LLP is the right organizational structure for doing business as it gives freedom of management and flexibility of ownership. The main benefits of an LLP are:
- Efficient tax-saving business form
In the eyes of tax laws, LLP is a 'Firm' and hence firm taxation is applicable to an LLP. Various taxes levied on a company, like minimum alternative tax, dividend distribution tax and surcharges, are not applicable to an LLP. The profit after tax from an LLP's operation will be reflected in the personal income of its partners. It is estimated that the approximate tax savings of an LLP will be about 17% compared to that of a company.
In companies, the management is vested with its Board of Directors. They are responsible for taking day-to-day decisions and management of a company. Shareholders have limited powers in the management of a company. However, in an LLP, management is vested with the partners unless specifically mentioned in the LLP agreement. It is possible for an LLP to delegate all powers of management to a single person except compliance requirements under the LLP Act, which are the responsibilities of the Designated Partners.
Less compliance requirements
Compared to a company, the legal compliance requirements are lesser for an LLP. For a company, it is mandatory to maintain various registers, minutes, etc., but there is no such requirement for an LLP.
Audit of accounts
All companies are required to assign a Chartered Accountant as auditors for auditing accounts, irrespective of the size and operation of the company. In case of an LLP, the audit requirement starts only if the turnover exceeds Rs.40 lakh or contribution exceeds Rs.25 lakh.
Less cost of maintenance
Statutory filing fees payable by an LLP is lesser compared to a company. Hence, even small businesses can think about incorporating their firms as the running costs are very low.
- Flexible ownership
It is possible for a partner in an LLP to resign, subject to the terms of the LLP agreement. After resignation, usually the partner can take back his share of contribution from the LLP.
An LLP is free to take any business decisions subject to the LLP agreement. It can enter into a contract with its partner or relatives of partners and borrow and give loans to outsiders. However, in a company structure, many of these decisions need either the permission of the shareholders or approval of government authorities, for which the process is cumbersome.
No ownership restrictions
In a private company, the number of shareholders is limited to 50. There is no such restriction in an LLP. An LLP can have any number of partners and thus can secure more capital for its business operations.
By virtue of being a registered entity under government laws, registering your business as an LLP will ensure better legitimacy and greater credibility while dealing with other companies, banks and potential business partners.