Limited Liability Partnership
An LLP is a unique form of legally recognized business vehicle, which integrates flexibility of a traditional partnership firm with the advantages of Separate Legal entity. As it contains the features of both Company and Partnership, it is rightly been called the HYBRID Entity.
LLP is governed by Limited Liability Partnership Act, 2008 which came into force on 1st day of April 2008. This Act was introduced with the idea of promoting MSME Sector (Micro Small Medium Enterprises) with the advantages of self governance and less compliances.
Limited Liability Partnership
LLPs are in law regarded as ‘bodies corporate’ and are subject to aspects of company law, but for tax they will generally be treated as ‘partnerships’. The members provide working capital and share any profits. Members who are individuals will be liable to pay income tax under self assessment, and self-employed Class 2 and Class 4 National Insurance contributions. Members who are companies will be liable to pay corporation tax on their share of profits.
The members of an LLP have limited liability, but the LLP is liable for all its debts to the full extent of its assets. To the extent that the members have contributed to those assets, a member risks losing that amount should the creditors claim those assets.
An LLP has unlimited capacity which means that third parties need not be concerned about any restrictions or activities.
Disadvantages of the Limited liability partnership
Inclusion of Indian Citizen as a Partner – An NRI/Foreign national who wants to incorporate an LLP in India shall have at least one partner who is an Indian citizen. Two foreign partners cannot form an LLP without having one resident Indian partner along with them.
Transfer of Ownership –If a partner wants to transfer his/her ownership rights then he/she has to obtain the consent of all the partners.
Filing of various returns – Public disclosure is the main disadvantage of an LLP. An LLP must file Annual Statement of Accounts & Solvency and Annual Return with the Registrar each year. Income Tax Return must also be filed to the Income tax department for the LLP.
Number of partners –A limited liability partnership must have at least two members. If one member chooses to leave the partnership, the LLP may have to be dissolved.
Non- recognition – LLPs are limited by state regulations due to which they are not given due recognition in every state as a business structure.
Huge penalties –The cost of non-compliance of procedural matters such as late filing of e-forms is very high which would lead to huge sum of penalties owing to Rs.100 for every day till the time the offence of late filing continues.
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Winding Up is a term used in business for closing, dissolving or shutting down a company.
Since limited companies are a legal entity in their own right you can’t simply fold the business without taking care of the legal aspects which include selling assets, paying creditors if there are any, and informing companies house of your decision
In the case of solvent or voluntary insolvent winding up, the directors would be the ones to apply or instigate the winding up process via collaboration with an insolvency practitioner such as ourselves.
Where a company is being pressured to wind up by a creditor, it will be the creditor that forces the winding up via a Winding up Petition that results in compulsory liquidation
If the company is solvent but has assets below 25k, then striking off may be the correct process.
This is a simpler procedure than an MVL and one which can be more cost effective since you do not need an insolvency practitioner to complete the process.
Read our full article on Striking off a Company from the Register
If your company is insolvent, then a Creditors’ Voluntary Liquidation is the correct method.
Offering more control than compulsory liquidation, the CVL process involves the directors choosing an insolvency practitioner who will then liquidate the company. This method offers significant advantages to that of being compulsorily wound up, as we explain below.
Read a full article here on Voluntary Insolvent Liquidation
Also known as ‘winding up by the court’, the process of being compulsorily wound up is when a creditor tries to force you to pay them by the threat of a winding up petition, a final demand document that gives you just 7 days to pay up or be shut down permanently.
Timeframes for liquidation are tricky and dependent upon the size of the company. Usually it would be expected to take between 6 months and 1 year from start to finish.
A solvent winding up (MVL) takes about 3 months from the point of entering the process.
Whether the company is solvent or insolvent, the consequences will be the ultimate closure of the company and the striking off from the register at Companies House. It will legally cease to exist.