Company Formation

ADVANTAGES OF FORMATION OF LIMITED LIABILITY PARTNERSHIP (LLP)

Limited Liability Partnership entities, the world wide recognized form of business organization has now been introduced in India by way of Limited Liability Partnership Act, 2008. A Limited Liability Partnership, popularly known as LLP combines the advantages of both the Company and Partnership into a single form of organization. LLPs also have many advantages over proprietorships, partnerships and limited companies as elaborated below.

● LIMITED LIABILITY

First and foremost benefit of trading/doing business via LLP is the limited liability conferred upon the partners. As a sole trader or partnership business, personal assets of the proprietor or partners can be at risk in the event of a failure of the business, but this is not the case for an LLP. Unfortunate events like business failures are not always under an entrepreneur's control; hence it is pivotal to secure the personal assets of the businessman in the event of crises. Unlike proprietorship and partnership, if an LLP becomes insolvent and is wound up, only the assets of the LLP are used to clear its debts. The partners of LLP have no personal liabilities and are not made bankrupt and are free to operate as credible businessmen.

● LEGAL ENTITY/STATUS OR RECOGNITION An LLP

is a legal entity, a juristic person established under the Act. It has its existence separate from its partners. Corporate entity status enables LLP to be taken more seriously than a proprietorship/partnership status does. Operating as a corporate entity/LLP often gives suppliers and customers a sense of confidence in a business. Larger organisations in particular will prefer in dealing with corporate entities than proprietorship/partnership organisations. Easy to attract quality workforce and achieve strategic motivation of employees by using flexible and wide range of management designations.

●  TAXATION LLPs

are taxed like general partnership firms. LLPs pay an effective tax of 30.9%. They are exempted from 10% surcharge. LLPs tax payment is lower than that of companies, which pay a 33.99% tax on profits. The tax will be imposed only on 40% of the LLP's income, since the firm will be allowed to pay the balance 60% to the partners as remuneration. This means, the partners will have to pay tax on the amount paid to them. So, there will be no double taxation of income.

● NO AUDIT REQUIREMENT

Tax Audit is not required unless capital exceeding Rs. 25 lac or turnover exceeding Rs. 60 lac. Unlike Limited Companies, no requirement for payment of Corporation Tax on distribution of income among Partners. Unlike Private Limited Companies, LLPs are exempted from statutory audit.

● OTHER IMPORTANT ADVANTAGES

Low cost of Formation and compliances Less statutory compliances as comp ared to Private limited Companies Less requirements as to maintenance of statutory records Renowned and accepted form of business worldwide No requirement of any minimum capital contribution No restrictions as to maximum number of partners Body corporate can be a partner of an LLP.

● THE ADVANTAGES OF REGISTRATION OF COMPANY

A Private limited company has many advantages over proprietorships and partnerships as elaborated below.

● BORROWING CAPACITY

A company enjoys better avenues for borrowing of funds. It can issue debentures, secured as well as unsecured, accept deposits from the public, etc. Even banking and financial institutions prefer to render large financial assistance to the company rather than partnership firms or proprietary concerns.

● TAXATION

Sole traders and partnerships pay income tax. Companies pay Corporation tax on their taxable profits. There is a wider range of allowances and tax deductible costs that can be offset against company's profits.

● RAISING MONEY FROM PUBLIC

Public Limited Companies can raise large amount of capital from the general public by issue of shares and public deposits. Private Limited Companies can raise capital by private placement of shares and deposits.

First and foremost benefit of doing business via company is the limited liability conferred upon the company's directors and shareholders. As a sole trader or partnership business, personal assets of the proprietor or partners can be at risk in the event of a failure of the business, but this is not the case for a Company. The unfortunate events like business failures are not always under an entrepreneur's control; hence it is pivotal to secure the personal assets of the businessman in the event of crises. Unlike proprietorship and partnership, if a Company becomes insolvent and is wound up, only the assets of the company are used to clear its debts. The Directors or Shareholders of the company have no personal liabilities and are not made bankrupt.

● LIMITED LIABILITY LEGAL ENTITY OR RECOGNITION

A private limited company is a legal entity, a juristic person established under the Act. It has its existence separate from its directors and members. Operating as a private limited company often gives suppliers and customers a sense of confidence in a business. Larger organizations in particular will prefer in dealing with private limited companies than proprietorship / partnership organizations. Easy to attract quality workforce and achieve strategic motivation of employees by using flexible and wide range of management designations.

● EASY TRANSFERABILITY

Where it is proposed to sell the business as a going concern, all that is required is to transfer the entire shareholding to the purchaser and thus facilitates easy change in management and ownership. This will save time and money fo r the Promoters. Huge amount of stamp duty is saved. This feature is very useful for easy and hassle free exit avenues for entrepreneurs. Easy transferability of business and ownership also helps in attracting venture capital funding for new business ventu res.

● DUAL RELATIONSHIP

In the company form of organization it is possible for a company to make a valid contract with any of its shareholders/directors. It is also possible for a person to be in control of a company and at the same time be in its employmen t. Thus, a person can at the same time be a shareholder, director, creditor and employee of the company. For eg: As a director he can receive remuneration. As a shareholder he can receive dividend. As a lessor he can receive lease rent. As a creditor he can lend money and earn interest. As a supplier he can supply goods from his/his family business.