Incorporation of LLP: A Complete Guide
Shivang Goyal
Shivang Goyal is a Practicing Company Secretary,with over a decade of experience in the field of corporate law, his expertise lies in managing corporate actions and ensuring routine compliance for listed companies, making him a trusted professional in the domains of the Companies Act and Securities Law.
Shivang’s deep understanding of regulatory frameworks and his commitment to excellence have established him as a go-to expert for navigating complex corporate governance challenges.
LLP stands for Limited Liability Partnership. It is a hybrid business entity that combines aspects of traditional partnerships with certain benefits of companies — particularly limited liability for its partners. In India, LLPs are governed by the Limited Liability Partnership Act, 2008.
Incorporating an LLP can offer a lot of flexibility, lower compliance burdens (compared with private limited companies), and a simpler governance structure, making it a popular choice especially for professional services firms, small businesses, startups not seeking large amounts of external equity, freelancers, among others.
What is an LLP?
An LLP is:
- A body corporate and a legal entity distinct from its partners. It can own property, enter into contracts, sue or be sued in its own name.
- It enjoys perpetual succession, meaning even if partners change, the LLP continues.
- Partners’ liability is limited to their agreed contribution to the LLP. Their personal assets are protected beyond what they have committed.
Why Choose LLP: Advantages & Use-Cases
Here are some of the key advantages that make an LLP attractive:
- Limited Liability
As above, partners are not personally liable beyond their contribution. This reduces risk for individuals, especially in businesses with liabilities or where lawsuits may arise. - Separate Legal Entity & Perpetual Succession
Because it’s a separate legal person, the LLP survives changes in partners. It has its own legal identity. - Lower Compliance Burden Compared to Companies
LLPs have fewer statutory compliances than private limited companies. For example, meetings like board or general meetings are not mandated; no requirement of MOA/AOA; fewer filings. - Cost-Effectiveness
Initial incorporation cost is lower; ongoing compliance (filings, audits) tends to be cheaper, provided thresholds are not crossed. - Flexibility in Management
The LLP Agreement (executed between partners) defines the rights, duties, profit sharing, and management structure, offering greater flexibility than the rigid framework of companies. - Tax Treatment
LLPs are generally taxed like partnership firms: income is taxed at the entity level (LLP), and profits distributed to partners are not taxed again in many cases as dividends (since LLPs don’t issue shares).
When is an LLP particularly well-suited?
- For small to medium businesses where external equity (venture capital) is not a primary focus
- For professional service firms (consultants, lawyers, accountants)
- For freelance or contracting operations where partners want limited liability, but don’t want the overhead of a full company
- For businesses where partners want more control and fewer formalities
Legal & Tax Basics
Some legal and tax characteristics to keep in mind when considering an LLP in India:
- Governing law: The Limited Liability Partnership Act, 2008.
- Minimum partners: At least two partners are required. Among them, at least two designated partners. One of the designated partners must be a resident of India, defined as having stayed in India for not less than 182 days during the immediately preceding 1 year.
- Capital contribution: There is no minimum capital requirement prescribed under the LLP Act. Partners can decide contributions among themselves.
- Audit requirement: An audit becomes mandatory only if the LLP’s turnover exceeds ₹40 lakhs or its capital contribution exceeds ₹25 lakhs. Otherwise, the audit is optional.
- Tax rate & surcharge: LLPs are taxed under the Income Tax Act. For example, as of recent years, LLPs pay tax at 30% plus applicable surcharge, with health & education cess.
- Filing & compliance: LLPs must file an annual return (Form 11) and Statement of Accounts & Solvency (Form 8) every year.
