Advantages And Disadvantages Of Forming An LLP As A Startup

Know the Benefits and Drawbacks of a Limited Liability Partnership as a Startup

Are you interested in starting an LLP as your Startup venture? As a Startup, it is usually prudent to consider all of the Pros and Cons / Advantages and Disadvantages of an LLP.

LLPs are ideal vehicles for a startup or small and medium-sized corporation.

LLP is a type of alternative corporate business structure that combines the benefits of a company's limited liability with the flexibility of a partnership. The LLP can continue to operate despite changes in partners. It has the authority to enter into contracts and own property in its name. The LLP is a separate legal organization with full accountability for its assets, but the partners' liability is limited to their agreed contribution to the LLP.

LLP (Limited Liability Partnership) 

A Limited Liability Partnership is a business with a minimum of two members (which can increase to five Designated Partners (without DIN)) and no maximum number of members. An LLP's members have limited responsibility.

Minimum Requirement in the Case of an LLP as a Startup 

• To begin the LLP establishment process, a minimum of two Partners are necessary.
• Two selected partners, one of whom must be a resident Indian citizen.
• In India, there is a registered office.

Note: With the adoption of the LLP (Second Amendment) Rules, 2022, an LLP can now have 5 Designated Partners (without DIN) at the time of LLP incorporation.

Procedure for registering an LLP 

The LLP registration procedure is the simplest and most transparent since it combines the advantages of a company and a partnership firm, namely the limited liability feature of a company and the flexibility of a partnership firm.

The LLP registration procedure includes the following steps.

• Obtain a digital signature certificate (DSC).
• Request a Director Identification Number (DIN).
• Get the company name approved by using the 'Reserve your Unique Name' program (RUN).
• LLP Incorporation File a 'Limited Liability Partnership Agreement.

The Benefits of a Limited Liability Company as a Startup 

• The fundamental advantage of an LLP is that it is simpler to establish and administer, with fewer paperwork.
• It is less expensive to register than a corporation.
• LLPs are similar to corporations in that they exist independently of their partners.
• Any amount of minimum capital can be used to establish an LLP.
• The partners' responsibility in the LLP would be restricted to their agreed-upon contribution.
• There is no requirement for a mandated audit.
• Annual ROC compliance in LLP is lower than in Private Limited Company.
• Because of its flexibility in structure and administration, the LLP is an ideal vehicle for small businesses and venture capital investment.

Disadvantages of a Limited Liability Partnership as a Startup 

• The fundamental disadvantage of an LLP is that it is required to file an income tax return and an MCA annual return each year, even if it has no activity. If it does not, it may face severe penalties.
• If a partner wishes to transfer ownership rights, he or she must seek the permission of all partners.
• A limited liability partnership must have at least two members. If one of the partners decides to quit the partnership, the LLP may be forced to dissolve.
• It is vital to remember that FDI in LLP is only permitted with the Reserve Bank of India's (RBI) prior authorization.

Conclusion 

LLP- Limited Liability Partnership is deemed easier to set up, has fewer hassles in day-to-day operations, and has substantially lower cumbersome compliance requirements and expenditures, thus many see it as favorable to start their business in this manner.

However, if you are still unsure whether you should form an LLP or a Private Limited Company, we have written an essay to help you: LLP vs. Private Limited Company: a comparison of two significant business structures in India