LLP versus Company: Pros and Cons of Investing in an LLP Structure

Introduction

A firm may be structured in a variety of ways, and the kind of business organization selected has a significant impact. There are a variety of business entities, each of which has its own advantages and disadvantages, in order to meet the challenges of the changing economy and changing times. It all started with the ownership of limited firms by individuals. To meet the growing demands of professionals, service providers, and small and medium-sized businesses, a hybrid business structure combining the merits of a General Partnership and a Limited Company was needed. The Ministry of Corporate Affairs introduced the concept of Limited Liability Partnership Firms, an entity that provides management flexibility and less compliance to follow, during a time when people were forged by the unethical structure of partnership firms and were unable to afford the compliance of a company. The Companies Act 2013 and the Limited Liability Partnership Act 2008 oversee two distinct company structures: corporations and limited liability partnerships. Small to medium-sized businesses may benefit from both a corporation and a Limited Liability Partnership (LLP), but there are significant distinctions between the two structures^[1]. Choosing the best legal structure for a brand-new company may be a difficult task for the untrained entrepreneur. Entrepreneurs may pick from a variety of business structures, but private limited company and limited liability partnership (LLP) are two of the most popular.

There has been a long tradition of people working together to accomplish commercial goals. These aims have been achieved via a combination of partnerships and corporations. Sole proprietorships, in which a single person uses his or her own resources, ability, and effort to run his or her own firm, are considered as an improvement over these. Due to the resource limitations of a sole-trade corporation, it is impossible to envision a bigger company needing more investment and resources than a sole trader can provide. In contrast, by forming a corporation or a partnership, a group of people may pool their resources and efforts to launch a much bigger firm than any one of them could afford to do so on their own. In the event of a loss, the burden is also shared.

By establishing a corporate form of partnership, the legislation aims to give the benefit of restricted liability. When a Limited Liability Partnership is defined in accordance with the Limited Liability Partnership Act (2008)^[2], it refers to a partnership that has been registered under the Act. For the record, a limited liability partnership is defined in Section 3(1) as an organization created and organized in accordance with the Act that exists independently of its partners. As with any partnership firm, an LLP has the benefit of limiting a company’s liability while yet allowing it to organize its internal management in accordance with mutual agreement. With the incorporation of both “corporate structure” and “partnership firm structure,” this model effectively blends professional know-how with entrepreneurial initiative while also being creative. Under the LLP Act of 2008, a corporation may create an LLP and register it, giving it the flexibility of a partnership business. The “LLP Agreement” will serve as the foundation for the company’s structure and operations.

What is LLP?

The easiest way to explain an LLP is as a partnership with limited liability. As a hybrid business vehicle, it has the ability to continue to exist indefinitely while maintaining its own distinct legal entity. Restricted liability partnership (LLP) is a novel organizational form that brings together the benefits of a partnership and the limited liability of a corporation at low costs. It is a separate legal entity with a continuous existence like a firm^[3], and it has a distinct legal personality. However, if a member commits fraud, malpractice, or other wrongdoings, the culpability of that person will be infinite. It’s important to note that unlike stockholders, business partners are able to exercise direct management control. A partner’s personal responsibility for LLP’s employees or other agents is likewise limited by the partnership agreement. Can sue and be sued in the name of an LLC. In contrast to a general partnership, it is able to sign contracts and deeds in its own name. It doesn’t matter how many members you have. In the absence of a Memorandum and Articles of Association, LLPs may do anything they choose. To the contrary of normal partnerships, LLPs are regarded as legal entities because of their fictitious nature. A member’s responsibility is limited to the amount of money he or she invested in the company. Claims filed against a member of the organization who is personally at fault should be covered by limited liability unless that member has agreed to an individual duty of care or an individual contractual obligation. Having a customised member agreement, which is confidential, is highly suggested for LLPs. In other words, LLP laws give default conditions that are not suitable for most organizations. Member contributions are a key issue in the members’ agreement of an LLP, which does not have a share capital. It is possible to use many of the terms of an existing partnership deed in the members’ agreement if the partnership is converted into an LLP. Members’ agreements must be more detailed and include issues of business law as well as the Insolvency Act,1986^[4]. Members of an LLP are taxed on their individual share of income or capital gains if the partnership is classified as a general partnership for tax purposes. Profits earned by the company are exempt from corporate taxation. The Act was designed to make the change of a partnership to an LLP a tax-neutral occurrence. To prevent some traps, however, it is necessary to seek the guidance of an expert. One of the most important elements of an LLP is that it retains the flexibility of a general partnership.

