[Editorial notes: Part 3 of series on company incorporation process in India.]
Let’s look at what partnership business entities have to offer. You can look at unlimited liability flavor or a limited liability one. Let’s see which suits your business better.
General Partnership (GP) in India
Minimum 2 people are needed to start a GP. This business form didn’t took off very well in India except few states like Gujarat and Maharashtra, where you see many business running as GP.
GP needs a very high level of trust and comfort among all partners. Mistakes of one partner could impact others and there is an unlimited liability associated with this. It is also possible that 1 partner can force closure of the GP even if others want to continue with the same (even in 20 Partner Company). These are few factors why GP needs a high amount of trust and chemistry among partners and why this has not picked up very well.
Other instances of GP business can be found at places where a particular business/ profession didn’t had any other choice. E.g. If there are multiple founders/ promoters, you cannot look at Propx business and Pvt. Ltd. was also not allowed to them. Typical examples are law firms, CA firms etc.
Limited Liability Partnership (LLP) in India
LLP has come as a big relief to people who wanted to have small business and at the same time do it professionally and with limited liability. Earlier Pvt. Ltd. was the only option for limited liability.
LLP needs minimum 2 people and do not have any restrictions on number of partners it can have. It has lower auditing norms and you do not need a mandatory audit until you cross a certain turnover. It is a separate legal entity and until you do a fraud, your liabilities are limited.
This is very new in Indian ecosystem and hence many professionals and experts are still not very comfortable dealing with LLP. But LLP is catching up fast and more and more businesses are looking to go LLP. One very good factor with LLP is its international acceptance. LLP has been a popular business type in countries like USA, UK etc. and have been there for a long time. People are aware of this and they are comfortable dealing with LLP. So IT industry and other segments which have an international dealing are looking at LLP.
One major disadvantage with LLP is that investors do not prefer to continue and want entrepreneurs to move to a Pvt. Ltd. company once they invest money. Few advanced issues like going public, transparency & controls on activities for non-mandatory audit etc. which make investors uncomfortable. Currently conversion of LLP to Pvt. Ltd. is not possible, so they want to move to Pvt. Ltd. as early as possible and not after the company grow big. This helps avoid lot of IP and capital gains issues.
There is also some tax advantages associated with LLP. Post-tax profits of LLP can be distributed to partners without further tax liability, which in case of Pvt. Ltd. is taxable again (although at a discounted rate).
Nonetheless LLPs are gaining momentum and it’s a matter of time before this becomes a major force in startup ecosystem in India.
[Guest article contributed by eLagaan team. eLagaan offers end to end CA, CS, Business Legal & Payroll services for businesses. It specialises in formulating investor friendly structures & terms, staying compliant, setting up best practices desired by founders, investors & employees. This facilitates businesses to grow & scale with ease and stay fundable, saleable and compliant.]