Should You Switch to an LLP? If So, When Is the Right Time?
February 16, 2023
The question has come to many entrepreneurs’ minds. But it’s more complex of a dilemma to be solved in a yes or a no. A company needs to analyze its situation and think of all the nuances of the Limited Liability Partnership (LLP) structure. For example, even though there are no capital requirements, partners should make sure their internal contribution to the capital is enough to keep the business running.
Limited Liability Partnerships can be a very beneficial business structure for some partnership firms. And since there are no restrictions per se other than the consent of all partners and creditors, and at least on annual return and balance sheet figures, any company can convert into an LLP. But when should you make the switch?
An LLP status works best for startups, small-scale companies run by partners who want nominal regulatory compliance and freelancers who want to give their trade a proper structure. Why? An LLP, as the name suggests, limits the liability of the partners to their contribution to the company. And if the partners see a need for external funding, the company can quickly be converted into a private limited firm.
Switching to an LLP has a lot of benefits. They don’t have to audit their accounts if their annual turnover is less than 40 lakhs, there is no upper limit for the number of partners, and it also has fewer compliances when compared to a Pvt. Ltd. But it’s not all positive. An LLP has to disclose their accounts publicly, which may result in the income of each partner getting public. Speaking of income, the earnings of an LLP can not be kept for future tax years, unlike a company which can retain the profits.
In the end, the decision hangs with the owners of the company. If the advantages outweigh the disadvantages, then LLP can be a very good option to dip your toe into at the beginning of the company’s tenure. But if the partners see a need for external capital and privacy when it comes to income, then sticking to a Pvt. Ltd. structure may be a better choice.