LLP vs. Company

It’s vital to distinguish between an LLP and a corporation before trying to grasp what an LLP is all about.

A limited liability partnership (LLP) must have at least two members; however, a one-person limited liability company (LLC) is permitted. An LLC, on the other hand, has a far broader range of potential business and trade activities than does an LLP. When it comes to things like public accounting, law, and even architecture, a California limited liability partnership (LLP) may get their hands dirty. For a variety of reasons, an LLC is given a corporate-like administrative framework, including the protection of personal responsibility. However, for tax purposes, it is often regarded as a non-corporate business association. So, although it is treated as a corporation for most reasons other than tax, it is treated as a partnership for tax purposes. For all intents and purposes, LLPs are treated like partnerships, even though they have the legal status of a corporation. There are just a few reasons why it is regarded as a business. As a result, LLPs are becoming a more popular choice for corporate structures due to their unique advantages for professions with a wide range of unique traits. A limited liability partnership (LLP) protects its members from the risk of being held personally liable for the mistakes or crimes of their fellow members^[5]. As a result of the LLP’s unique characteristics, it has quickly become a widely recognized and well-received corporate business structure type. In nations like the United States, the United Kingdom, Singapore, and Hong Kong, LLP is widely used, and it has recently found its way into the Indian commercial sector as well. The LLP Act of 2008 governs the registration of LLPs in India, while the Companies Act of 2013 governs the registration of companies.

Advantages & Disadvantages of LLP

Despite the fact that corporations are the most common type of company organization, an LLP is more beneficial than a company. There is no need to register a partnership firm despite the fact that there are some advantages to doing so, whereas in the case of a company and an LLP, registration is mandatory. The statutory fees for a partnership firm are lower than those for a company and an LLP, but there are some advantages to doing so. When it comes to liability, the major distinction between partnerships and corporations is that a partnership business has limitless responsibility, but a corporation’s liability is restricted to the amount of unpaid capital. As long as the partners in LLP aren’t involved in fraud, they aren’t personally accountable for any of the company’s debts. There is no legal distinction between a partnership business and an LLC, which are both different legal entities. An LLP may have as many partners as it wants. According to the recommendations of the J.J. Irani Committee, the formation of limited liability partnerships (LLPs) should be motivated due to the potential for growth in the service sector, the need to provide flexibility to small businesses to participate in joint ventures and agreements that allow them to access technology and bring together business synergies, and the need to face increasing global competition made possible by the World Trade Organization, among other things.

