In India, to commence business as a startup – an entrepreneur has to choose from different types of legal entities to conduct business which includes Limited Liability Partnership, Private Limited Company, Public Limited Company, Sole Proprietorship and Partnership Firm.
In order to incorporate the best matched legal corporate entity for the startup, the entrepreneur must consider and choose the legal corporate entity based on various factors which include compliance and taxation requirements, investments,ownership and management control.
What is a Limited Liability Partnership?
Limited Liability Partnership (governed under The Limited Liability Partnership Act, 2008) was established by an Act of the Parliament with effect from 31st March 2009 as the new form of business entity.
LLP allows members to retain flexibility of ownership like a Partnership Firm but provides a liability protection similar to companies incorporated under the Companies Act, 2013. It therefore exhibits elements of partnerships and corporations. Overall, it is the pliability of an LLP along with good corporate governance structure that makes it a superior option to any other corporate entity.
Separate Legal Entity
Like a company a limited liability partnership firm also has a separate legal entity. Therefore the partners and the LLP are distinct from each other. This is like a company where members are different from the company’s shareholders.
In a corporate entity incorporated under the Companies Act, 2013, there should be a minimum amount of capital brought by the members/owners, but to start a Limited Liability Partnership firm there is no minimum capital requirement.
To start a limited liability partnership at least two members are required initially since it’s a partnership. However, there is no limit on the maximum number of partners.
All the corporate entities incorporated under the Companies Act, 2013, irrespective of their share capital, are required to get their accounts audited through a Statutory Audit, whereas in case of limited liability partnership, there is no such mandatory requirement.
It is more flexible to incorporate, manage and organize the structure of a limited liability partnership in comparison to incorporating, managing and organizing the structure of a corporate entity incorporated under the Companies Act, 2013.
There is no maximum limit for the number of partners in an LLP, hence with any number of partners a limited liability partnership can be incorporated, managed and organized.
Raising and utilization of funds depends on the partners will. Funds can be bought and utilized only as per the norms listed under the limited liability partnership act, 2008. Utilization of funds can be initiated with the least amount of funds available with the promoters.
An LLP is exempt from paying Dividend Distribution Tax (DDT) whereas for corporate entity incorporated under the Companies Act, 2013 DDT on dividend distribution is mandatory.
LLPs as well have some limitations within. Some of them can be summarized as below:
The incorporation, management and operations of a limited liability partnership are governed under the Limited Liability Partnership Agreement and hence are binding. Therefore, all actions by a partner must be taken with consent of all partners and as per the Limited Liability Partnership Agreement limiting the scope of improvisations.
Raise money from public
An LLP cannot raise funds through public unlike a corporate entity incorporated under the Companies Act, 2013. Therefore, in order to generate and utilize funds either partners need to inject fresh contribution or else loans are required to be taken.
Angel investor or venture capital firm does not prefer LLP. The structure and governing law of Company makes it easier for infusion of an investor and also enjoys better credibility and confidence.
There is no absolute rule that makes one type of corporate entity better than the other type. The selection of the most suited legal corporate entity by the entrepreneur shall be based on the fact and requirements.
For example, for an early stage startup it’s highly advisable to incorporate an LLP by pooling resources to lower the costs of doing business while increasing the capacity for growth. On a later stage when the startup is investment ready and starts generating revenue converting the LLP to a company removes restrictions while scaling up.