EnglishIntroduced in the year 2000, an LLP (Limited Liability Partnership) is governed by the Partnership Act 2000. This Business structure is unique as even though it’s not under the Company’s Act, partners of an LLP enjoy the benefit of Limited Liability. Apart from this, an LLP also enjoys the flexibility of a Partnership firm.
Such a Business structure is well-suited for multiple professions like Consultants, Architects & Accountants, where the individual income of the partners is clearly defined.
Now let’s check out the disadvantages of an LLP
1. Public Disclosure of Financials
As an LLP is mandated to submit all of its financial records to the Companies House, the income details of every Partner are available to the Public. This can be a major concern for some individuals who do not prefer to disclose their financials in the public domain.
2. Extensive Penalty for Non-Compliance
An LLP is easy to start and manage, but the penalties involved in not following the compliances actively are heavy. The penalty may be as high as 4-5lakhs in some cases.
All the LLPs are required to file annual Income Tax Return & MCA (Ministry of Corporate Affairs) returns every year even if it has not performed any Business Activity. This is a major cause of concern for LLPs.
As the penalty for failure to submit these returns is INR 100 per day, this can cause a significant financial loss to the Businesses. Moreover, there is no upper cap on this penalty, which means if left unpaid, this amount can run into lakhs.
3. No option for Equity Investment
As there is no concept of Equity investment, all the investment has to come from the Partners. So it is not possible to scale up the Business.
4. Mandatory Indian Partner
As per law, it is mandatory to have an Indian Partner for establishing an LLP. No foreign national or NRI can establish an LLP in India by themselves.
5. Higher Income Tax rates
The tax rate for an LLP is 30%, irrespective of the amount of the total turnover. Also, a surcharge of 12% is applied, if the income exceeds INR 12 crore.
This rate is considerably higher than the income tax rates applicable to the companies. An LLP with a lower turnover would have to pay a considerably high chunk of its income.
6. No tax benefits for Partners
The income of a Partner in an LLP is treated as the income of an individual & taxed accordingly. This means there is no tax benefit for the Partners of an LLP
7. Minimum Two members
As per the Law, an LLP must have at least two members. In any case, if any member chooses to leave the LLP, it will be dissolved automatically. This can hamper normal Business operations in the case of sudden demise or inability of a Partner.
8. Transfer of Ownership
Transferring the ownership right to someone else is a challenging task. The Partners wishing to transfer/her rights will need written consent from all the partners. In case if some Partner raises an objection, the transfer process cannot proceed further.
Know more about Limited Liability Partnerships.