An examination of the Limited Liability Partnership Act, 2008 in India shows that it is modelled on the Limited Liability Partnership Act, 2000 of Britain and the Limited Liability Partnership Act 2005 of Singapore, which is based on the Delaware Code or the Delaware Revised Uniform Partnership Act, respectively. The UK’s perspective on responsibility is identical to those of India and the United States. However, in India, where the Income Tax Act has been changed to reflect that LLPs are now classified as “Partnership Firms” for purposes of Income Tax, partners’ share of company profits is taxed individually, as it is in the UK. Many other nations, such as Canada, Kazakhstan, Panama, New Zealand, Japan, Singapore, Hong Kong, and so forth, have adopted the LLP model. Currently, it is available in Mauritius, Pakistan, and the United Arab Emirates. The Ministry of Corporate Affairs requires all LLPs in India to file an annual return in the specified format. Within 60 days following the end of the financial year, an LLP must file its annual return. The value of the company’s audit cannot be overstated. Following the rules set out, the accounts must be audited. The government has the authority to exclude any kind of limited liability company (LLP) from the audit obligation. There must be a formal announcement in the official newspaper. This rule exempts an LLC from auditing its accounts if its turnover does not exceed Rs. 40 lakhs or its contribution does not exceed Rs. 25 lakhs in any given financial year. Accounts of a limited liability partnership (LLP) seeking an exemption must include a declaration signed by all partners stating that they understand and accept responsibility for maintaining proper accounting records and for the accurate compilation of financial statements. For each financial year, LLPs must appoint an auditor or auditors unless they are excluded from auditing^[6]. Between January 1 and December 31, each financial year’s chosen partners must nominate an auditor, who must be in place by that time. In order for the Auditor to function, they must be a certified public accountant. For income tax purposes, LLPs are classified as partnership firms. Amendments to Section 2(23) of the Finance Act, 2009 made it clear that “Firm” now includes a Limited Liability Partnership, and “partner” now includes a partner of a Limited Liability Partnership. 30 percent + 2 percent Education Cess plus 1 percent Secondary and Higher Education Cess is the tax rate on the partnership firm’s income. A 12 percent fee is applied if your income is more than Rs 1 crore.

Advocates/lawyers, accountants, corporate secretaries, and physicians are among the many professions in India who can’t practice through a corporation. Providing these kinds of professional services would benefit greatly from an LLP structure. In the near future, Indian experts may supply valuable services to a significant number of foreign organizations. In order to meet the needs of worldwide customers, interdisciplinary combinations will be necessary, but in an increasingly litigious climate, it is a perilous profession to be a member of a partnership business with limitless personal responsibility and therefore unappealing. Professional partnership businesses such as accountants, attorneys and others have not increased in size to address the difficulties faced today by worldwide competition because of this. As a result, it is thought that a new corporate form, such as a partnership with limited liability and a flexible business environment, should be created as an alternative to the conventional partnership. Competition on the worldwide market will be feasible for entrepreneurs, professionals, and service providers to cooperate and operate in an effective way.  In Legum & Law Awareness Society vs Union of India^[7], a writ petition under Article 226 of the Indian Constitution was filed, pleading for the following reliefs: (1) directing the respondent to include advocates as practising professionals on the list, (2) allowing advocates to issue different certificates integrated into various e-Forms under the Companies Act, 1956 and the Limited Liability Partnership Act, 2008.  As a result, the Respondent was ordered to return to the physical form of all eForms prescribed by law under the Companies Act, 1956 and the Limited Liability Partnership Act, 2008. E-Forms notified under the Companies Act, 1956, and the Limited Liability Partnership Act, 2008, must be amended. As the petitioner’s legal counsel was aware that a mandamus order could not be given to the Legislature, he relied on Sections 33 and 459 of the Companies Act to support his position.

There are several drawbacks to the more conventional forms of company in India, making a hybrid structure like a Limited Liability Partnership all the more necessary. It is clear that the LLP’s benefits exceed its disadvantages:

1. To the degree of their involvement in the business, the partners are personally accountable for its debts. They are not individually accountable for the debts of the outside creditors.
2. There are no precise standards for meetings, resolutions, yearly meetings, or any other kind of gathering.
3. There is no upper limit to the number of people who may participate. Unless there are two partners for six months, the partner who is still in business will be personally accountable.
4. Co-operative societies, societies, and corporations are not allowed to join LLPs. In the Act, there is no mention of HUF (Hindu Undivided Family) admittance. Ministry of Corporate Affairs said that HUF or Karta cannot be a Limited Liability Partnership partner, as stated by the Ministry of Corporate Affairs Section 5 of the Limited Liability Partnership Act, 2008 states that only individuals or corporations may be partners. According to the LLP Act 2008, HUFs are not considered corporations for the purposes of LLPs^[8].
5. It is possible for an LLC to hold property in its own name since it is a distinct legal entity.
6. It is possible for an LLC to exist indefinitely. LLP’s continuity will not be affected by the departure of its partners.
7. An LLP is a legal entity. As a legal entity, it may sue and be sued.
8. It is illegal for a minor to join as a partner. No mention of a minor was made of the partnership’s advantages.

