5 Reasons why LLP Registration is NOT a good idea

Introduction

Anyone who wants to start the business in India faces their first important question of which entity should they choose to commence their business and certainly it is one of the most important question. There are multiple options available to start the business like private limited company, LLP, proprietorship etc. Each of the form has certain parameters based upon which the decision for choosing one of them is taken.

In simple words, choosing the type of entity is like choosing a vehicle for a longer journey, better the vehicle, more comfortable the journey. Hence, not to take it lightly, it is one of the base on which the whole business and structure depends.

LLP Registration in India

LLP is a rare combination of traditional partnership and a modern limited company and therefore, it offers conclusive benefits of the both the entities. The concept of LLP was introduced in the year of 2008 and expectedly, it has gained so much importance thereafter.

However, like every coin has two sides, LLP registrations too have some disadvantages and hence in some cases, it cannot be said to be an ideal form of business. Hence, for better understanding, we have summarised the cases into five reasons.

So, here are the five reasons why LLP registration is not a good idea.

1. Raising funds from the Venture Capitalist or angel investors

If you are a start-up or company who is looking to raise funds from the angel investors or the venture capitalist, then you cannot register a LLP because LLP does not support funding. The prime reason behind this disadvantage is that the ownership of LLP is classified as interest and not as shares and cannot be offered to investors in return for the required funds.

Only a limited company offers this advantage of raising funds in India and hence, if you are a start-up and willing to raise funds, then you need to register a private limited company instead of LLP.

2. Issuing ESOP’s to retain good talent into the company

“A great employee is like a four leaf clover, hard to find and lucky to have”

Retaining a good talent is always a challenging task for the HR manager and it is even more difficult for the start ups due to a high risk involved. Hence, start-ups and other companies often comes with various news schemes for employee to regularly motivating them and monetising them, whenever needed.

ESOP is one of those schemes when each employee is offered some shares with a condition of long terms commitment. ESOP is used as a retention tool by various companies and startups.

However, if you are willing to incorporate LLP, then unfortunately you will not be able to issue ESOP’s, this is because LLP has no concept of shares and therefore, LLP cannot issue ESOP’s to employee to retain good talent.

3. You cannot convert it into a Private Limited Company  

If you think that you could start a LLP initially and then convert the same into private limited company, then we have a bad news for you as there is no option in the law to convert the LLP into a private limited company directly.

Also, in future if you want to convert the LLP into a Private Limited Company, then you shall need to follow a comprehensive procedure which is not always possible.

4. Less trust worthy than limited companies

Trust is one of the factors which drive sales and which reflect in the form of brand. Brand is something we can trust upon and the same is backed by the company guarantee.

LLP may be a combination of traditional partnership or a limited company but it is still regarded as partnership. So, customers see it as a partnership and not as a company which in itself is a big disadvantage.

5. Forgetting due dates is a crime

Compliance under LLP is very limited and is a well reckoned fact. However, it is a advantage till you file everything on time. If you forget to comply with the normal provision (which is very normal), then there is a penalty of Rs.100 per day till the date of compliance. Further, there is no maximum cap on the amount of penalty and hence, if you forget to comply with 10 days, then penalty would be 1000 and if it continues for one year, then the penalty would be Rs.36,500 per form.

Conclusion

As said, there may be various advantages or disadvantages related with the number of form of business. Hence, the decision should be taken based upon the current needs and future plans so that one doesn’t have to suffer at a later stage.