All About Annual LLP Compliances

Overview

Starting a business and running it for the long term are two completely different things. It would be an interesting fact to know that most start-ups fail within five years of initiation of their business operations. But, what goes wrong? There could be many reasons such as failure to establish a unique product, disputes between partners, failure to upkeep with the trends, or any mismanagement issues, etc. Therefore, it is important to realize that apart from the production or development of any unique product or service, it is also necessary to manage the legal sides of a business.

With the advent of the internet and several government policies & programs to encourage businesses, there has been a massive rise in the number of start-up businesses that have achieved tremendous growth, making the Indian compliance landscape grow and expand and making the compliance processes simpler, easier to manage and transparent.

Speaking of legal compliances, there are business-related compliances applicable depending on the type of business entities chosen by the entrepreneur to start his business. Ideally, a Limited Liability Partnership or LLP is one of the most popular choices for start-ups to start small and medium scale businesses. With the benefit of limited liability & body corporate structure similar to a private limited company and the procedural flexibilities of a partnership firm, it allows the start-ups to adopt a more focused approach towards the fulfillment of their business goals. It is an attractive option for receiving Foreign Direct Investments (FDI) from foreign sources and even has lesser compliances to manage as compared to any other type of business entity.

If you are planning to start your start-up venture anytime soon, you may consider LLP as your business structure to avail the benefits that come with it. However, before starting your business you should have the knowledge of all compliances including annual compliances relevant to an LLP. Corporate compliance should be an essential measure of your business operations to ensure efficient growth of start-up business, avoid penalties, and stay out of any other possible risks/difficulties. This article mentions the introduction and salient features of LLPs, their annual compliances, and penalties for failure to manage those compliances within their due date.

Salient Features of Limited Liability Partnership (LLP)

i. LLP is a body corporate

Section 3 of the Limited Liability Partnership Act 2008 states that an LLP is a body corporate incorporated under the provisions of the Act. Thus, unlike a sole proprietorship firm or partnership firm, it enjoys a separate & distinct status in the eyes of law.

ii. Perpetual Succession

Unlike in the case of a partnership firm, an LLP enjoys perpetual succession and is not affected by events such as the retirement, insanity, insolvency, or even death of one or more partners.

iii. Limited Liability

Another interesting feature of an LLP includes the fact that unlike in the case of a partnership firm in which the partners are mutually liable for the actions of the other partner, the actions of each partner are independent of that of the other and no mutual or joint liability is applicable in case of LLP. As all the partners are agents of the LLP, hence the actions of one do not bind the other.

iv. LLP Agreement

Every LLP has a written agreement executed between the partners to define their roles & responsibilities and their mutual rights & obligations, which could be devised as per their mutual agreement. However, if there is no LLP agreement in place, the provisions of Schedule I of the LLP Act 2008 will govern their mutual rights & duties towards the LLP.

v. Limited Liability

Section 26 of the LLP Act 2008 provides the benefit of limited liability to all the partners and designated partners of the LLP organization. Though every partner is in the position of the limited agent of LLP in fulfillment of his duties & responsibilities towards business, no partner is the agent of any other partner. In other words, no partner shall be responsible for the actions of the other partner under the Act and shall be allowed protection against personal liability.

Pre-Requisites for incorporation of an LLP

i. It shall be compulsory to have at least two designated partners that could be extended to five designated partners after the introduction of the LLP (Second Amendment) Rules, 2022 at the time of incorporation of LLP.

ii. Designated Partners should be individuals and at least one of them should be a resident of India. Such designated partners shall be primarily accountable for all the applicable regulatory and legal compliances, besides their liability as partners of LLP.

iii. An LLP can have any number of partners in the organization.

iv. Every LLP must have a registered office located in India.

What is meant by LLP Compliances?

In the case of LLP, certain compliances are required to be fulfilled and maintained timely to escape heavy penalties for non-compliance under the law. The number of compliances is way lower than applicable to a private company, heavy fines have been levied to ensure strict implementation of all the compliances. For instance, where the highest amount of penalties for non-compliance may go up to Rs.1 Lakh, it may be extended up to Rs. 5 Lakh, in the case of an LLP. Therefore, every LLP must act proactively & diligently toward the management of its annual & other compliances. An LLP registered under the provisions of LLP Act, 2008 with the Ministry of Corporate Affairs (MCA) needs to comply with the following compliances-

i. Filing Annual Return for the LLP-Every LLP shall be required to prepare and file a copy of its annual return which is essentially a summary of the business activities undertaken by the LLP during the financial year including any changes in the management that took place during the year. Such annual return shall be filed in Form-11(e-form) to the Registrar of Companies either on or before 30^th May each year.

ii. Filing of Statement of Account & Solvency- Every LLP must maintain their books of accounts and prepare a Statement of Solvency (Accounts) every year ending on 31st March in its registered office of the business. The books of accounts must include information such as money received and incurred list of total assets and liabilities, statements of Costs of Goods Sold (COGS), a list of inventories and statement of finished goods, etc.

