Myths about LLP in India

Myths about LLP in India

The Limited Liability Partnership was introduced a decade ago. However, it has not gained widespread acceptance. Many misconceptions remain about this structure.

Myth 1: LLP has higher tax liability than Partnership

LLPs have a corporate structure, so many people assume their tax liability is higher than their general partnership. This leads to lending on partnerships instead.

As far as tax authorities are concerned, a Limited Liability Partnership is no different from a traditional Partnership. Whether it is a tax on the firm’s income or on the income of the partners, the rules are the same regardless of the structure.

It may be a valid reason that keeps you from LLP registration requirements, but let’s not stop there. Let’s not forget about the next point as well.

Myth 2: There is no Compliance for LLP

As a legal structure, it is subject to several requirements under the LLP Act, 2008. For instance, it is required to file annual returns, even if there is no transaction during the year. Another requirement is to file income tax returns for the year.

When running a business, the LLP agreement may need to be changed or any of its clauses changed. Any change in the LLP agreement must also be informally communicated to the RoC.

Those who follow this understanding are few, while those who follow the next believe that it exists.

Myth 3: Compliance level is too high like a Company

The requirement for filing LLP forms is no more than for a company. A LLP has no need to maintain records and conduct meetings. It does not have to adhere to any formalities such as resolutions or meetings.

In addition, Audit attracts a yearly fixed cost for the company. In LLPs, it applies after crossing either of the following thresholds:

Turnover – INR 40 Lakh

Capital Contribution – INR 25 Lakh

Myth 4: Partners get limited returns

I will again repeat point 2. It is a Partnership. And Returns are not termed as the dividend here. Partners get returns in the following three heads:

  • Remuneration
  • Interest on capital
  • Share of profit

Since there is no limit on how profits are distributed, the partners can take all the profits home in a predetermined ratio. In the LLP structure, you can decide when and how partners are paid. However, you need to consider what is allowable remuneration for partners according to Income Tax Law.

The dividend from a company is double-taxed, but it is not the case with LLPs. Therefore, this is a quite cost-efficient approach to distribution.

Myth 5: LLP is ideal for investments

As it has been observed, funding issues are a major reason for choosing a corporate structure. Therefore, I was wondering what you thought about funding in an LLP.

It is fairly observed that a Private Company is preferred over an LLP for investments, even if both offer limited liability and many similar features. I can outline the following reasons why a company wins the race:

  • In a company, it is equity-based ownership and sharing.
  • Shares are more transferable compared to capital in LLP.

Further, share can also be issued at a premium. But an LLP does not stand chance for same. Therefore premium is a primary reason for investors’ attraction to the company structure.

Myth 6: Profit sharing and the capital ratio is the same

Although partners generally understand that profit sharing and capital contribution ratios must be equal when they execute LLP agreements, the fact is that each partner can decide both.

The profit sharing ratio is what a partner takes home while capital is what a partner contributes. Capital also determines ownership.

Myth 7: There is no distinction between partners

A LLP has two types of partners: a Partner and a Designated Partner. Partnership does not provide this distinction, but LLP does. In an LLP, responsibilities and obligations must be assigned to a specific individual due to its separate legal identity. Therefore, designated partners are appointed. Aside from prescribed responsibilities, such partners are responsible for ensuring the LLP’s compliance with the law annually. 

Myth 8: All data is accessible to the public

The confusion arises since in LLP the data of partners is reserved. Where names, DINs, and other details of designated partners are accessible on the MCA portal, they are reserved for general partners. 

In addition to this, the partnership agreement is also a private document. It outlines the internal agreements between the partners.

Several forms are made public, including annual returns, financial statements and others. These documents help banks, financial institutions and other parties to a contract establish the credibility of a business. As a result, you should consider public documents as a plus rather than a detriment.

Myth 9: LLP registration is an expensive affair

The registration cost of an LLP is heavily dependent on the professional’s services and changes since the Government fee is fairly constant. The last thing to mention is that LLPs are not as expensive to set up as general partnerships. Despite the fact that you have the choice of choosing a professional, we are taking into account the Government’s registration fee. It is approximately 750-1000 INR to register an LLP online. 

During the execution of the agreement, stamp duty must also be paid. Stamp duty amounts are determined by the capital contribution and the state of the company. There is a basic stamp duty of INR 500 payable, but the amount varies depending on the state of the company. LegalWiz.in services make the formation affordable, and our customised packages assist in selecting the most cost-effective package.

Bottom Line

Business structure affects many factors, including the manner of operation, taxability and many others. Therefore, it is essential that you chose the right business structure and clarify any misconceptions you may have.

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