Conclusion

The principle of limited liability plays an important role in Indian companies since individuals have the option of going with an LLP instead of a partnership firm. After the LLP Act of 2008, a new two-party system was born. It is our responsibility to ensure that our nation does not fall behind in the LLP idea like other emerging countries. It is essential that measures be both effective and frequent. A partnership with limited liability confines its participants to performing their obligations in a restricted way. To give this new notion a new meaning, the law must include more and more individuals. There has been a steady rise in the proportion of LLP businesses that have profited compared to the percentage of partnership firms. The law is dynamic in nature because it always strives to keep up with the times and to meet the needs of the people, yet no law can ever be flawless. A good legislation is one that accomplishes its stated goals to the fullest extent possible. It is imperative for entrepreneurs to be given the freedom to run their businesses in an effective way without spending resources on non-essentials after economic liberalization. This may be done by eliminating unnecessary regulatory actions, which can save costs to a large amount. For maximum resource use, businesses must function in an open yet responsible atmosphere. Although the creation of Limited Liability Partnerships (LLPs) in India is an encouraging step forward, there are still a number of regulatory loopholes that must be addressed.

There have been initiatives by the Ministry of Company Affairs, but they are still at an infancy stage in our country’s legal structure. While certain sections of the legislation still need to be rethought, there are other qualities that may be taken from other nations’ laws. It is still necessary to adapt even the most established laws from other countries to the unique characteristics and circumstances of India. As LLP is a novel idea, it will need a great deal of consideration. Law-making should be a process that includes as many individuals as possible. There must be an effort to make the LLP form of corporate governance generally acknowledged and popular in order for everyone to benefit from the law’s substance and application. If a job has been started properly, it is already half done. There has been a good start by the Ministry, and we hope it will lead to a new legislation in the nation in the future. Since its introduction in India, the idea of Limited Liability Partnership has been extensively recognized in nations like the United States, Britain and Germany. The LLP structure is a hybrid of a partnership and a corporation, and it comes with a slew of advantages. For partners and especially for professionals, it’s clear that LLPs are regarded as best practice in the globe.

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References:

[1] Singhi, A. (2015, September 23). Why it makes sense to go for LLP. The Economic Times. Retrieved December 14, 2021, from https://economictimes.indiatimes.com/small-biz/legal/why-it-makes-sense-to-go-for-llp/articleshow/49070161.cms?from=mdr.

[2] The Limited Liability Partnership Act, 2008(IND)

[3] Govt Of India. (2021, March 31). Income Tax Department. LLP. Retrieved December 14, 2021, from https://www.incometaxindia.gov.in/Pages/i-am/llp.aspx.

[4] The Insolvency Act,1986 (UK)

[5] RAJANAHALLI, K. U. S. H. I. (2018). Limited Liability Partnership as a better alternative to Incorporation. International Journal of Law Management & Humanities, Volume 3(Issue 5), 514–528. https://doi.org/ISSN 2581-5369

[6] Mehta, A., & Rastogi, S. (2018). LIMITED LIABILITY PARTNERSHIP: AN EMERGING FORM OF BUSINESS ORGANISATION. IJRAR- International Journal of Research and Analytical Reviews, VOLUME 5(ISSUE 4). https://doi.org/ISSN 2349-5138

[7] Legum & Law Awareness Society vs Union Of India [ 2011 SCC OnLine Del 3381]

[8] Associates, S. &. (2016, May 23). HUF or its Karta cannot become a partner or designated partner in LLP – Corporate/Commercial Law – India. Welcome to Mondaq. Retrieved December 14, 2021, from https://www.mondaq.com/india/corporate-and-company-law/493070/huf-or-its-karta-cannot-become-a-partner-or-designated-partner-in-llp.