The Limited Liability Partnership (LLP) integrates the ease of running a Partnership along with the the separate legal entity status and limited liability aspects of a company. What’s more is that such an entity has minimal compliance requirements and need not conduct an external audit of its books until it has a turnover of Rs. 40 lakh per year or a paid-up capital contribution of Rs. 25 lakh.
Advantages of LLP
Separate legal entity: An LLP is a separate legal entity. This means that it has assets in its own name and can sue and be sued. Furthermore, one partner is not responsible or liable for another partner’s misconduct or negligence.
No owner/manager distinction: An LLP has partners, who own and manage the business. This is different from a private limited company, whose directors may be different from shareholders. For this reason, VCs do not invest in the LLP structure.
Flexible agreement: The partners are free to draft the agreement as they please, with regard to their rights and duties.
Limited liability: The liability of the partners is limited to the extent of his/her contribution to the LLP. Unless fraud has been detected, the personal assets of the partner are protected from any liability of the LLP.
Fewer compliance requirements: An LLP is much easier and cheaper to run than a private limited company as there are just three compliances per year. On the other hand, a private limited company has a lot of compliances to fulfil and conduct an audit of its books.
Easy to wind-up: Not only is it easy to start, it’s also easier to wind-up an LLP, as compared to a private limited company. While it still takes two to three months to complete this process, it can take over a year to close a private limited company.
Disadvantages of LLP
Inability to raise VC funding: VCs would be unwilling to invest in an LLP structure. This is because all ‘shareholders’ in an LLP must be partners, which have certain responsibilities toward the entity. No VC wants any of these responsibilities, and would, therefore, only invest in a private limited company.
Rights of partners: An LLP can be structured in such a way that one partner has more rights than another. So it isn’t a one vote per share system. So, some lesser partners may feel compromised if higher shareholders choose to move the business in a direction that affects their interests.
Greater penalties: An LLP’s compliances are minimal, but if you don’t complete them, you could end up paying more in fines than you would with a private limited company. These fines can escalate to Rs. 5 lakh for a single year.