LLP was introduced a decade ago. But, it has not successfully received wide acceptance from targeted segments. Some misconceptions are still prevailing in general about this structure. Today, I am going to clear up many such misconceptions.
Myth 1: LLP has higher tax liability than Partnership
LLP is a corporate structure. So, many assume that the tax liability is much higher compared to the general partnership. This becomes a common reason for lending upon Partnership and not LLP.
Well, let me clear this up. LLP is just another Partnership for tax authorities. Whether it is the tax on the firm’s income or partners’ the provisions are the same for both structures.
So, if this reason is holding you from LLP registration, let’s not stop. But, let’s not forget to consider the next point.
Myth 2: There is no Compliance for LLP
This is completely untrue. It is a corporate structure formed under the LLP Act, 2008. The same prescribes much compliance at various events. LLP must file annual returns, even if it has no transaction during the year. Also, Income Tax Return filing is a must for an LLP.
While running a business, there are many instances to change LLP agreement or any of its clauses. Any change in the LLP Agreement also requires intimation to RoC. Check out the Post Registration Compliance Checklist for an LLP.
While few follow this understanding, others believe in the next.
Myth 3: Compliance level is too high like a Company
No, that is not true. Yes, you need to file a few forms regularly. But, the level is much lesser than a company. Unlike a company, an LLP does not need to maintain registers and conducts meetings. There is no procedural formality like meetings or resolutions unless provided.
Further, Audit attracts yearly fixed cost for the company. But in LLP, it applies after crossing any of the following limits:
- Turnover – INR 40 Lakh
- Capital Contribution – INR 25 Lakh
Myth 4: Partners get limited returns
I will again repeat point 2. It is a Partnership. And Returns are not termed as the dividend here. Partners get returns in following three heads:
- Interest on capital
- Share of profit
The partners can take home all the profit in pre-decided ratio because there is no limit for distribution of profit. LLP structure provides the flexibility to decide how and when a partner is paid. However, you must consider what is allowable remuneration to partners under Income Tax law.
While the dividend from the company is double-taxed, it is not the case in LLP. Therefore, the distribution of profit is quite cost-efficient here.
Myth 5: LLP is ideal for investments
This does not fit to the definition of myth. Funding needs have been observed as one of the primary reasons for choosing a corporate structure. Therefore, I wanted to clear your thoughts on funding in an LLP.
It is fairly observed that a Private Company is preferred over an LLP for investments, even if both offer limited liability and many similar features. I can outline the following reasons why a company wins the race:
- In a company, it is equity-based ownership and sharing.
- Shares are more transferable compared to capital in LLP.
- Further, share can also be issued at a premium. But an LLP does not stand chance for same. Therefore premium is a primary reason for investors’ attraction to the company structure.
Myth 6: Profit sharing and the capital ratio is the same
Generally, while execution of LLP Agreement, partners understand that the profit sharing ratio and capital contribution ratio must be same. The fact is that the partners are free to decide both.
Profit sharing ratio is what a partner takes home. And capital is what a partner contributes to business. Further, capital decides the ownership. Both factors are independent of each other.
Myth 7: There is no distinction between partners
If you have carefully understood what an LLP is, you will find two types of partners – Partner and Designated Partner. This distinction is not provided in Partnership but in LLP. As LLP is a separate legal identity, it needs to assign the responsibilities and obligations on a specific person. Therefore, there are designated partners appointed. Apart from prescribed responsibilities, such partners are responsible for the annual and other compliance of the LLP. Understand here how Designated Partners are different from other partners in an LLP.
Myth 8: All data is accessible to the public
This confusion is created as that is the case in a Company. However, in LLP the data of partners is reserved. Where name, DIN and other details of Designated Partners are available on the MCA portal, it is reserved for general partners.
Further, the LLP agreement is also a private document. The concern is raised because it also outlines the internal agreement between partners.
The documents such as annual returns, financial statement and other forms are made public. The banks, FIs and other parties to a contract build the business credibility based on these documents. Hence, if you find public documents as a demerit for you, you should rather consider it as a plus point.
Myth 9: LLP registration is an expensive affair
Last, but not least. If you believe that LLP is costly to set up as compared to a general partnership, it is not true. The registration cost heavily depends on the professional’s services and changes because the Government fee is fairly constant. While it is up to you to choose a professional, we are taking into consideration the Government fee for registration. The form filing fee is nearly 750-1000 INR at present for online LLP registration. The process also requires paying stamp duty for execution of the agreement. Payable stamp duty is decided based on the capital contribution and the concerned State. The basic amount payable is INR 500, however, varies based on these factors. The formation is affordable with LegalWiz.in services. Further, our customised offerings help to choose the right package in a cost-efficient manner.
While starting a business you need to understand the structure from basics. The business structure primarily affects the manner of operations, taxability and many other matters. Therefore, choose the business structure wisely and clear up any misconception you have. I have tried to address the misconceptions, which we have come across frequently. If you still don’t find your answer, LegalWiz.in expert is just a call away.