A Limited Liability Partnership (LLP) is a business structure that combines the liability protection of a corporation with the operational flexibility and tax benefits of a partnership. While LLPs offer various advantages, they also come with certain limitations that should be considered before establishing one. Below are some key limitations of an LLP.
Minimum Two Members Requirement
An LLP must have at least two members to be formed. Unlike a sole proprietorship or a single-member company, an individual cannot establish an LLP alone.
Mandatory Indian Partner
For foreign nationals or Non-Resident Indians (NRIs) looking to set up an LLP in India, at least one partner must be a resident Indian. Two foreign nationals alone cannot form an LLP without having an Indian resident as a partner.
Time-Consuming Formation Process
Setting up an LLP generally takes longer compared to other business structures, such as a private limited company. This is because every partner’s signature is required on multiple documents, which must then be attached to various e-forms for filing. The process of self-attestation for all partners makes LLP formation more time-intensive. We provide the best LLP registration services in pune!
Restrictions on Asset Withdrawal
Partners contribute capital to the LLP, either in the form of assets or cash, while drafting the LLP Agreement. Once contributed, these assets or funds cannot be withdrawn or returned to the partners unless explicitly stated in the LLP Agreement.
Challenges in Transferring Ownership
The ownership rights of an LLP are not easily transferable. Any transfer of ownership requires the approval of all partners. A resolution passed by a majority of partners is needed for ownership-related changes, such as:
- Increase or decrease in capital contribution
- Change in designated partners
- Modifications in working partners
- Business amalgamation
- Change of registered office
- Opening or closing of bank accounts
- Admission of new partners
A supplementary agreement must be drafted to include new partners, their contributions, and adjustments to existing partner contributions. Additionally, any such changes must be reported to the Registrar of Companies (ROC) under whose jurisdiction the LLP operates.
Offenses and Penalties
The LLP Act includes provisions for penalties in case of non-compliance. If an LLP fails to adhere to procedural requirements, such as timely filing of e-forms, a default fee is charged daily until compliance is met. The penalty can be Rs.100 per day, with a maximum period of 300 days. Some offenses may even result in fines or imprisonment, depending on the severity of the violation.
Foreign Direct Investment (FDI) Restrictions
As per the FDI policy, foreign direct investment in LLPs is only permitted through the government approval route. FDI through the automatic route is not allowed. Additionally, FDI is only permitted in sectors where 100% FDI is allowed under the automatic route. This means that foreign companies and individuals can invest in Indian LLPs, but only with prior government approval.
Limitations on External Commercial Borrowing (ECB)
An LLP is not permitted to raise External Commercial Borrowing (ECB). This means an LLP cannot secure loans from foreign investors, Foreign Institutional Investors (FIIs), overseas banks, foreign companies, or any other external financial institution outside India. This limitation can be a significant drawback for LLPs looking to secure foreign funding.
Conclusion
While LLPs offer flexibility, liability protection, and tax benefits, these limitations should be carefully evaluated before deciding whether an LLP is the right business structure. Entrepreneurs must assess their business needs and compliance requirements to determine if an LLP aligns with their goals.
Frequently Asked Questions (FAQs)
1. Can a single person start an LLP?
No, an LLP requires a minimum of two partners. A single individual cannot establish an LLP.
2. Can two foreigners start an LLP in India?
No, at least one partner must be a resident Indian to form an LLP in India.
3. How long does it take to set up an LLP?
The process of forming an LLP generally takes longer than a private limited company due to the requirement of multiple partner signatures and self-attestations on various documents.
4. Can a partner withdraw their capital contribution from an LLP?
No, once a partner has contributed capital to an LLP, it cannot be withdrawn unless explicitly permitted by the LLP Agreement.
5. Is it easy to transfer ownership in an LLP?
No, transferring ownership in an LLP requires the consent of all partners and approval through a resolution. The process is more complicated than in other business structures.
6. What are the penalties for non-compliance in an LLP?
If an LLP fails to file required documents on time, it faces penalties of Rs.100 per day for up to 300 days. In some cases, non-compliance may also result in fines or imprisonment.
7. Can an LLP receive Foreign Direct Investment (FDI)?
Yes, but only through the government approval route. Automatic FDI is not allowed for LLPs.
8. Can an LLP raise loans from foreign entities?
No, an LLP cannot take loans from foreign partners, ban
