Advantages & Disadvantages of LLP Registration in India – Benefits Explained

As the name suggests, registering as an LLP gives the partners running a business limited liability. In simple terms, the advantages of LLP include that the partners involved in a business have limited liability. In short, no individual partner is liable for the liability and misconduct created by another partner.

The Limited Liability Partnership Act of 2008 governs the rights and duties of the partners, and these partners and responsible for compliance with the provisions of this act.

It is an alternate form of business, which is different from Sole Proprietorship, Partnership, and Private Limited Company. Other benefits of LLP involve the flexibility in the independent decision-making of the partners who are operating a company. Additionally, LLP also has a very low compliance cost (Rs. 1,000 – 10,000) as compared to other business structures.

Advantages of LLP Registration

A Limited Liability Partnership (LLP) combines the flexibility of a partnership with the legal benefits of a corporate structure. Below are some of the key benefits of LLP in India:

1. Separate Legal Entity

One of the major advantages of LLP is that it functions as a separate legal entity. This means the LLP can own assets, enter into contracts, and be sued or sue in its own name. The partners are not personally liable for the firm’s debts or wrongful acts of other partners. 

Their liability is limited only to the extent of their agreed contribution. This provides a strong layer of personal asset protection for every partner.

2. No Minimum Capital Requirement

Unlike a Private Limited Company, there is no minimum capital requirement for starting an LLP. The contribution of partners can be in the form of tangible, movable, immovable, or intangible assets. 

This makes it one of the most cost-effective business structures in India — a major benefit of LLP registration in India for startups and small businesses.

3. Easy Formation and Low Compliance

An LLP is comparatively easier and cheaper to register than other business structures. It is governed by the LLP Act, 2008, and operates mainly through a partnership agreement. 

The benefits of LLP over a Partnership Firm registration also include fewer compliance requirements, no mandatory audit below a certain turnover, and minimal paperwork. This ease of formation makes LLP a preferred choice for professionals and SMEs.

4. Flexible Management Structure

Another important benefit of an LLP is that partners have the freedom to manage business operations directly. Management is not separate from ownership, giving partners autonomy to make decisions efficiently. 

Moreover, one partner is not responsible for the misconduct or negligence of another — one of the practical benefits of LLP over partnership firms.

5. Limited Statutory Filings

LLPs enjoy simplified annual compliance compared to companies. They are only required to file:

• Annual Returns
  
• Statement of Accounts and Solvency
  
• Income Tax Returns

An audit is mandatory only when:

• Total contribution exceeds ₹25 lakhs, or
  
• Annual turnover exceeds ₹40 lakhs.

This limited compliance requirement is one of the major benefits of LLP over Private Limited Companies, and also results in tax benefits of LLP due to lower compliance costs.

6. Tax Benefits of LLP

The tax benefits of LLP make it an attractive option for many business owners. LLPs are taxed at a flat rate of 30%, but they are exempt from the Dividend Distribution Tax (DDT) applicable to companies. 

Partners also do not pay tax on profit shares, as profits are taxed only at the LLP level. This results in better post-tax earnings compared to other companies.

7. Flexible in Nature

It has combined features of both – a Partnership Business incorporated under the Partnership Act of 1932 and that of a corporation under the Companies Act of 2013.

• A Partnership Business- The business is structured and run by partners and does not have an organisational structure to comply with, but it does not have limited liability; it has unlimited liability.
• A Corporation- A corporation where there is compliance of a corporate body, but it has limited liability; personal assets of the stakeholders are protected in case of any business default or Tax Liability.

8. Easy to Wind Up

Another advantage of LLP in India is the ease of closure. If the partners decide to dissolve the LLP, the process is simpler and faster — usually completed within 2–3 months. This is much quicker than winding up a Private Limited Company.

Also Read: How to Wind Up an LLP Company

Disadvantages of LLP Registration

While there are several benefits of LLP registration, it’s important to consider the drawbacks as well to make a balanced decision.

1. More Paperwork Compared to Partnership Firms

Although LLPs require fewer compliances than companies, they still involve more documentation and filings than traditional partnership firms due to their separate legal status.

2. Difficulty in Attracting Investors

Raising funds is one of the main disadvantages of LLP in India. LLPs cannot issue shares; hence, investors or venture capitalists usually prefer companies where they can hold equity. This limits external funding opportunities.

3. Higher Penalties for Non-Compliance

Failure to meet annual compliance deadlines results in higher penalties under the LLP Act. Even minor delays in filing can attract significant fines, which can be more than those imposed on private limited companies.

4. Minimum Two Partners Required

An LLP must have at least two designated partners at all times. If one partner leaves, the remaining partner can only continue operations for a limited period (up to six months). After that, the LLP must be reconstituted or dissolved.

5. Tax Filing Even with No Income

Even if an LLP has no business transactions or profit, it must still file income tax returns. The LLP’s profits are taxed at 30%, and partners cannot avail the benefit of progressive individual tax slabs.

6. Cannot Raise Capital from the Public

Unlike companies, an LLP cannot raise capital from the public since it cannot issue shares or securities. Ownership and profit sharing remain limited to its partners only — one of the clear disadvantages compared to a limited company.

LLP At a Glance: Key Features

The following are the features of registering as an LLP in India:

1. Different Forms of Partnership

Normally, as per the provisions, an LLP can have two designated partners. This may be a natural person or a Body Corporate.

