It has been increasingly observed that entrepreneurs have started opting for limited liability partnerships(LLPs). This combines the characteristics of both – a corporation and a partnership. So let us discuss some of its advantages and disadvantages.
What is a Limited Liability Partnership?
A limited liability partnership or an LLP is an alternative corporate business form. It gives the benefits of limited liability of a company and the flexibility and ease of a partnership. In other words, some or all partners of an LLP have limited liabilities. Also, it continues to function even if the partners change. It includes some rights and duties for the partners which are regulated by an agreement between the partners. An LLP is a separate legal entity, liable to the full extent of its assets, as well as have perpetual succession. However, the liability of the partners is limited to the agreed contribution in the said limited liability partnership.
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Advantages of Limited Liability Partnership
1. Tax benefits
In LLP, the partnership is not liable to pay taxes. The individuals can file taxes like self-employment tax, personal income tax, etc. This paves the way for individual tax returns. The percentage of partnership each partner has is taken into consideration when the deductions are divided.
2. Limited liability
Generally in partnerships, each partner is legally responsible for the debts and liabilities of other partners and the company. But LLP offers protection to the partners from being responsible for the wrongdoings of other partners. They are also free from any liability for the downfall of the company.
3. Any number of partners
This is not limited to an LLP. Any number of partners can be involved in the business. This becomes helpful if the business faces any issues. The amount can be distributed to the huge number of partners and each will have a lesser liability of the debts.
LLP is usually flexible in nature. The partners have complete freedom to decide about the percentage of their partnership. How much they want to contribute is also their choice. The partners can opt-out of any business meetings if they wish so. There is no compulsion in anything.
5. Separate entity
An LLP has a separate existence from its partners. And this limited liability partnership is a legal entity. Thus, LLP earns more respect when compared to other partnerships. The customers are more satisfied and confident in dealing with LLP. The same is the case with large organizations also. Their interest towards LLPs is noteworthy.
Disadvantages of Limited Liability Partnership
1. Not accepted in all the states
Not every state is ready to accept LLP. This may be because of the tax benefits and the way in which an LLP works. Due to this, many states do not allow it to operate. There are some states which do not permit LLP to function legally.
2. Be careful about agreements
As already said, the partners have complete freedom in an LLP. It is possible that they take advantage of this and misuse the freedom. The partners could sign business deals without the knowledge of others. So the agreements in an LLP should be carefully made specifying each partner’s roles and limitations while making a business decision.
3. LLP assets
The agreement of LLP specifies how much a member contributes. The partners can contribute this in the form of assets or cash. Once contributed, it becomes an LLP asset which is difficult to retrieve. The only way out is to specially mention the retrieval in the agreement.
4. Lengthy admission
Adding a new member to a limited liability partnership is a lengthy process. Firstly, a supplementary agreement has to be made with the new member’s details and his contribution. The existing partners have to then modify their contribution to facilitate the entry of new members. Finally, this has to be brought before the concerned Registrar of Companies within whose control the partnership is.
There is an LLP Act that has defined the different penalties. You have to pay the default fee for matters like the late filing of e-forms. The fee has to be paid for every day till it is filed or the default continues. For certain matters, it can be paying a fine or paying fine together with imprisonment.
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Pros and Cons
|Not accepted in all the states|
|Be careful about agreements|
Any number of partners