LLP (Limited Liability Partnership)

What it means

A Limited Liability Partnership (LLP) is a business structure registered under the LLP Act, 2008. It works like a partnership in day-to-day running, but it is a separate legal entity, so each partner’s liability is limited to the contribution they agreed to bring in. A partner is not personally liable for another partner’s misconduct.

How it works

• Minimum two partners, with at least two designated partners, one of whom must be resident in India. There is no maximum.

• Registered with the MCA; the LLP agreement must be filed in Form 3 within 30 days of incorporation.

• Two annual filings: Form 11 (annual return) by 30 May and Form 8 (statement of accounts and solvency) by 30 October.

• Accounts audit under LLP law is needed only if turnover exceeds ₹40 lakh or contribution exceeds ₹25 lakh.

• Income tax: taxed like a firm at 30%, plus 12% surcharge if income exceeds ₹1 crore, plus 4% cess. Tax audit applies if turnover crosses the income-tax audit limit.

• The share of profit received by partners is exempt in their hands, while interest on capital (up to 12%) and remuneration within limits are deductible for the LLP and taxable for partners.

Example

Two friends start a design LLP with total contribution of ₹10,00,000. In the first year turnover is ₹35,00,000 and profit before partner remuneration is ₹12,00,000.

1. Audit under LLP Act: turnover ₹35 lakh is below ₹40 lakh and contribution ₹10 lakh is below ₹25 lakh, so no audit is required.

2. Partners take remuneration of ₹6,00,000 (assumed within allowed limits). Taxable profit of LLP: ₹12,00,000 minus ₹6,00,000 = ₹6,00,000.

3. Tax: 30% of ₹6,00,000 = ₹1,80,000, plus cess 4% of ₹1,80,000 = ₹7,200. Total ₹1,87,200.

4. The ₹6,00,000 remuneration is taxed in the partners’ own returns at their slab rates.

Key points to remember

• Draft the LLP agreement carefully; profit sharing, capital and exit terms all come from it.

• Late filing of Form 8 or Form 11 costs ₹100 a day per form with no upper cap.

• An LLP cannot use presumptive taxation under section 44AD.

• LLPs cannot raise equity from investors the way a private limited company can, so choose a company if you plan to raise funding.