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Startups often face the dilemma of choosing an entity. While there are a number of structures such as sole proprietorship, limited liability partnerships, private limited companies etc. available, the pros and cons associated with the same, makes the choice difficult. Limited Liability Partnership or a LLP is one of the most preferred entities by startups. However, an early stage startup often vacillates between sole proprietorship, one person company and a LLP. The government on recently enacted the LLP Amendment Act, 2021, that has further simplified the working of a LLP and has made it easier to do business through the structure of a LLP. Through this blog post, we attempt to unravel the implications that this Amendment would have on the choice of entities made by startups and also on existing startups that are operating as LLPs.
Key Changes
Implications of the LLP Amendment on Startups
Choice of Entity
Early-stage startups tend to choose an entity that is easier and less expensive to incorporate, has manageable compliances and is attractive to investors. The decriminalization of procedural offences has brought a LLP at par with a private limited company. Moreover, simplified dispute resolution procedures and enhancement of the monetary threshold for Small LLPs has definitely pegged LLPs one notch above the other entity structures.
Compliances
The enhancement of the definition of a Small LLP would now enable a greater number of early-stage startups to qualify as a Small LLP. A Small LLP is a concept similar to a Small Company. Such LLPs are subject to lesser compliances and lower costs of incorporation. Widening the ambit would incentivize startups to register as Small LLPs.
Dispute Resolution
Early-stage startups want minimum hassles as far as dispute settlement is concerned. Setting up of special courts would enable LLPs to dispose off their disputes in a speedy manner. Having a dedicated official supervise the compounding process would also streamline the process of out of court dispute resolution. Hence, a simplified dispute resolution process would bring more startups under the ambit of LLPs.
Decriminalization of Offences
An early stage startup does not want to undertake the risks of attracting criminal penalty. Many startups feared to incorporate due to procedural defaults being treated as criminal offences. The decriminalization of procedural offences would go a long way in assuring the startup community that they would not have to face jail term for minor oversights.
The LLP Amendment Act would go a long way in inspiring confidence among early-stage startups. It is not only promoting ease of doing business but also streamlining the processes a LLP is subject to.
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