Question

As discussed in the textbook, large accounting firms and other professional firms operate as limited liability partnerships (LLPs).

• Compare and contrast the advantages and disadvantages of an LLP form of business and a C Corporation.
• Suggest the significant tax reasons why a new entity would choose an LLP over a traditional partnership or a C Corporation.

Answer 1

The advantages of forming into LLP are much as it is a newly growing business structure. LLP is a new concept while Partnership is an old concept. LLP and Partnership are different.

Benefits of an LLP
There are numerous benefits to be had from trading through an LLP -

Limited liability protects the member’s personal assets from the liabilities of the business. LLP’s are a separate legal entity to the members.
Flexibility:Theoperation of the partnership and distribution of profits is determined by written agreement between the members. This may allow for greater flexibility in the management of the business.

The LLP is deemed to be a legal person. It can buy, rent, lease, own property, employ staff, enter into contracts, and be held accountable if necessary.
Corporate ownership. LLP’s can appoint two companies as members of the LLP. In an LTD company at least one director must be a real person.
Designate and non-designate members: You can operate the LLP with different levels of membership.
Protecting the partnership name:By registering the LLP at Companies House you prevent another partnership or company from registering the same name.

Disadvantages of an LLP
As with all formats of business there will be disadvantages as well as advantages. The following may be considered disadvantageous in some cases.

Public disclosure is the main disadvantage of an LLP. Financial accounts have to be submitted to Companies House for the public record. The accounts may declare income of the members which they may not wish to be made public.
Income is personal income and is taxed accordingly. There may be tax advantages in registering as a company, but this will depend on your personal circumstances.
Profit can not be retained in the same way as a company limited by shares. This means all earned profit is effectively distributed with no flexibility to hold over profit to a future tax year.
An LLP must have at least two members. If one member chooses to leave the partnership the LLP may have to be dissolved.
Residential addresses were historically recorded at Companies House. Whilst the use of ‘service addresses’ now allows for home addresses to be kept out of public view, any address previously supplied to Companies House is still part of the public record unless you pay for the records to be suppressed. For many businesses this is not a problem. However, there are some examples where this may not be desired. Consider solicitors and partners of law firms that may not want their home address so freely available if their work involves sensitive cases.

✓Significant tax reasons for choosing LLP.

No requirement of compulsory Audit
LLPs are not required to audit the accounts. Any other company (Public, Private) are mandated to get their accounts audited by the auditing firm. LLP is required to audit their account in the following situation:

When the contributions of the LLP exceeds Rs. 25 Lakhs, or
When annual turnover of the LLP exceeds Rs. 40 Lakhs
√ Savings from lower compliance burden
LLP have to face less compliance burden as they have to submit only two statements i.e. the Annual Return & Statement of Accounts and Solvency. Whereas in the case of private company, at Least 8 to 10 regulatory formalities and compliances are required to be duly completed. Read Annual Cost Comparison of Private Limited and LLP.

√ Taxation Aspect on LLP
LLP is not liable to pay the tax on the income and share of its partner. Thus, no dividend distribution tax is payable as under section 40(b). Bonus, commission or remuneration, Interest to partners, any payment of salary, allowed as deduction. Provision of ‘deemed dividend’ under income tax law, is not applicable to LLP.

√ (DDT) not applicable
If the partners of LLP withdraw profits from the company, an additional tax liability in the form of DDT is not payable by partners. Whereas, in the case of a company, the owners have to pay DDT @ 15% ( surcharge & educational cess). Hence, profit of LLP is in the hands of its partners can be easily withdrawn by the partners.

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