A foreign investor looking to set up a business in India must consider multiple factors before deciding which type of business entity to choose. Limited Liability Company (LLP) is gaining popularity with the many benefits it offers 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 partner’s liability is limited.

One of the main reasons for registering 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 capital invested in the LLP.

For example, if Sam invested Rs 50,000 to start an LLP in India. The maximum liability she can bear 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 one partner borrowed some money on behalf of the LLP without the knowledge of the other partner, the other partners cannot be held liable.

Transfer and Departures

LLP has a perpetual succession meaning, the LLP can continue its existence regardless of changes in partners. Partners may come and go, but the LLP continues to exist. A partner in an LLP may resign and assign his share of the profits to another person and exit the LLP. Exit formalities can be completed by executing a simple supplemental agreement.

legal accomplice

Limited companies must hold board meetings 4 times a year, at least once every quarter. You must also hold an annual general meeting and keep minutes of those meetings. LLPs do not have to adhere to such compliance unless otherwise specified in the LLP Agreement.

LLP does not need to audit its accounts unless its turnover exceeds Rs 40 lacs or capital contribution exceeds Rs 25 lacs in any financial year.

income tax

LLPs do not have a Dividend Distribution Tax (DDT), while Indian Limited Companies are subject to paying DDT at 16.609% (including surcharge and education fee) on dividends paid to shareholders .

The income tax rate for LLPs is 30%. The profits shared by the partners after paying taxes are exempt from taxes.

Let’s look at an example

Jack and Jill start an LLP with a 50% profit share between them. In one fiscal year, the LLP made a profit of Rs 10,00,000. Corporate tax is Rs 3,00,000 (30% of profit). The balance of Rs 700,000 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

LLP and Private Limited companies are legal persons and a separate legal entity from their partners and shareholders. Limited liability company, similar to a private limited company, is capable of entering into contracts and owning property in its own name.

LLP Agreement

LLP is organized and operates on an agreement basis. The LLP agreement will contain the partners’ mutual rights, duties and obligations to each other and other legally binding provisions.

Remuneration and interest on capital

Partners may receive remuneration as a working partner, as long as the LLP agreement allows it.

LLP partners are also entitled to charge interest on invested capital up to 12% per annum. Partners may also charge interest on loans made to the LLP, provided the interest rates are within the limits specified in the income tax law.