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Incorporating a Limited Liability Partnership

Jul 17 2012, 17:47   |   By SME Mentor

Gargi Banerjee

If you to make the most of partnership and a private limited while setting up your company... then a limited liability partnership is the right option for you. The Limited liability partnership has the limited liability features of a private limited company, and the flexibility that a partnership can offer.

In India, it is a fairly new concept as the LLP Act was enacted in 2008 and was notified only by   2009. And from a mere 4000 odd LLPs that were incorporated by mid 2011, the number has shot up to more than double at 9000 till May 2012.  Here's a step by step guide an entrepreneur can refer to, if he or she is willing to set up an LLP.

Applying for DPIN and digital signature for partners

In order to set up an LLP there must be a minimum of two designated partners, at least one of whom should be a resident Indian. The two designated partners must have a designated partner identification number (DPIN) and a digital signature. The DPIN can be obtained by making an online application at www.llp.gov.in.

After the online application has been made, a physical copy of Form number 7 that has been signed has to be submitted to the Ministry of Corporate Affairs along with the address proof as well as the identity proof of the applicant. The documents required for the applying for DPIN are a self attested copy of the PAN card, a residence proof that is self attested, a photograph (in .JPEG format) and verification by the applicant. If all the documents are in order, the DPIN is approved within a maximum of 3-4 days.

The designated partners also need to obtain digital signatures, since all the filing and forms have to be done electronically. There are a total of seven certification agencies that can be approached for obtaining a digital signature. These agencies are NIC, IDRBT, TCS, MTNL, e-Mudhra CA and GNFC.  Although each vendor may charge a different fee, you are likely to be charged in the range of Rs 2000-2500 in order to obtain a digital signature that will be valid for two years. The entire process of obtaining the DPIN and digital signature should not take longer than three to four days.

The process of name approval

Selecting a name is an important part of any business. Choose a name for your organisation carefully. Keep in mind that a company's name should be reflective of the nature of business of the company. After a name has been finalised an application of name availability has to be made in form number one available at www.llp.gov.in

Form number one will require the partners the furnish information about the LLP along with the choice of names. The state in which the LLP is being incorporated, the proposed line of business of the LLP and total contribution of partners in an LLP are the other information that must be provided in form 1. If the name of your proposed organisation is available and all the information is accurate, the approval for the name of your company should come within 7-10 days.

Drawing up the LLP Agreement

An LLP agreement ought to be drawn up in conformity to the LLP Act. An LLP agreement need not be mandatorily filed at the time of registration, and can be filed at anytime within a period of 30 days. An LLP agreement should be drawn up meticulously and should clearly define the following

·         Capital contributions made by the partners

·         The division of profits or losses

·         The management responsibilities

·         The process of decision making

·         The process of dispute resolution

·         Changes to the membership if and when applicable

·         Provision for the amendment of the  LLP agreement

·         Termination procedure of  the LLP

Filing of the Incorporation documents

After the LLP agreement has been drawn up, it is necessary to file the some documents along with some required attachments on www.llp.gov.in. They are as follows:

Form 2: Subscription sheet- All the partners of the proposed LLP will be required to subscribe their names along with their signatures in this sheet. This document must be witnessed by a practising advocate/ company secretary or a chartered accountant.

Form 3: A scanned copy of the agreement on a stamp paper of the requisite value. This document can be filed anytime within 30 days of registration.

Form 4: Consent of persons who have agreed to act upon as partners in an LLP.

Is an LLP more advantageous than a private limited company?

Firstly it is much more cost effective to set up an LLP instead of a private limited company, as the minimum fee for the incorporation of a company is Rs 6000, whereas to incorporate an LLP you need only Rs 800. There are some other obvious advantages too.

No minimum paid up capital: In order to set up a private limited company, an entrepreneur must have a minimum of Rs 1,00,000 as paid up capital. There are no such limits specified for an LLP.

No audit required: Unlike a private limited company, a formal audit is not required, unless the turnover of the organisation exceeds a sum of Rs 60 lakhs.

Taxation benefits: LLPs are taxed like partnership firms at a tax rate of 30 per cent with no surcharge. The tax payment of LLPs is much lower than that of companies that have to pay 33.99 per cent tax on profits. There is no double taxation either as tax will be imposed on only 10 per cent or 40 per cent of the income of the LLP. The balance can be paid to the partners as remuneration. The partners will however be liable to pay individual taxes on their income.

Separate entity: A LLP has the status of a separate corporate or legal entity. As a result it is taken more seriously than a partnership firm that does not have a separate entity and may not be taken into consideration especially by investors.

In conclusion

There are several advantages that the LLP structure offers an aspiring entrepreneur. Bharat Dhawan, Partner of Mazars, an accounting and consulting group, says that entrepreneurs' have taken to the LLP format because " it is a much easier. It is a less formal way of setting up a serious business organisation and the monetary implications are far less as well. Besides it combines the benefits of both proprietorship and partnership."

However not everyone agrees. Pratik Singhi, CEO, Lakshya Consulting says "though it is undoubtedly more beneficial to incorporate an LLP in the short run, in the long run it would be prudent for an entrepreneur to transfer it into a company." "With LLP laws being relatively new, there seems to be some disputes regarding taxations and foreign investments." He further adds. Whether these are teething problems or are here to stay, only time will tell.

 


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