Regulatory framework and Taxation for Limited Liability Partnerships

A Limited Liability Partnership (LLP) is a newer way to start a business that gives partners in a partnership more safety from personal liability. LLPs are not their own business entities; for tax reasons, they are treated like limited or general partnerships. In this blog post, we’ll talk about Taxation for Limited Liability Partnerships and what their perks are. We will also show you how to set up a limited liability partnership (LLP).

Meaning of Limited Liability Partnership

LLPs are flexible partnerships that offer limited liability to its owners. LLPs are popular in India because they combine limited liability with partnership simplicity. The 2008 Limited Liability Partnership Act established LLPs in India. 

Indian Parliament passed this act to legalize LLPs and allow entrepreneurs and professionals to form them. The Indian ROC and MCA regulate LLPs. The 2008 Limited Liability Partnership Act launched LLPs in India. LLPs blend partnership and limited liability corporation traits. 

LLP partners have limited liability, meaning they are not personally accountable for the LLP’s debts and obligations. LLPs are taxed as partnerships, and partners can administer the business as they see fit.

Characteristics of Limited Liability Partnership

• Separate Legal Entity: LLPs are legal entities separate from their partners. Contracts, assets, and lawsuits can be made in its name.
• Limited Liability: LLP partners are only liable for their contributions. LLP liabilities cannot be paid with partners’ personal assets.
• No minimum Capital. As agreed, partners can invest any amount. 
• Perpetual Succession: The LLP survives partner changes and retirement. LLP rights and responsibilities are unaffected by partner changes.
•  Management Flexibility: LLP agreements allow partners to govern and operate the LLP. The agreement might outline partner duties, profit-sharing, and decision-making. 
• Easy to Form and Maintain: LLPs are easier to form and maintain than companies. Compliance is simpler. 
• Indian LLPs receive tax benefits: No dividend distribution tax applies, and they are taxed less than businesses.

Positive Aspects of Limited Liability Partnership in India

LLP trading has many advantages. –

• Limited liability shields members’ personal assets from business liabilities. LLPs are legal entities.
• Members agree in writing on partnership operations and profit distribution. Business management may be more flexible.
• LLPs are legal persons. It can buy, rent, lease, own, hire, contract, and be held accountable.
• Company ownership. Two corporations can join LLPs. A real person must be an LTD company director.
• Members both designated and undesignated. The LLP can function with a tiered membership structure. 
• LLP registration at Companies House prevents another partnership or corporation from using the same name.
• LLPs in India are taxed less than corporations. LLP partners are taxed according to their individual tax slabs, which can save money.
• In India, limited liability partnerships (LLPs) have fewer regulatory burdens than corporations.

Drawbacks of Limited Liability Partnership

All business models have pros and cons. Let’s have a look at LLP disadvantages:

• LLPs’ biggest drawback is public transparency. Companies House must publish financial accounts. The accounts may reveal members’ private income.
• Personal income is taxed. Company registration may offer tax benefits, depending on your situation.
• A share-limited firm cannot retain profit. This implies all earnings is dispersed and cannot be carried over to subsequent tax years.
• LLPs need two members. LLPs may dissolve if a member leaves.

Limited Liability Partnership Registration

Anyone who want to register LLP need to follow below mentioned steps:

• Obtaining a Certificate of Digital Signature (DSC): All specified partners must receive DSC if they don’t already have it. This step is crucial because all LLP registration documents are signed digitally and the procedure is online. DSCs must be obtained from government-approved certifying agencies.
• Name Approval: For their LLP, the partners need to come up with a unique name and get it accepted by the ROC.
• Director Identification Number: A director identification number (DIN) must then be obtained from the Ministry of Corporate Affairs by each partner.
• LLP Agreement: The partners must make an LLP agreement that spells out the rules of the company.
• Filing of Forms: After the LLP agreement is signed, the partners must send the ROC the necessary forms and papers.
• Certificate of Incorporation: If everything is in order, the ROC will give the LLP a certificate of formation and register it.
• Apply for Bank, TAN and Bank Account: After registration, the applicant(s) should apply for TAN, PAN, and a bank account for the new LLP. For tax returns and assessment, the entity needs a PAN and TAN. Registration Arena accepts TAN and PAN.

Compliance Requirement for Limited Liability Partnership

Following are the Compliance Requirement for LLP:

• Each year, LLPs must submit an annual return to the ROC. 
• The ROC requires all LLPs to submit an annual statement of accounts.
• All LLPs must submit tax returns for the financial year.
• Limited Liability Partnerships (LLPs) having more than Rs. 40 lakhs in annual revenue or more than Rs. 25 lakhs in capital contribution must have their financials audited by a certified accountant.

Limited Liability Partnership Ownership and Executives:

An LLP in India must have at least two partners and no maximum. Individuals or companies can partner. LLP partners are only liable for their agreed share, unlike in a traditional partnership. 

The LLP agreement must state that partners can split earnings and losses however they like. The LLP’s management structure and chosen partners for daily operations are up to the partners.

Limited Liability Partnership Taxation

India taxes LLPs differently than partnerships and corporations. LLPs pay 30% (plus surcharge and cess) on their whole income. LLP partners are not taxed on LLP income. 

Instead, partners only pay taxes on profits or remuneration. LLPs are exempt from dividend distribution tax, which businesses pay when they pay shareholders dividends.

Limited Liability Partnership Conversion

Traditional partnership firms and private companies can convert to LLPs in India. The method requires shareholder or partner permission, Income Tax Department approval, and ROC filing. 

The traditional partnership firm or private company becomes an LLP, and the partners or shareholders become LLP partners.

Foreign Limited Liability Partnerships in India.

Under certain circumstances, foreign LLPs may also conduct business in India. They need to sign up with the ROC, and the Income Tax Department will issue them a PAN and a TAN for tax deduction and collection purposes. 

Certain industries, including agriculture, plantations, print media, and real estate, are off-limits to foreign LLPs. The Reserve Bank of India’s regulations and the Foreign Exchange Management Act (FEMA) must also be followed.

Takeaway

With so many positives, it’s easy to see why LLPs are so common in India. The partners are shielded from personal responsibility, it’s simple to set up and run, and it offers advantageous tax treatment. However LLPs may not be the best fit for every business due to the necessity to adhere to a number of regulations.