Are you looking to form an LLP (Limited Liability Partnership)? If so, there are several mandatory compliances you must adhere to to maintain compliance with state and federal law. This blog post will outline the most important of these compliances and provide tips on how to stay compliant.
What is an LLP (Limited Liability Partnership)?
An LLP is a business structure that offers the limited liability protection of a corporation with the tax benefits of a partnership. In an LLP, each partner is not personally liable for the debts and obligations of the Partnership. This means that if the Partnership owes money or is sued, the partners will not have to use their assets to pay off the Partnership’s debts.
How does an LLP differ from a traditional partnership or corporation?
A limited liability partnership (LLP) is a business structure that offers the benefits of both a traditional partnership and a corporation. Like a traditional partnership, an LLP has two or more co-owners who share profits and losses.
However, each partner’s liability is limited to their investment in the business. This means that if the LLP is sued, partners are only responsible for the debts and obligations of the business up to the amount they have invested.
In contrast, shareholders in a corporation are not personally liable for the business’s debts. LLPs also have the advantage of being taxed as limited liability partnerships, which means that profits are only taxed once at the individual partner level.
This is different from corporations, which are taxed twice: first at the corporate level and then again at the shareholder level when dividends are distributed. As a result, LLPs can offer significant tax advantages over traditional corporations. For these reasons, LLPs are an attractive option for businesses looking for flexibility and protection from personal liability.
What are the mandatory compliances that must be followed by all LLPs in India?
All LLPs registered in India must comply with the provisions of the Limited Liability Partnership Act, 2008, and the Limited Liability Partnership Rules, 2009. These laws govern the formation, registration, operation, and dissolution of LLPs in India.
In addition to these general rules, LLPs must comply with all applicable tax laws, including the Income Tax Act and the Goods and Services Tax (GST) Act. Failure to comply with these laws can result in significant penalties, including fines and imprisonment.
Here are some of the most important compliances that LLPs must follow:
First, file an annual return: All LLPs must file an annual turnover with the Registrar of Companies (ROC). This
return must be filed within 60 days of the LLP’s financial year-end. The annual turnover return must contain information such as the names and addresses of the partners, the LLP’s registered address, and details of the LLP’s income and expenditure for the year.
- Maintain financial records:
LLPs must maintain proper accounting and financial records. These records must be kept for a minimum of 8 years from the date of preparation. LLPs must also prepare audited financial statements each year. These statements must be filed with the ROC within 30 days of their approval by the partners.
- Appoint a designated partner:
Every LLP must appoint at least one “designated partner” responsible for the LLP’s compliance with the law. The designated partner must be a natural person (i.e., not a company or another LLP) and must be resident in India.
- File an annual statement of accounts and solvency:
LLPs must file an llp annual compliance requirements statement of accounts and solvency with the ROC. This statement must be filed within 90 days of the LLP’s financial year-end. The statement must contain information such as the LLP’s balance sheet, profit and loss account, and cash flow statement for the year.
- Pay annual fees:
LLPs must pay annual fees to the ROC. These fees are based on the LLP’s capital contribution and range from INR 500 to INR 5,000.
What are the consequences of non-compliance?
Failure to comply with mandatory LLP compliances can result in significant penalties, including fines and imprisonment. In addition, the ROC can strike off the LLP from the register of companies. This would effectively dissolve the LLP and prevent it from conducting business in India.
How can I ensure compliance with all applicable laws?
The best way to ensure compliance is to seek professional help from a qualified lawyer or accountant. They will be familiar with all the applicable laws and can help you ensure that your LLP is compliant.
What are the benefits of forming an LLP in India?
LLPs offer several advantages over traditional business structures, such as sole proprietorships and corporations. These advantages include the following:
- Limited liability:
LLP partners are not personally liable for the debts and liabilities of the LLP. This protection is limited, however, and does not apply to debts and liabilities incurred through fraud or negligence.
LLPs are flexible and can be structured to suit the business’s specific needs. For example, LLPs can have different classes of partners with different rights and responsibilities.
- Tax benefits:
LLPs are taxed once at the individual partner level. This is different from corporations, which are taxed twice: first at the ministry of corporate affairs and then again at the shareholder level.
- Attracts foreign investment:
LLPs are attractive to foreign investors as they offer the same limited liability protection as corporations but with added flexibility and tax benefits.
Who can form an LLP in India, and what are the requirements for doing so?
To form an LLP in India, at least two partners are required. These partners can be individuals, companies, or other LLPs. There are no minimum capital requirements for the LLP form.
However, all partners’ total contribution must not be less than INR 100,000. Also, at least one partner must be a resident of India.
How do I register an LLP in India?
- Appoint a designated partner:
The first step is to appoint a designated partner responsible for compliance with the law. The designated partner must be a natural person and resident of India.
- Draft the LLP agreement:
The next step is to draft the LLP agreement, which sets out the rights and responsibilities of the partners. Finally, the agreement must be signed by all the partners and filed with the ROC.
- File the incorporation documents:
The final step is to file the incorporation documents with the ROC. These documents include the LLP agreement, the application for registration, and the prescribed fees.
Once these steps have been completed, your LLP will be registered, and you can start doing business in India.
What are some common mistakes made in LLPs?
One of the most common mistakes made in LLPs is failing to appoint a designated partner. This can lead to significant penalties, as the designated partner is responsible for enforcing the law. Another common mistake is not drafting a comprehensive LLP agreement. This can result in disputes between the partners and make resolving them difficult. Finally, many LLPs fail to file their annual returns with the ROC. This can lead to the LLP being struck off the register of companies.
How can I avoid these mistakes?
The best way to avoid these mistakes is to seek professional help from a qualified lawyer or accountant. They will be familiar with all the applicable laws and can help you ensure that your LLP is compliant.
Registering an LLP is a simple process with several benefits for the business, including limited liability protection for the partners and a more flexible profit-sharing structure. Although there are some additional compliance requirements for LLPs compared to other business structures, these are generally not onerous and can be easily managed with the help of a professional service provider. If you are thinking of setting up an LLP, we can help you with all aspects of the registration and compliance process.
What are the risks associated with an LLP?
There are several risks associated with an LLP, such as the risk of personal liability for debts and liabilities incurred through fraud or negligence.
How is an LLP taxed?
An LLP is taxed once at the individual partner level. This is different from corporations, which are taxed twice: first at the corporate level and then again at the shareholder level.
How are LLP partners liable?
Partners in an LLP are liable for the debts and liabilities of the LLP incurred through fraud or negligence.
How can I dissolve my LLP?
To dissolve your LLP, you must file a notice of dissolution with the ROC. Once this has been done, the LLP will be wound up and dissolved.
Can I do filing of income tax returns myself?
Yes, you can fill out your income tax return yourself. However, it is always advisable to seek the help of a professional to ensure that all the necessary forms are filled out correctly and that you receive the best possible return on your investment.