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What are the limitations of LLP?

Limitations of LLP

What are the Limitations of LLP?

A Limited Liability Partnership (LLP) is a type of business structure that offers a corporation limited liability protection while allowing a partnership flexibility and tax benefits. While LLPs have several advantages, they have certain limitations that should be considered before setting up an LLP. This article will discuss the limitations of LLP.

Minimum Two members

In general, the structure or model of an LLP is similar to that of any partnership firm but requires a minimum of two members. A single person cannot form LLP.

Mandatory Indian Partner

RI/ Foreign nationals who want to form an LLP in India, at least one partner should be an Indian. Two foreigners cannot form LLP without having one resident Indian partner.

Take more days to form LLP.

LLP structure takes more days to form, as all the partners’ signatures are required for every document, which is then attached to required e-forms. Therefore self-attestation of each partner on documents is more than the formation of any Private limited company.

Assets of LLP

Partners undertake to contribute some amount towards the LLP firm, which they contribute in the form of assets or cash while executing the LLP agreement. Once money or assets are contributed to LLP, they cannot be returned to the partners unless any specific provision is mentioned in the LLP agreement.

Difficulty in the transfer of ownership

Ownership rights are only easily transferable with obtaining consent from all LLP partners. If any partner wishes to transfer some portion of ownership, he has to get the permission of all partners.

The resolution to be passed by the majority in numbers of the partners in some of these cases:

  • Increase or decrease in contribution
  • Increase or decrease of designated partners
  • Alteration of working partners
  • Amalgamation
  • Shifting of the registered office of the firm
  • Opening or closing of bank account
  • Admission of a new partner

The supplementary agreement containing details of new partners and their contribution has to be created. The existing partners must revise or change their assistance to accommodate the new partners in the LLP agreement.

It is necessary to notify the Registrar of Companies, whose jurisdiction the registered office of the LLP is located, of these changes.

Offenses and penalties

LLP Act has provided provisions for offenses and penalties.

  • If a person fails to comply with procedural matters, such as filing an e-form on time, a default fee will be charged every day the default continues. It would be payable at the rate of Rs.100 per day after the expiration of the filing date up to 300 days after the filing date.
  • The offense can result in either payment of a fine or through payment of fine as well as imprisonment of the offender.

Click here for more details on Important LLP Compliance – Due Date & Penalty.

Permission of Foreign Direct Investment (FDI) in LLP

According to FDI Policy, FDI in LLP is allowed only through the Government route; FDI in LLP under automatic route is not permissible.

  • Furthermore, FDI in LLP is allowed only in sectors where 100% FDI is permitted through the automatic route.
  • In India, foreign companies and individuals can invest in LLPs, but government approval is required.

Limitation in External Commercial Borrowing

LLP cannot raise External Commercial Borrowing (“ECB”). An LLP cannot take loans from foreign partners, FIIs (Foreign Institutional Investors), banks outside India, FI outside India, or any other firm outside India.

These limitations should be considered when deciding whether an LLP suits your business. IndiaFilings can help you to register your LLP.get in touch with an IndiaFilings Advisor at [email protected]