A Body Corporate may be defined as a company that is incorporated/registered outside India, but does not include a corporation sole, a cooperative society that is not registered under any law for the time being in force, and any other body corporate that is not a company according to Section of the Companies Act, 1956. It includes the following: 

• An LLP registered under the Act;
• An LLP incorporated outside India;
• An Indian company that is either private or public; and
• An individual.

2. Artificial Legal Person

In supplement to the point above, an LLP may be treated as a separate entity, a separate artificial person, it can be made a partner, as discussed above, a partnership firm because it is not explicitly restricted in the Partnership Act, as well as a shareholder in the company if it can acquire shares of the company since it is not explicitly restricted in the Companies Act, 2013.

3. Perpetual Succession

An LLP is capable of perpetual succession; it can own, hold, dispose acquire shares, a part of its name. The property may be movable, immovable, tangible, or intangible, and it has its ongoing existence despite of whether members are alive or not.

5. No mandatory company stamp/seal

The company uses a stamp or seal to show that they have approved themselves to do business. An LLP doesn’t need to have a seal or stamp to be used in the common name of the business. But if an LLP still wants to have a seal, as per Section 14(c) of the Limited Liability Partnership Act, 2008, then it needs to be used carefully in the presence of the two designated partners.

6. No change in Members’ Number

As per Section 6(1) of the Act, there needs to be at least two designated partners for the formation of an LLP. Section 7 of the Act states that one of them must be a resident of India and must be able to incorporate a company in India. 

Death, or absence of one partner, or even a reduction in one of the partners at the table, brings the sole liability on the remaining partner if he agrees to do so, but it cannot be for a period longer than 6 months. The minimum number of members required for the formation is 11.

7. An investigation by a competent Authority

An LLP may be investigated by the Central Government, in case there is an allegation that the LLP is trying to defraud creditors or partners, or if there is a negative complaint by the Registrar of Companies

8. Motive of Profit

An LLP is formed only to make a profit or to do business; it cannot be formed for profit or any sort of charity.

9. LLP Agreement

An LLP is governed by the terms of the LLP agreement that the partners have agreed upon with each other. This agreement decides how the business will run, the powers and responsibilities of the partners, and this agreement must comply with the Limited Liability Partnership Act, 2008.

10. Conversion into LLP

The Limited Liability Partnership Act of 2008 permits the conversion of a partnership firm under the Partnership Act, as well as a private or public unlisted company, into a Limited Liability Partnership (LLP). This conversion is allowed as long as there is no security interest existing on the date of the application, and all shareholders must become partners in the LLP.

11. Mutual Agency

All the partners in an LLP are the agents of the LLP; an unauthorized action of a single partner does not bind all the partners to it. Each partner is individually liable for their action and to the extent of their contribution to the LLP. They aren’t liable personally as mentioned above. The designated partners are responsible for the legal compliance of the LLP.

Ending Note

In conclusion, a Limited Liability Partnership offers the advantages of limited liability, flexible management, and pass-through taxation, fostering a balanced business structure. It encourages entrepreneurial collaboration while safeguarding personal assets. However, challenges include potential complexities in decision-making and compliance.

Despite this, the LLP’s adaptability makes it an appealing choice for small to medium-sized enterprises seeking liability protection without the formalities of a corporation. Understanding both the advantages and disadvantages of LLP in India is crucial for businesses to leverage the structure effectively, aligning with their specific goals and operational needs.

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Frequently Asked Questions (FAQs)

1. What are the advantages of LLP registration in India?

LLP registration in India offers limited liability protection, flexible management, and minimal compliance compared to private limited companies. It combines the benefits of partnership and company structures, making it ideal for startups and small businesses seeking legal protection without high compliance costs.

2. What are the main benefits of an LLP over a private limited company?

The key benefits of an LLP over a private limited company include lower compliance costs, no mandatory audits for smaller LLPs, and a flexible ownership structure. Unlike Pvt Ltds, LLPs don’t require a board of directors or complex filings, making them more cost-effective for small firms.

3. What are the tax benefits of an LLP in India?

LLPs enjoy tax benefits such as no dividend distribution tax (DDT) and lower compliance with corporate tax laws. Partners are taxed individually on their income shares, avoiding double taxation. This makes LLPs more tax-efficient compared to companies paying corporate and dividend taxes.

4. What are the benefits of LLP over a partnership firm?

The main benefits of an LLP over a partnership firm are limited liability protection and legal recognition as a separate entity. In LLPs, partners are not personally liable for business debts, and the structure offers greater credibility and transparency for clients and investors.

5. What are the advantages of LLP over sole proprietorship?

An LLP provides better scalability, legal recognition, and limited liability than a sole proprietorship. It allows multiple partners to share management and profits, ensuring business continuity and protection of personal assets in case of financial losses or business risks.

6. What are the overall advantages and disadvantages of LLP in India?

The advantages of LLPs include limited liability, easy formation, tax efficiency, and minimal compliance. However, disadvantages include limited fundraising options, restricted ownership transfer, and higher penalties for non-compliance. LLPs suit small to medium businesses seeking flexibility and legal protection.

7. What are the benefits of LLP registration for startups in India?

LLP registration benefits startups by offering a cost-effective, compliant, and flexible structure. It reduces legal risks through limited liability and allows profit-sharing without complex governance. This makes LLPs a popular choice among small businesses and tech-based startups in India.