Limited Liability Partnership (LLP) Advantage and Disadvantage
Limited Liability Partnership (LLP)is a body corporate formed and incorporated under this LLP Act and is a legal entity separate from that of its partners.
- Renowned form of business: Though the concept of Limited Liability Partnership has been recently introduced in India but it is very known concept in other countries of the world especially in service sector.
- Easy to Form: It is very easy to form LLP, as the process is very simple as compared to Companies and does not involve much formality. Moreover, in terms of cost the minimum fees of incorporation.
- Body Corporate: Just like a Company, LLP is also body corporate, which means it has its own existence as compared to partnership. LLP and its Partners are distinct entity in the eyes of law. LLP will know by its own name and not the name of its partners.
- Liability: A LLP exists as a separate legal entity from your personal life. Both LLP and person, who own it, are separate entities and both functions separately. Liability for repayment of debts and lawsuits incurred by the LLP lies on it and not the owner.
- Perpetual Succession: An incorporated LLP has perpetual succession. Notwithstanding any changes in the partners of the LLP, the LLP will be a same entity with the same privileges, immunities, estates and possessions. The LLP shall continue to exist till its wound up in accordance with the provisions of the relevant law.
- Flexible to Manage: LLP Act 2008 gives LLP the at most freedom to manage its own affairs. Partner can decide the way they want to run and manage the LLP, in form of LLP Agreement. The LLP Act does not regulate the LLP to large extent rather than allows partners the liberty to manage it as per their will and fancies.
- Separate Property: A LLP as legal entity is capable of owning its funds and other properties. The property of LLP is not the property of its partners. Therefore partners cannot make any claim on the property in case of any dispute among themselves.
- No Mandatory Audit Requirement: Under LLP, only in case of business, where the annual turnover/contribution exceeds Rs. 40 Lacs/Rs. 25 Lacs are required to get their account audited annually by a chartered accountant. This provides great relief to small businessmen.
- Partners are not agent of other Partners: In LLP, Partners unlike partnership are not agents of the partners and therefore they are not liable for the individual act of other partners in LLP, which protects the interest of individual partners.
- Compliances: As compared to a private company, the numbers of compliances are on lesser side in case of LLP.
Limitation in the formation of LLP
- As the basic structure or model of the LLP is similar to that of any partnership firm but it requires minimum two partners to form it. LLP cannot be formed by a single person. NRI/ Foreign national who want to form an LLP in India then at least one partner should be a resident of India. Two foreign partners cannot form LLP without having one resident Indian partner along with them.
- It takes more days to form, as all the partners’ signatures are required for each and every document which is then to be attached to required e-forms. Therefore self attestation of each partner on documents is more as compared to the formation of any Private Ltd company.
- Assets of LLP: Partners undertake to contribute some amount towards LLP firm which they contribute in the form of cash or assets, while executing the LLP agreement. Once cash or assets are contributed to LLP, it cannot be returned to the partners of an LLP unless there is any specific provision mentioned in LLP agreement.
- Difficulty in transfer of ownership: Ownership rights are not transferable easily without obtaining consents of all partners of the LLP. If any partner wishes to transfer some portion of ownership, he has to obtain consent of all partners. The resolution to be passed by majority in numbers of the partners in some of these cases – increase or decrease in contribution, increase or decrease of designated partners, alteration of working partners, amalgamation, shifting of the registered office of firm, opening or closing of bank account.
- Admission of new partner: The supplementary agreement containing details of new partners and his contribution has to be created and then accordingly the existing partners need to revise or change the contribution held by them due to admission of new partners in the LLP agreement. These changes have to be intimated to the concerned Registrar of Companies within whose jurisdiction registered office of the LLP is situated.
- Offenses and penalties: LLP Act has provided the provisions of offenses and penalties. For default/ non-compliance on procedural matters such as delay in filing of e-forms, one has to pay default fee for every day for which the default continues. Such default fee would be payable at the rate of rupee one hundred per day after the expiry of the date of filing (as prescribed in relevant provision) up to a period of three hundred days. The offense can result in either (i) through payment of fine or (ii) through payment of fine as well as imprisonment of the offender.
- Permission of Foreign Direct Investment (FDI) in LLP: As per FDI Policy, FDI in LLP is allowed only through Government route, FDI in LLP under automatic route is not permissible. Further FDI in LLP through Government route is allowed to only those sectors where 100% FDI is allowed under automatic route under the FDI policy. Foreign company or individual can invest in LLP in India but it requires prior government approval.
- Limitation in External Commercial Borrowing (ECB) : LLP is not allowed to raise External Commercial Borrowing (“ECB”). Thus LLP cannot take commercial loans from its foreign partners, FII’s (Foreign Institutional Investors), banks from outside India, any financial institution outside India or any other entity outside India.