A foreign investor seeking to establish a business in India must consider multiple factors before deciding which type of business entity to choose. Limited Liability Partnership (LLP) is gaining popularity with the many benefits it offers to the entrepreneur. LLP is a business entity that combines the limited liability of a business 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 liability of the partner 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 that she can have is Rs 50,000. In other words, his potential loss cannot exceed Rs 50,000. She will not be responsible for any liability beyond this 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 a partner borrowed some money in the name 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 may come and go, but the LLP continues to exist. A partner of an LLP may resign and assign his or her share of the profits to someone else and exit the LLP. Exit formalities can be completed by executing a simple side agreement.
lawful accomplice
Limited partnerships must hold board meetings 4 times a year, at least once every quarter. You must also hold an annual general meeting and keep minutes of those meetings. LLPs are not required to adhere to such compliance unless otherwise specified in the LLP Agreement.
LLP need not audit its accounts unless its turnover exceeds Rs 40 lacs or the capital contribution exceeds Rs 25 lacs in any financial year.
income tax
LLPs do not have a Dividend Distribution Tax (DDT) while Indian Limited Liability Companies are subject to paying DDT at 16.609% (including surcharge and education fee) on dividends paid to shareholders .
The income tax rate for LLPs is 30%. Profits shared by partners after paying taxes are tax exempt.
let’s see an example
Jack and Jill start an LLP with a 50% profit sharing between them. In one fiscal year, the LLP made a profit of Rs 10,00,000. The corporate tax is Rs 3,00,000 (30% of the profit). The balance of Rs 700,000 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.
corporation
LLP and Private Limited companies are legal persons and a separate legal entity from their partners and shareholders. Limited liability company, similar to a private limited company, is able to enter into contracts and own property in its own name.
LLP Agreement
LLP is organized and operates on the basis of agreement. The LLP agreement will have the mutual rights, duties and obligations of the partners to each other and other legally binding provisions.
Remuneration and Interest on capital
Partners may receive compensation as a working partner, as long as the LLP agreement allows it.
LLP partners are also entitled to charge interest on invested principal up to 12% per annum. Partners may also charge interest on loans made to the LLP, as long as the interest rates are within the limits specified in the income tax law.