Listed below are some of the benefits of Limited Liability Partnership entities. However an entrepreneur should choose the entity based on his or her requirements and decide which suits them best in the long run.
Minimum Capital
To incorporate a private limited company, the shareholders need to invest a minimum of Rs 1 lac into the company. This is not applicable for an LLP. An LLP can be incorporated with a capital of Rs 1 or above.
Limited Liability
One of the main advantages of starting a private limited company is limited liability. Limited liability means limited exposure to financial risk by investors of a company. Limited liability means the shareholders liability in the company is limited to the capital amount invested in the company.
For example, if Sam invested Rs 50,000 to start a private limited company. The liability is his investment of Rs 100,000. In other words, his can potential loss cannot be beyond Rs 50,000. He won’t be liable 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 of one partner borrowed some money in the name of the LLP without the knowledge of the other partner, the other partners cannot be held liable.
Transfer and Exits
A partner of an LLP can resign and assign his profit sharing to another person and exit the LLP. Exit formalities can be completed by way of executing a simple supplementary agreement.
Legal Compliance
Limited companies need to hold board meeting 4 times a year, at least once in every quarter. It also needs to hold annual general meeting and maintain minutes for such meetings. An LLP does not have to adhere to such compliance unless and otherwise specified in the LLP Agreement.
Income Tax
LLPs do not have Dividend Distribution Tax (DDT) whereas Companies are liable to pay DDT @ 16.609 % (inclusive of surcharge and education cess) on dividends paid to the shareholders.
Both LLP and companies are taxed at 30% plus education cess and higher education cess.
Audit
LLP has to appoint and get its accounts audited only if the LLP’s turnover exceeds Rs.40 Lacs or the capital contribution is more than Rs 25 Lacs any financial year.
But there are other factors an entrepreneur should consider such a size and nature of business, fund raising, scale etc before choosing the type of business entity.