Further, it shall be mandatory for every LLP to file an annual statement of accounts & solvency of LLP in prescribed form LLP form-8 the Registrar of Companies on or before, 30th October every year with a declaration of the solvency and financial soundness of LLP by the designated partners.

iii. Audit of LLP-Every LLP shall be required to get its accounts audited by a practicing Chartered Accountant in any financial year, where-

• The annual turnover of the LLP exceeds Rs. Forty Lakhs or more or
• Total contribution in the LLP exceeds Rs. Twenty-Five Lakhs
• Or Both.

iv. Filing of Tax Returns

As per the Income Tax Act, all LLPs are required to close their financial year by the 31st of March and accordingly file the returns with the IT Department in the prescribed form ITR-5. It shall be mandatory for the ITR to be filed electronically under the digital signature of the designated partner if its accounts are required to be audited under section 44AB.

An LLP holding GST registration shall also be required to maintain GST compliances by filling Annual GST return by 31^st December of the year succeeding the relevant financial year in addition to the monthly & quarterly GST compliances in addition to MCA and income tax returns.

LLPs that have carried out any international transaction with associated enterprises or undertaken any specific domestic transactions previously shall be obligated to file form 3CEB. Such form must be certified by a Chartered Accountant by 30th November of every year.

Here is the list of tax-based compliances along with their due dates-

Penalty in case of Failure to Fulfil Annual Compliances

i. For MCA Filings-

As per the Limited Liability Partnership Act, 2008 it shall be compulsory for every LLP to file e-forms Form 8 and Form 11 every year annually. Any failure to fulfill these MCA compliances will attract a penalty of Rs. 100 per day for each form till the date these forms are filed with no upper specified ceiling for the maximum penalty.

Further, every designated partner of such LLP shall be liable for a minimum penalty of Rs. 10,000 that could go up to Rs. 100,000. In case of continual failure or failure for a longer duration, the ROC may even issue notice and initiate a legal proceeding for striking off the name of LLP from its records leading to the closure of business.

ii. For Tax –Related Filings-

Any failure to file ITR either on or before the due date would attract a two-fold penalty for the LLP in default. While Rs. 5000 shall apply to LLPs, in case they file their ITR till 31^st December, whereas if the LLPs do not even file within 31^st December shall be required to pay Rs. 10,000/- as a penalty.

Similarly, in case the LLP fails to file the GST annual return shall also be liable for a late fee of Rs. 100 per day per Act, which means that the LLP in default shall be liable for a penalty of Rs.200 per day for each day until the return is filed.

Documents Required for Filling Annual Compliances of LLP

Provided below is the list of documents that should be kept ready for fulfilling annual compliances of LLP-

• Monthly Bank Statements for the whole financial year from all the bank accounts in the name of the LLP;
• Credit card Statements in cases where expenses have been incurred by the partners on behalf of the LLP;
• Purchases & Sales invoices
• Invoices containing details of expenses expended during the year.
• Copies of GST, VAT, or other tax returns (where applicable)
• Copy of TDS challans (if applicable)

Benefits of Annual Compliances for LLP

i. Reputation & Credibility

An LLP with an impressive track record of managing compliances within time could help to create an excellent repute of the LLP in the eyes of the public as well as the regulatory authorities. Further, such LLP would be a point of attraction for investment purposes among investors and financial institutions due to its higher credibility.

ii. Compliance-

Fulfilling all legal & regulatory compliances on time would save a lot of energy and time for the LLP to focus on business activities rather than the unnecessary legal hassles. Further, if the partners of the LLP wish to convert the LLP into any other form of business entity (such as a private company) or to shut down the business, the partners shall not be allowed to do so until and unless they fulfill all compliances within time.

iii. Avoiding Penalty or Prosecution

Though, the number of applicable compliances or procedures applicable to an LLP is much lower than any other business entity, however, at the same time they are subject to heavier penalties and prosecution. Thus, managing and fulfilling all annual and other compliances timely would save an LLP from any unnecessary penalty or prosecution. Whereas failure to do so, may also bring down the reputation of LLP and affect its growth.

iv. Attractive Choice for FDIs

To encourage the development of the business sector, the Govt. of India has recently rolled out guidelines allowing FDIs in LLP under the automatic route through which a foreign citizen or a foreign business entity can make investments in the LLPs allowing more inflow of capital for business expansion. Naturally, an LLP with better legal compliances would be more trustworthy and profitable and hence a more effective choice for investors.

v. Easier Access to Funds

Before entering into any contracts, partnerships, or joint ventures, the other parties may examine the track record of compliances and financial health of the LLP, which will give them a clear picture of the commitment of the LLP toward compliance procedures. Similarly, banks or financial institutions may also seek financial statements or reports filed to MCA for annual fillings before finally making decisions for providing loans or overdraft facilities.

Conclusion-

Thus, an LLP is a form of business entity that offers numerous benefits to the start-ups such as freedom from any joint liability and limited liability towards the LLP organization, body corporate structure, and perpetual succession apart from being a popular choice for FDI by foreign investors due to its procedural flexibilities. It is great relief for entrepreneurs and professionals like CA/CS/CMAs and other similar professionals who wish to come together and start a business collectively.

Further, the cost of managing compliances is lesser than for any other entity including various tax benefits and exemptions such as Income- Tax, Surcharge, and Dividend Distribution Taxes. Consequently, it could be settled that the annual compliances though are compulsory to be fulfilled by an LLP, and they enhance the reputation & trustworthiness of the organization. Whereas non-fulfillment of compliances beyond the due date attracts penalties and fines on the directors or partners, affecting its growth even leading to the closure of business permanently.