How to Incorporate LLP: Everything You Need to Know
Learning how to incorporate LLP helps you protect your personal assets from lawsuits related to the operation of your business.3 min read
What Is an LLP?
An LLP is a limited liability partnership similar to a limited liability company (LLC). When a business is organized as an LLP, all of the partners have some liability for the debts incurred by the business. However, if the business is sued for malpractice, negligence, or another wrongful act allegedly committed by partners or employees of the LLP, the partners' personal assets are protected, as long as the partners didn't participate in or oversee any of the wrongful acts.
Take note that some states grant greater protections to an LLC or a corporation than they do to an LLP. While a limited liability partnership enjoys many of the positives of a Private Limited Company (PLC), it is significantly less expensive and easier to manage, making it the choice of many small businesses. However, some jurisdictions restrict the type of business that can use the LLP designation. Often, only licensed professionals like accountants, attorneys, medical practitioners, architects, and a few more. In some states, especially those where this is the rule, the LLP may be required to maintain a minimum net worth or post a bond.
Benefits of an LLP
- Limited liability protection: As in most LLCs, the partners in the company are not personally liable for debts and other obligations of the company. However, the LLP structure does not protect the individual partners from liability for each other's actions. A limited liability partnership may be required to carry an insurance policy to cover any personal liabilities. The risk is spread out over all the owners as opposed to a sole proprietorship where one person is liable for everything.
- Pass-through taxation: No tax is levied on the business, so the company doesn't file a return. Instead, profits or losses "pass through" to the tax returns of the individual partners. Taxes owed on income from the business is paid through the individual return. Dividend Distribution Tax and tax surcharge don't apply to LLCs, and the company can make nontaxable loans to partners.
- Converting from a general partnership: It is usually easier to convert from a general partnership to an LLP than to a limited liability company or a corporation.
- Management flexibility: The partners in an LLP have flexibility in establishing the structure of the management team. They can decide which partner is responsible for what tasks in the day to day running of the business. Each partner determines how much they want to be involved without obligation to attend meetings they don't feel are relevant. An LLP can have an unlimited number of owners.
- Fewer formal requirements: An LLP requires less paperwork than a corporation, and the annual filing requirements are less demanding.
- Easier to create: LLPs are fairly simple to set up. No minimum capital contribution exists for an LLP the way it does for a private limited company or a public company. Partners can make contributions that are tangible or intangible. Property given to an LLP can be movable or immovable.
- No audit required: All limited companies, whether private or public, must have an audit of the books. LLPs have no such mandate unless contributions exceed Rs. 25 Lakhs or the annual turnover exceeds Rs. 40 Lakhs.
How to Form an LLP
An LLP is a separate legal entity under the law, but it's technically more correct to say that it is a process rather than a thing. The procedure to create an LLP involves registering an existing limited or general partnership to be treated as an LLP. Most states spell out a procedure for this, and it may require a vote. This happens at the state level with a Certificate of Registration or equivalent document and a filing fee. The Certificate lists the name of the LLP with one of the required endings. An individual or a company must act as a registered agent of the business.
While it may or may not be a statutory requirement, a written agreement among the partners as to each party's responsibilities and rights is a wise instrument to have.
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