LLP in India: Myths you should not be blinded by

LLP in India: Myths you should not be blinded by

There have been Limited Liability Partnership companies for a decade. However, it has not been well received by targeted segments. There are still some misconceptions about this structure that are prevalent in general. In today’s post, I will correct a number of such misconceptions.

Myth 1: LLP has higher tax liability than Partnership

In corporate terms, LLPs are corporations. Consequently, many believe the tax liability is much higher than for a general partnership. In many cases, this is the reason behind lending to a partnership rather than an LLP.

Here’s what I need to clarify. A Limited Liability Partnership is simply another type of partnership that tax authorities understand. Both structures have the same provisions when it comes to taxing the firm’s income or the partners’ income.

As a result, let’s not stop here if this is holding you back from LLP registration. But don’t forget to consider the next point as well.

Myth 2: There is no Compliance for LLP

False. This type of corporate structure is governed by the LLP Act, 2008. Various events require compliance with the same. It is mandatory for LLPs to file annual returns, even if they have no transactions during the year. For an LLP, income tax returns are also required.

As a business owner, you may need to change your LLP agreement or any clause within it several times in the course of your business operations. RoC must also be informed of any change in the LLP Agreement. You can find the Post Registration Compliance Checklist for an LLP here.

Those who follow this understanding are few in number, while those who believe in the next are many.

Myth 3: Compliance level is too high like a Company

This is not true. Forms must be filed regularly.  The level of the organization is much lower than that of a company. It is not necessary for an LLP to maintain registers or to hold meetings like a company. There is no formal procedure, such as a meeting or resolution, unless it is provided.

Further, audit incurs a fixed cost every year for the company. The limitation does not apply to LLPs until one of the following thresholds has been crossed:

Turnover – INR 40 Lakh

Capital Contribution – INR 25 Lakh

Myth 4: Partners get limited returns

Point 2 will be repeated again. We are in a partnership. There is no mention of dividends here, and returns are not called dividends. The following three heads are where partners get their returns:

  • Remuneration
  • Interest on capital
  • Share of profit

Because of the lack of limits for profit distribution, the partners can take home all profits at the predetermined ratio. In an LLP structure, partners have the freedom to decide their own payment schedules. It is important to consider what remuneration is allowable for partners under Income Tax law. As opposed to LLPs, companies have double-taxed dividends. It is therefore cost-efficient to distribute profit here.

Myth 5: LLP is ideal for investments

There is no way this fits into the definition of a myth. Corporate structures are typically chosen because of funding requirements. Consequently, I wanted to clarify your views on funding an LLP.

Although both offer limited liability and many similar features, it is generally considered that a Private Company is better for investment purposes than an LLP. The following reasons explain why a company wins:

In a company, it is equity-based ownership and sharing.

Shares are more transferable compared to capital in LLP.

Moreover, premium shares can be issued as well. However, LLPs do not have a chance in this regard. As a result, premiums are a primary attraction to investors.

The bottom line 

Thus, you might have got some idea on what is true and what is just believed to be true, which has great differences. So, when you are looking to register the LLP online in India, there are the aspects to be known. Make note of it and go ahead. 

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