Limited Liability Partnerships also referred as LLP and introduced in 2000 by the Partnerships Act 2000 to provide partnerships with the limited liability previously only available to companies. LLP’s may be suitable when the earnings of partners are defined clearly and not simply added to one pot and distributed by dividend. In LLP, the earnings of the members are counted as personal income. The Limited Liability Partnership (LLP) gives you the easiness of running a Partnership along with the separate legal entity status and limited liability aspects of a company.
An LLP is a partnership comprising of partners whose liability is limited to the capital invested by each for starting the business. Limited liability partnership is a corporate body having a legal entity independent of the partners who are a part of the organization.
A limited Liability Partnership termed as a business where the minimum 2 members are required and there is no limit on the maximum number of members. The liability of each members involved in LLP is limited.
What are the Main Disadvantages of a Limited Liability Partnership?
Include one Indian Citizen as a Partner in case of NRI – If a NRI or foreign citizen wants to incorporate an LLP in India then he/she needs to add at least one partner who have Indian citizenship. Two foreign partners cannot create an LLP without having at least one resident Indian partner along with them.
Ownership Transfer -If a partner is willing to transfer his/her ownership rights then he/she need to obtain the consent of all the partners.
Filing of Numerous Tax Returns – The main disadvantage of an LLP is Public disclosure. An LLP must file Annual Statement of Accounts & Solvency and Annual Return with the Registrar every year. ITR must also be filed to the Income tax (IT) department for the LLP.
Number of Partners –A LLP must have at least two members, if one member want to leave the partnership, the LLP may have to be dissolved.
Non- Recognition from Many States- LLPs are limited by state regulations due to which they are not given due recognition in every state as a business structure.
High penalties –The cost of non-compliance of procedural matters like late filing of e-forms is very high which would lead to large no. of penalties.
Incapacity to Raise VC funding- VCs would be unwilling to invest in an LLP structure. This is because all ‘shareholders’ in an LLP must be partners, which have defined responsibilities toward the entity.
Partner’s Right– An LLP can be formed in such a way that one partner has more rights than another. Thus, it is not a one vote per share system. So, some lesser partners may feel compromised if higher shareholders choose to move the business in a direction that effect their interests.
Partner’s Responsibility– Another disadvantage of LLP is individual partners are not constrained to consult with other participants in some business agreements. To secure the company’s integrity, you need to make a partnership agreement that specifically outlines what each limited partner’s work are which define that- what each partner can and cannot do when taking business decisions. The financial statements of LLPs must also be disclosed publicly, which may draw an issue for certain partners.
Minimum Business Credibility– Another main disadvantage with limited liability partnerships is the fact that other businesses & many clients do not see them as a credible business. Corporations attract much more respect & are usually more successful than LLPs.
Foreign Direct Investment (FDI) in LLP- According to the FDI Policy, FDI in LLP is allowed only through Government route. Foreign company or individual can invest in LLP in India, but it needs take prior government approval.