Last updated: November 15th, 2024 2:27 PM

LLP Advantages & Disadvantages

There are a number of reasons why many entrepreneurs prefer to go in for a LLP registration over a Private Limited Company incorporation. LLPs are considered easier to set up and are comparatively hassle-free in day to day operations. It also has a lower compliance burden if there is minimal activity. Hence, many Entrepreneurs see it as advantageous to begin their organization in this manner. In this article, we look at the various advantages and disadvantages of an LLP in India.

LLP Advantages:

The following are advantages of incorporating an LLP in India:

No requirement of minimum contribution

There is no minimum capital requirement in LLP. An LLP can be formed with the least possible capital. Moreover, the contribution of a partner can consist of tangible, movable or immovable or intangible property or other benefits to the LLP.

No limit on owners of the business

An LLP requires a minimum of 2 partners while there is no limit on the maximum number of partners. This is in contrast to a private limited company wherein there is a restriction of not having more than 200 members.

Lower registration cost

The cost of registering LLP is low as compared to the cost of incorporating a private limited or a public limited company. However, the difference in the cost of registering an LLP vs Private Limited Company has come down in recent days.

For example, an LLP can be registered through IndiaFiling for Rs.7899. A company can also be registered through IndiaFilings for Rs.7899.

No requirement of compulsory Audit

All companies, whether private or public, irrespective of their share capital, are required to get their accounts audited. But in case of LLP, there is no such mandatory requirement. This is perceived to be a significant compliance benefit. A Limited Liability Partnership is required to get the tax audit done only in the case that:-

1. The contributions of the LLP exceeds Rs. 25 Lakhs, or
2. The annual turnover of the LLP exceeds Rs. 40 Lakhs

Taxation Aspect on LLP

For income tax purpose, LLP is treated on a par with partnership firms. Thus, LLP is liable for payment of income tax and share of its partners in LLP is not liable to tax. Thus no dividend distribution tax is payable. Provision of 'deemed dividend' under income tax law, is not applicable to LLP. Section 40(b): Interest to partners, any payment of salary, bonus, commission or remuneration allowed as deduction.

Dividend Distribution Tax (DDT) not applicable

In the case of a company, if the owners to withdraw profits from the company, additional tax liability in the form of DDT @ 15% (plus surcharge & education cess) is payable by the company. However, no such tax is payable in the case of LLP and profits of an LLP can be easily withdrawn by the partners.

LLP Disadvantages:

An LLP also has various disadvantages when compared to a private limited company as under:

Penalty for Non-Compliance

Even if an LLP does not have any activity, it is required to file an income tax return and MCA annual return each year. In case an LLP fails to file Form 8 or Form 11 (LLP Annual Filing), a penalty of Rs.100 per day, per form is applicable. There is no cap on the penalty and it could run into lakhs if an LLP has not filed its annual return for a few years. In case of a proprietorship or partnership firm, there is no requirement for filing an annual return. Hence, only penalty under the Income Tax Act would be applicable.

Inability to Have Equity Investment

An LLP does not have the concept of equity or shareholding like a company. Hence, angel investors, HNIs, venture capital and private equity funds cannot invest in an LLP as shareholders. Thus, most LLPs would have to rely on funding from promoters and debt funding.

Higher Income Tax Rate

The income tax rate for a company with a turnover of upto Rs.250 crores is 25%. (Further reduced in 2019 for new companies involved in manufacturing). However, LLPs are taxed at a 30% rate irrespective of the turnover. Know more about LLP income tax rate.

Limited liability partnership FAQs