The idea of Limited Liability Partnership was not widely adopted by the Indian market as it was expected. Discuss the reasons, identify lack of tax reforms and outline the relevance of LLPs.

Question:

The idea of Limited Liability Partnership was not widely adopted by the Indian market as it was expected. Discuss the reasons, identify lack of tax reforms and outline the relevance of LLPs.

Solution:

Anyone looking to start a business in India must first address the critical question of which entity to incorporate, and this is undoubtedly one of the most critical questions. There are numerous business formation alternatives available, including private limited company, limited liability partnership, and sole proprietorship. Each of the forms has a set of parameters that influence the decision to use one over the other.

Choosing the type of entity is like to selecting a vehicle for a longer journey; the nicer the vehicle, the more pleasurable the voyage. Thus, not to be taken lightly, it is one of the foundations around which the entire business and structure is built.

Concept:

LLP is a unique blend of a conventional partnership and a modern limited liability company, and hence combines the advantages of both forms. The concept of LLP was launched in 2008 and, as expected, has grown in popularity since then.

However, just as every coin has two sides, LLP registrations also have some downsides, and hence cannot be considered a perfect business structure in some instances. As a result, for the sake of clarity, we have summarised the scenarios into eight justifications.

Thus, here are eight reasons why forming an LLP is not a good idea.

1. Financial Transparency

Due to the fact that an LLP is required to publish all of its financial records to Companies House, the income information of each Partner are publicly available. This might be a significant worry for some individuals who do not wish to have their financial information made public.

2. Significant Penalties for Non-Compliance

While an LLP is simple to form and operate, the consequences for not actively adhering to compliance requirements are severe. In extreme instances, the penalty might be as much as 4-5 lakhs.

All LLPs are required to file annual income tax returns and MCA (Ministry of Corporate Affairs) returns, even if they have not engaged in any business activity throughout the year. This is a significant risk for LLPs.

Due to the INR 100 day penalty for failure to submit these returns, this might result in a large financial loss to businesses. Additionally, there is no cap on this penalty, which implies that if left unpaid, this amount might go into the thousands.

3. Absence of an equity investment option

Due to the absence of an equity component, all investment must come from the Partners. As a result, scaling the business is impossible.

4. Indian Partner Requirement

A minimum of one Indian Partner is required by law while forming an LLP. No foreign national or non-resident Indian can form an LLP in India on their own.

5. Increased personal income tax rates

The tax rate on an LLP is 30%, regardless of the amount of overall revenue. Additionally, a 12% surcharge is applied if the income surpasses INR 12 crore.

This rate is significantly higher than the corporate income tax rate. A limited liability partnership with a smaller turnover would be required to pay a disproportionately large portion of its income.

6. There are no tax advantages for partners.

The income of a Partner in an LLP is taxed as if it were the income of an individual. This means that an LLP’s partners receive no tax benefit.

7. A minimum of two individuals

According to the law, an LLP must have a minimum of two members. In any case, if a member elects to quit the LLP, it will be instantly dissolved. This can jeopardise normal business operations in the event of a Partner’s untimely demise or disability.

8. Ownership Transfer

Transferring ownership to another party is a difficult task. Partners desiring to transfer their rights must obtain the written permission of all partners. If a Partner objects, the transfer procedure will be halted.

Additionally, there are other advantages to forming an LLP. Several of the most significant advantages are given below.

Conclusion:

As previously said, there may be a variety of downsides associated with LLP business structure. Thus, the decision should be made in light of one’s current requirements and future plans in order to avoid suffering in the future. Although Pvt Ltd is very suitable business structure compared to LLP, so Indian business owner don’t preferred LLP.