A foreign investor wishing to establish business in India must consider multiple factors before deciding which type of business entity to choose. The Limited Liability Partnership (LLP) is gaining popularity for the many benefits it provides to the entrepreneur. LLP is a business entity that combines the limited liability of a business and the flexibility of a partnership.
LLP registration in India requires the LLP to operate in an industry where 100% FDI is allowed.
We have listed the characteristics of an LLP that should help you make an informed decision.
The liability of the partner is limited
One of the main reasons to register an LLP is limited liability. Limited liability means limited exposure to financial risk on the part of a company’s investors. Limited liability ensures that the partner’s liability in the LLP is limited to the amount of principal invested in the LLP.
For example, if Sam invested Rs 50,000 to start an LLP in India. The maximum liability that she can have is Rs 50,000. In other words, his potential loss cannot exceed Rs 50,000. She will not be responsible for any liability beyond this initial Rs 50,000.
Another important feature of an LLP is that the act of one partner does not affect the other partner. For example, if a partner borrowed some money in the name of the LLP without the other partner’s knowledge, the other partners cannot be held liable.
Transfer and Departures
LLP has meaning of perpetual succession, the LLP can continue its existence regardless of changes of partners. Partners may come and go, but the LLP continues to exist. A partner of an LLP can resign and assign his or her share of the profits to another person and exit the LLP. Exit formalities can be completed by executing a simple side agreement.
lawful accomplice
Corporations must hold board meetings four times a year, at least once every quarter. You must also hold an annual general meeting and keep minutes of such meetings. LLPs are not required to comply with such compliance unless otherwise specified in the LLP Agreement.
LLP need not audit your accounts unless your turnover exceeds Rs. 40 lacs or the capital injection is more than Rs 25 lacs in any financial year.
Income tax
LLPs have no Dividend Distribution Tax (DDT), while Limited Liability Companies in India are required to pay DDT at 16.609% (including surcharge and education fee) on dividends paid to shareholders.
The income tax rate for LLPs is 30%. After-tax profits shared by partners are tax-exempt.
let’s see an example
Jack and Jill start an LLP with a 50% profit split between them. In one financial year, the LLP made a profit of Rs 10,000,000. The corporate tax is Rs 3,00,000 (30% of profit). The balance of Rs 7,00,000 was shared between Jack (Rs 3,50,000) and Jill (Rs 3,50,000). Jack and Jill do not have to pay taxes on their income.
Corporation
LLPs and limited liability companies are legal persons and a separate legal entity from their partners and shareholders. limited liability companySimilar to a private limited company, it is able to enter into contracts and own property in its own name.
LLP Agreement
LLP is organized and operates on the basis of agreement. The LLP agreement will have the mutual rights, duties and obligations of the partner to each other and other legally binding provisions.
Remuneration and Interest on capital
Partners may receive compensation as worker partners, as long as the LLP agreement allows it.
LLP partners may also charge interest on invested principal up to 12% per year. Partners may also charge interest on loans made to the LLP, as long as the interest rates are within the limits specified in the income tax law.
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