An LLP is a Limited Liability Partnership. It is a type of business entity that allows two or more partners to work together while limiting their personal liability for the debts and obligations of the partnership. An LLP has some features of both a partnership and a corporation.
For example, an LLP has a separate legal existence from its partners, but the partners can still manage the business directly. An LLP is different from a traditional partnership, where each partner is jointly liable for the actions of other partners. An LLP is also different from a limited liability company (LLC), which has more flexible management and tax options. An LLP is suitable for professional businesses like law firms, accounting firms, medical practices, and wealth managers.
An LLP or a Limited Liability Partnership is a new form of business entity that was introduced in India in 2008. It is a partnership firm that has some characteristics of a company, such as limited liability of the partners and perpetual succession. An LLP is ideal for small and medium enterprises that want to enjoy the flexibility of a partnership and the security of a company.
If you are an entrepreneur looking for a flexible and easy way to start your business in India, you might want to consider forming a Limited Liability Partnership (LLP). An LLP is a hybrid form of organization that combines the features of a partnership firm and a company. In this blog, we will explain what an LLP is, how it works, and what are its advantages and disadvantages.
Key Points
- Limited liability partnerships (LLPs) offer a partnership structure with limited liabilities for each partner, restricted to the amount invested in the business.
- Business partners in an LLP spread the risk, utilize their individual skills and expertise, and establish a division of labor.
- Limited liability ensures that in case of partnership failure, creditors cannot pursue a partner’s personal assets or income.
- LLPs are prevalent in professional businesses such as law firms, accounting firms, medical practices, and wealth management companies.
Advantages of LLP
Choosing a Limited Liability Partnership (LLP) comes with a range of compelling benefits that offer business owners a unique blend of liability protection and partnership advantages. Some of the advantages of LLP are:
- Low-cost formation: The cost of registering an LLP is low compared to the cost of incorporating a private or public limited company.
- No limit on the number of members: An LLP can have a minimum of two partners and there is no upper limit on the maximum number of partners. This gives flexibility to the business to expand or contract its partnership as per its needs.
- Less compliance: An LLP has fewer regulatory and legal requirements than a company. For example, an LLP does not need to file annual returns or financial statements if its turnover is less than Rs. 40 lakhs and its capital contribution is less than Rs. 25 lakhs. An LLP also does not need to hold annual general meetings or board meetings.
- Perpetual succession: An LLP has a continuous existence irrespective of the changes in its partners. The death, retirement, insolvency or exit of any partner does not affect the continuity of the LLP.
- Easy transferability: The ownership of an LLP can be easily transferred by introducing new partners or transferring the rights and interests of existing partners to others. There is no need to transfer the assets or liabilities of the LLP separately.
- Tax advantages: An LLP enjoys some tax benefits over a company. For instance, an LLP does not have to pay dividend distribution tax or minimum alternate tax. The income of an LLP is taxed only at the partner level and not at the entity level. The partners can also claim deductions for interest, salary, bonus, commission or remuneration paid to them by the LLP.
The taxation system in the context of LLP
Understanding the taxation system in the context of Limited Liability Partnerships (LLPs) is essential for any business owner, as it influences the financial structure and compliance requirements for the partnership.
Taxation in LLP is the process of calculating and paying taxes on the income of an LLP and its partners. Some of the key points about taxation in LLP are:
- LLP taxation is done at rates applicable to firms: The income of an LLP is taxed at the flat rate of 30% (plus surcharge and cess, as applicable) on the total income. The surcharge is 12% if the income exceeds Rs. 1 crore. The cess is 4% on the amount of income tax and surcharge.
- LLP is liable to pay Alternative Minimum Tax (AMT): If an LLP has claimed certain deductions under Chapter VI-A (such as section 80IA, 80IB, 80IC, etc.) or section 10AA, it has to pay AMT at the rate of 18.5% (plus surcharge and cess, as applicable) on its adjusted total income. The adjusted total income is the total income before giving effect to these deductions. The AMT credit can be carried forward for up to 15 years and can be set off against the regular tax liability in future years.
- The income of an LLP is taxed only at the partner level: The partners of an LLP are not taxed on the income that is earned by the LLP. Instead, the income is taxed in the hands of the partners only when it is distributed as profits or remuneration. The profits are taxed as business income and the remuneration is taxed as salary income in the hands of the partners. The partners can also claim deductions for interest, salary, bonus, commission or remuneration paid to them by the LLP under section 40(b).
FAQs of LLP:
Q: Can an LLP claim deductions under section 80C?
Ans: No, an LLP cannot claim deductions under section 80C. Section 80C allows deductions for certain investments or expenses made by an individual or a Hindu Undivided Family (HUF). An LLP is neither an individual nor a HUF, but a separate legal entity. Therefore, it is not eligible for deductions under section 80C.
Q: What are the deductions that an LLP can claim?
Ans: Some of the deductions that an LLP can claim are:
- Business Expenses: LLPs can claim deductions for expenses incurred in running their business, such as rent, salaries, utilities, and other operating expenses.
- Depreciation: LLPs can claim depreciation on their fixed assets, such as buildings, machinery, and equipment.
- Remuneration to Partners: Partners can receive remuneration for their work in the LLP, which is deductible from the LLP’s taxable income. The remuneration should be within the limits specified under section 40(b) of the Income Tax Act.
- Interest on Capital: Partners can earn interest on their capital investment in the LLP, which is deductible from the LLP’s taxable income. The interest should be within the limits specified under section 40(b) of the Income Tax Act
- Pre Incorporation Expenses: Expenses incurred before the LLP was incorporated, such as legal and professional fees, can be claimed as a deduction. The deduction is allowed in five equal instalments starting from the year of incorporation
- Salary to Family Members: LLPs can pay salaries to family members who work for the business, which is deductible from the LLP’s taxable income. The salary should be reasonable and commensurate with the work done by the family members
- Traveling Expenses: Expenses incurred for business travel, such as airfare, lodging, and meals, can be claimed as a deduction. The expenses should be supported by proper bills and vouchers
- Meeting Expenses: Expenses incurred for business meetings, such as venue rental and catering, can be claimed as a deduction. The expenses should be related to the business of the LLP and not personal in nature
Q: How can I check the status of my LLP registration?
Ans: You can check the status of your LLP registration on the Ministry of Corporate Affairs (MCA) website. Here are the steps to follow:
- Go to the MCA website (https://www.mca.gov.in/)
- Go to the ‘MCA Services’ tab. In the drop-down click on ‘View Company/LLP Master Data’.
- Enter the LLP Identification Number (LLPIN) or the LLP name. Enter the captcha code. Click on ‘Submit’. You can also search for LLPIN by clicking on the search icon beside the ‘Company/LLP Name’ field.
- You will see the details of the LLP, such as its date of incorporation, registered office address, status, and partners. The status will show whether the LLP is active, under the process of striking off, converted to company, dissolved, etc