Steps to Incorporate an LLP in India
Below is a step-by-step process to incorporate an LLP under Indian law:
- Obtain Digital Signature Certificates (DSC)
Since most of the registration & filings are done online, designated partners must obtain a DSC. This allows signing documents digitally. - Obtain Designated Partner Identification Number (DPIN) / Director Identification Number (DIN)
Partners (especially designated partners) need to obtain a unique identification. - Name Reservation
Use the RUN-LLP (Reserve Unique Name – LLP) service to propose and reserve the LLP name. You typically provide two choices, ensuring that the name is unique and not undesirable or similar to existing entities or trademarks. - Filing Incorporation Form (FiLLiP)
After name approval, you file the incorporation form (FiLLiP) with the required details: name, address, details of partners/designated partners, contribution, registered office address, and business activity. Attach subscribers’ sheet, NOC for registered address if needed, consent forms, etc. - Certificate of Incorporation
Once the Registrar is satisfied, the Certificate of Incorporation is issued, along with the LLP Identification Number (LLPIN). - Draft LLP Agreement & File Form 3
An LLP Agreement among partners is a critical internal document. It defines roles, profit sharing, management, dispute mechanisms, decision rights, etc. After incorporation, the LLP Agreement must be filed in Form 3 within 30 days. Stamp duty applies (varies by state) depending on the amount of contribution and the state’s stamp act. - Obtain PAN & TAN; Other Registrations
PAN (Permanent Account Number) & TAN (Tax Deduction and Collection Account Number) for the LLP need to be obtained. Also, other licenses/registrations (GST, municipal/local, etc.) as applicable. - Comply with Annual Requirements
After incorporation, an LLP needs to adhere to statutory filing & compliance:
a. Annual Return (Form 11) by 30th May every year.
b. Statement of Accounts & Solvency (Form 8) within 30 days from the end of the 6 months of the financial year (i.e., by 30th October)
c. If thresholds are exceeded, ensure audit, bookkeeping, etc.
Disadvantages & Limitations
While LLPs offer many benefits, they also have some drawbacks. Knowing these helps you decide if LLP is the right vehicle for your business.
Disadvantage / Limitation | Details |
Limited ability to raise equity investors | LLPs cannot issue shares like companies. For venture capital / private equity or equity investors, the LLP structure may be less popular. Investors often prefer equity/shareholding, ownership structure, etc. |
Public disclosure | LLP’s incorporation documents, financials, etc., are public via the MCA portal. So, there is a trade-off between loss of privacy and proprietorship or partnership. |
Non-compliance penalties | Although LLPs face fewer compliance requirements than companies, missing filings (forms, returns) attracts penalties. Penalties can accumulate. |
No equity shares / ESOPs | Employee stock ownership plans (ESOPs), issuing share capital, etc., are not available under LLP; it limits some startup incentive models. |
Restricted external perception | Some banks, investors, and customers may prefer dealing with a company structure (private limited) for credibility, for ease of contract with shareholding, etc. LLP may sometimes be less formal. |
Resident partner requirement | At least one designated partner must be an Indian resident. For foreign partners only structure, there are limitations. |
LLP vs Private Limited Company:
Feature | LLP | Private Limited Company |
Liability | Limited to the contribution | Limited to shareholding |
Ownership vs Shareholding | Partners, profit shares per agreement | Shareholders holding equity shares |
Raising capital/equity funding | Difficult; no shares | Easier; issue shares, ESOPs, etc. |
Compliance burden | Lower (fewer meetings, fewer formalities) | Higher (board meetings, AGMs, compliance with more rules) |
Audit requirement | Only above the above-specified turnover/contribution thresholds | Companies often require an audit regardless of turnover, with more rigorous statutory requirements. |
Public perception/credibility | Good for small businesses or professional firms | Often preferred for larger-scale companies engaging in investment, global markets, etc. |
Taxation Details
- Tax Rate: LLPs are taxed at the rate applicable under the Income Tax Act. For recent years, that has been ~30% + surcharge + health & education cess.
- Profit Distribution: Profits once taxed at the LLP level can be distributed to partners without further dividend tax. Partners are taxed on the LLP’s income per the profit-sharing ratio.
- Presumptive taxation: LLPs do not qualify for presumptive taxation under sections 44AD/44ADA of the Income Tax Act, unlike proprietorship or partnership firms.
- GST, Other Indirect Taxes: If business turnover exceeds the threshold, LLP must register for GST and comply with regular filings, etc. Additional registrations may apply depending upon the nature of business (licenses, export, state taxes, etc.)
