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LLP for Startup/SMEs

, March 25, 2013, 8 Comments

                                   LLP has its own advantage when compared to the traditional partnership and the Private Limited, as it picks the best of these two structures in one solid viable package. It tackles various challenges that entrepreneur faces when using a traditional partnership structure.

The main focus of any Startup is to keep the recurring cost at a bare minimum and yet run the company without any hiccups,  as one of the major costs are related to accounting & compliance when compared to Pvt Ltd.  In this article we take positive things of LLP and delve on its pros and cons thereby understand the LLP offerings.

  1. No minimum capital contribution required
    LLP could be formed without any minimum capital contribution as opposed to the Private Limited companies’ requirement of Rs. 1 Lac. Even the contributions could be made in installments which makes the small entrepreneurs/startups avail these benefits and forge  ahead.For instance that the partners can bring minimum capital say Rs. 5000 /Rs. 10000/Rs. 20000/- because there is no restriction provided under the LLP Act to bring a minimum capital contribution at the time of incorporation.
  2. Liability is Limited
    The liability of each partner is limited to the extent of his/her contribution/share as opposed to the sole proprietorship or the traditional partnership firm where the personal assets of the proprietor or partners could be at risk in the event of a failure of the business. Thus this mode helps the partners to be free from personal liabilities or becoming bankrupt (except in cases of fraud by any partner). Its quite safe compared to the unlimited liability which offered by partnership firm.
  3. Separate legal entity
    LLP has its separate existence from its partners. LLP can sue and be sued in its own existence.  Due to its status , the entry and exit  of the partners don’t affect the LLP.  As it incorporates various stakeholders(i.e. Suppliers, Customers etc.), it offers the flexibility while dealing & signing legal contracts and in many other things.
  4. Economics  & Working
    Statutory filing fees as well as  the cost of formation is less compared to forming a Private limited company. Apart from  stamp duty for executing LLP agreement  the registration fees are less than required for incorporation for a private Limited company.
    Partners are not subjected to hold 4 mandatory board meetings as required in once in a year by Companies Act.  The partners can meet as per their convenience or need basis. Partners can specify about the meetings details & schedule in the LLP agreement.
In the upcoming parts of the MarketExpress Startup/SME series we shall look at adding more insights related to LLP & Startup/SMEs challenges






About author
Meenal Abhyankar is a qualified Company Secretary (CS) from ICSI India and Law Graduate, based in Pune, India. ...more
  • Amod

    Very good article

    • Nataraj

      //Thus this mode helps the partners to be free from personal liabilities
      or becoming bankrupt (except in cases of fraud by any partner).//

      Is patent/copyright violation amounts to fraud?

  • Sda

    Good one but did not understand the concept of that if loss exceeds the capital then who bears the loss.!!

  • CS Meenal

    Sda, Thanks for your comment.

    May i know which “loss” concept are you referring to? In this article I have not mentioned that point.

    Regards,
    CS Meenal Abhyankar

  • CS Meenal

    Sda, Thanks for your comment.

    Assuming your question is a generic one (doesn’t refer to this article), if there is a loss which exceeds capital contribution of partners, then it will be borne by LLP and not by partners. It will be carried forward to the next year.

    In statement of accounts, loss will be mentioned under the head Reserve or surpluses on liability side or under miscellaneous expenses on Asset side.

    Hope this clarifies your doubt.

    Thanks,

    CS Meenal

  • Sunil Lahoti

    Articles on LLP are excellent giving deep insight into intricacies of LLP..Thanks

  • Sunil Lahoti

    Regarding Capital Contribution:
    You expert advice required for the following problem faced by us:
    We have incorporated LLP with partners’ capital contribution of Rs. 1.00 lakh (Filed form 2 and got approval). Now while executing LLP agreement (initial agreement), the partners decided to go for Rs.15.00 lakhs as capital contribution. In such a situation how to go about filing form 3 because while filling Form 3 (filing information with regard to LLP agreement), it is allowing Rs. 1.00 lakh as capital only. Your expert adivice is appreciated on this…Thanks….

  • v3bangalore

    @CS Meenal : Could you please provide information on:
    1. Full time Employee of one company can be director of other company?