India LLP myths: Don’t believe them

A decade has passed since Limited liability partnership companies were introduced. Targeted segments, however, have not received it well. This structure still has some misconceptions that are prevalent in general. I will address several of these misconceptions in today’s post.

Myth No 1: LLPs have higher tax liabilities than partnerships

LLPs are corporations when viewed from a corporate perspective. As a result, many people believe that the tax liability for a general partnership is much higher than that for a limited partnership. It is for this reason that partnerships are often favored over LLPs when lending money.

The following needs to be clarified. Limited Liability Partnerships are simply another type of partnership recognized by tax authorities. In terms of taxation, both structures have the same provisions.

We shouldn’t stop here if you are unable to register an LLP because of this. Also, keep in mind the next point.

Myth 2: There is no Compliance for LLP

It is false. LLPs are governed by the LLP Act, 2008. These regulations must be followed at various events. No transactions must be reported by LLPs during the year, even if they do not have annual returns to file. It is also necessary to file income tax returns for an LLP.

The LLP agreement or any clause within it may need to be amended several times as a business owner. Every change to the LLP Agreement must also be reported to RoC. An LLP’s Post Registration Compliance Checklist can be found here.

The number of those who follow this understanding is small, while the number of those who believe in the next understanding is vast.

Myth 3: Compliance level is too high like a Company

There is no truth to this. The forms must be filed on a regular basis.  In comparison with a company, the level of the organization is much lower. Like a company, an LLP does not have to keep registers or hold meetings. Meetings or resolutions are not required unless they are provided.

Furthermore, audit incurs a fixed cost for the company every year. Limitations do not apply to LLPs until one of the following thresholds is crossed:

Turnover – INR 40 Lakh

Capital Contribution – INR 25 Lakh

Myth 4: Partners get limited returns

We will repeat point 2 again. Our partnership is mutually beneficial. It does not mention dividends, and returns are not called dividends. Returns to partners come from three heads:

Remuneration

Interest on capital

Share of profit

Partners can take home all profits based on a predetermined ratio since there are no limits for profit distribution. The payment schedules of LLP partners are determined by each partner. It is important to determine what remuneration is allowable for partners under Income Tax law. Unlike LLPs, companies have double-taxed dividends. Therefore, it makes sense to distribute profits here.

Myth 5: LLP is ideal for investments

This does not fit the definition of a myth. A corporation’s structure is typically determined by its funding requirements. Due to this, I wanted to clarify your position on LLP funding.

In spite of both having limited liability and many similar features, a private company is generally considered to be a better investment vehicle than an LLP. Why a company wins is explained by the following factors:

A company’s ownership and sharing is based on equity.

The shares of an LLP are more transferable than the capital.

Furthermore, premium shares can also be issued. A LLP, however, does not stand a chance in this regard. Therefore, premiums are a primary attraction for investors.

Myth 6: Profit sharing and the capital ratio is the same

LLP agreements require that profit sharing and capital contribution ratios be the same. The partners are free to make both decisions.

It is the profit sharing ratio that determines how much a partner takes home. In business, capital refers to what an investor contributes. A person’s ownership is also determined by his or her capital. Neither factor is dependent on the other.

Myth 7: There is no distinction between partners

It is important to understand that there are two types of partners in an LLP: a Partner and a Designated Partner. The LLP provides this distinction, whereas the partnership does not. Individuals must be assigned responsibilities and obligations in a limited liability partnership (LLP). A designated partner has therefore been appointed. The LLP’s partners ensure compliance with all annual and other compliance obligations, along with prescribed responsibilities. Discover what makes Designated Partners unique.

Myth 8: All data is accessible to the public

It occurs because a company has a certain nature. The data of partners is not reserved by LLPs, however. On the MCA portal, general partners can access names of designate partners, DINs, and other information.

A LLP agreement is also a private document. A partner’s internal agreement is also outlined, which raises concerns.

Annual returns, financial statements, and other forms can be viewed by the public. The credibility of banks, financial institutions, and other parties depends on these documents. Documents that are available to the public should not be viewed as a flaw by you, but rather as a strength.

Myth 9: LLP registration is an expensive affair

I would like to conclude by saying. As far as the cost of setting up LLPs is concerned, there is no evidence that they are more expensive than general partnerships. Registration costs are heavily influenced by the professional’s services, since the government’s fee remains relatively constant. When choosing a professional, we take government registration fees into account. For LLP registration online, you will need to pay about 750-1000 INR. The agreement must also be stamped to be executed. A property’s state and capital contribution determine the stamp duty payable. It is these factors that determine the amount payable, which is usually 500 rupees. Create a company easily with LegalWiz.in. Besides offering a variety of packages at reasonable prices, we also offer tailor-made services.

Bottom Line

It is crucial to understand how a business operates from the beginning. It affects the way operations are conducted, taxation, and many other matters. Make sure you choose the right business structure and that any misconceptions you may have are clarified. I’ve addressed misconceptions we’ve encountered frequently throughout this article. 

Leave a Reply

Your email address will not be published.