Practical Considerations & Tips
- Carefully choose your LLP name
Ensure uniqueness, avoid similarity with existing company / LLP names or trademarks. Also consider branding, domain availability, professionalism, etc. - Define roles clearly in the LLP Agreement
Since the internal governance is heavily dependent on the LLP Agreement (there is no MOA/AOA like in companies), it’s vital to define: decision rights, profit sharing, exit/partner exit clauses, dispute resolution, authority, and responsibilities. A weak agreement often leads to disputes later. - Ensure designated partners are reliable
Designated partners have statutory responsibilities. Select partners who understand compliance, statutory duties, timely filing, etc. - Keep the projection of growth in mind
If you anticipate raising external equity, issuing ESOPs, going global, or listing, plan. Switching from LLP to a Company later is possible, but may involve costs and complications. - Monitor compliance deadlines strictly
The penalties for missing annual filings (Form 8, Form 11, etc.) can add up. Even if business is inactive, filings often have to be done. - State‐specific stamp duty for LLP Agreement
LLP Agreement must be stamped under the Stamp Act of the state where registered. Stamp duty rates vary; ensure you factor that in. Delay in stamping may create legal issues. - Use professionals for incorporation
Having a Chartered Accountant / Company Secretary or legal advisor helps get all documents, filings, and compliance done correctly. Mistakes can lead to delays or extra costs. - Evaluate future policies & incentives
Schemes like Startup India, or state-level support, sometimes offer tax or compliance relief; check whether LLP is accepted under such schemes. Also, monitor changes in law (tax thresholds, audit limits, etc.) to assess whether LLP continues to be optimal.
Case Example:
Let’s imagine “ABC LLP”, two partners: A and B; A resident in India, B overseas. They want to offer software consulting services. They expect a turnover of ₹30 lakhs in the first year, and the capital contribution is modest.
- They decide LLP is suitable: limited liability, simpler compliance, and no need for large equity funding immediately.
- Steps: Get DSC, get DPINs, propose name “ABC LLP” (second name option “ABC Solutions LLP”).
- File RUN-LLP, get name approval.
- File FiLLiP, submit proof of address, identity, and registered office.
- Once incorporated, file Form 3 with the LLP Agreement.
- Obtain PAN, TAN. Register GST if expected turnover > threshold.
- Maintain books; file Form 8 & 11 annually. Since turnover < ₹40 lacs, audit not required.
Over time, if the business grows, they may consider converting to a private limited company to raise venture capital.
Recent Trends & Regulations
- FDI in LLPs: Earlier, LLPs needed prior approval from the government for foreign investment; many of those restrictions have eased over time.
- Compliance penalties have become stricter; e-governance (MCA portal) has made filings more transparent and public. Missing filings can lead to penalties, and documents are publicly available.
- States differ in stamp duty rates, which affect the cost of the LLP Agreement.
- Government efforts to simplify the ease of doing business are pushing to reduce friction in registration, enabling more online filing, name approval, etc.
Conclusion
Incorporating an LLP in India is often an excellent option for entrepreneurs who want limited liability, flexibility, lower overheads, and relatively simple compliance. It strikes a balance between formality and simplicity, making it well-suited for small and medium-sized businesses, professional firms, and service-oriented ventures.
However, this structure has limitations — particularly in raising equity financing, share-based incentives, investor perception, and some statutory limitations. As a business evolves, the appropriateness of the LLP structure should be reassessed. For many, an LLP works well in the early stages; for others, shifting to a private limited company at a later stage may be more suitable.
For any clarifications or queries, please feel free to reach out to us at admin@fintracadvisors.com
Disclaimer
The content published on this blog is for informational purposes only. The opinions expressed here are solely those of the respective authors and do not necessarily reflect the views of Fintrac Advisors. No warranties are made regarding this information’s completeness, reliability, or accuracy. Any actions taken based on the information presented in this blog are solely at the reader’s risk, and we will not be liable for any losses or damages resulting from its use. It is recommended that professional expertise be sought for such matters. External links on this blog may direct users to third-party sites beyond our control. We do not take responsibility for their nature, content, or availability.
