LLPs- Entity of the Future post COVID-19?
Updated: Jun 2, 2020
Bhumesh Verma, Managing Partner, Corp Comm Legal
The emergence of COVID-19 has drastically altered personal and professional course of all, particularly professionals to a great deal as majority of people is witnessing a different and hitherto unknown way of professional/personal living.
Things are definitely not going to be the same post COVID-19 as persons and businesses will have to make certain amendments to their living and working pattern to embrace the new normal way of living.
Working professionals and businesses are gearing up to embrace a ‘new normal way of life’ post Covid19. Particularly, businesses/companies may have to adapt to a business structure which is cost effective, flexible and compliant.
Limited Liability Partnership (LLP) as a business structure is preferable particularly for smaller businesses to cope up with testing and changing economic times as it provides diversified benefits and flexibilities. Here we examine some of the distinct features.
LLP is a unique partnership structure with separate identity as a legal entity with liability of partners being limited to proportion of investment made by such partners or such other monetary limit as agreed by partners or as stipulated by law.
Advantages of LLP Structure:
LLP structure provides certain flexibilities to businesses in terms of compliance, capital generation and mobilization, business administration and hassle free dissolution of partnership in comparison with Limited Liability Company (Company).
There is no mandatory requirement of:
a) Conducting board/shareholders meetings on quarterly and annual basis; and
b) Engaging and employing key managerial personnel.
Business administration and policy making is comparatively easier and flexible - prior written approval of stakeholders isn’t mandatory for administration and policy making matters.
Under LLP structure, withdrawal of firm profits by a partner may not require statutory approvals – it could be more tax effective as well.
In a company, capital infusion requires shareholders consent and is finalized following a series of statutory filings and approval of such filings by regulatory authorities – for LLP, it is a matter of deposit of requisite capital into its bank account.
Filings and other compliances are much less compared to companies.
In a company, shareholders have to finalize the remuneration of directors via written consent. Under LLP, partners have flexibility to determine their remuneration and it is quite tax efficient as well.
Incorporation of a company is comparatively time consuming process and requires submission/authentication of certain major legal/business documentation - LLP incorporation is much simpler with less paper work.
Unlike company, addition/exit of a partner in LLP just requires an amendment to the LLP agreement. Exiting partner can be paid off without requiring any approvals and tax implications.
In existing state of economic affairs and challenges LLP structure may be a better option to launch and operate a business due to inherent benefits.
Businesses / professionals opting for LLP structure can save time, energy and resources in respect of legal /business documentation, compliance requirements, low tax payouts and policy making.
In new normal way of living/business that will emerge out of COVID-19, existing businesses may consider the prospect of converting into LLP structure subject to careful evaluation of certain legal and business factors concerning the economic/business interest of companies, shareholders and lenders.
Given the benefits and flexibilities associated with the incorporation and functionality of LLP structure – It may be time for businesses to transform into LLP structure to reduce compliance and financial burden, for operational flexibilities and for better mobilization of capital.