is not compulsory except in two cases. They are
  1. If the contribution of LLP exceeds Rs. 25Lakhs, or
  2. If the annual turnover of LLP exceeds Rs. 40Lakhs.

Disadvantages of a Limited Liability Partnership firm

Listed below are some of the disadvantages of LLP

  • Some states do not allow LLP to operate in their region because of the tax benefits and tricky workings of an LLP. Another big problem is that many states do not recognize LLP as a legal business.
  • Many consumers or clients and other businesses do not consider LLP as a credible business.
  • Each partner in an LLP firm has a duty of care position in the business. If something happened unusually, the partners are held personally and legally responsible.
  • Each partner in an LLP firm must set up an agreement and should register it in their state.
  • LLP firm cannot raise money from the public.
  • An LLP must have at least two members. If one member chooses to leave the partnership, then LLP may have to be dissolved.
  • Venture capitalists would be unwilling to invest in an LLP structure because all shareholders in an LLP firm are treated as partners who have certain responsibilities towards the entity. No Venture Capitalist wants any of those responsibilities. Therefore, they would like to invest only in a private limited company.
  • If you don’t complete the fewer LLP compliances, you must pay fine of Rs. 5 lakh for a single year.

What are the tax benefits available for an LLP firm?

Listed below are some of the tax benefits enjoyed by LLP firm are listed below.

  • In an LLP firm, the deduction is allowed for interest on loan and interest on capital from partners @ 12% per annum.
  • Limited Liability Partnership firm is exempted from paying DDT (Dividend Distribution Tax)
  • Limited Liability Partnership firm is exempted from paying wealth tax.
  • While converting a company into an LLP firm, there is no tax on capital gains.
  • The share of the partners in LLP firm is not liable to tax.
  • Profits earned are taxable in the hands of LLP and not on partners.
  • Limited Liability Partnership firm is exempted from the payment of MAT (Minimum Amount of Tax)
  • Remuneration paid to partners will be taxed as “Income from Business and Profession”
  • No surcharge (additional charge or payment) is applicable to a Limited Liability Partnership firm.
  • LLP firm is exempted from the payment of corporation tax ( a tax levied on companies profits), but partners in an LLP firm are liable to pay corporation tax.

Thus, these are some of the tax benefits enjoyed by a Limited Liability Partnership firm.

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