© Copyright Our Wall
Introduction
The Limited Liability Partnership (LLP) is a hybrid form of business where LLP enjoys the benefit of partnership and Private Limited Companies. The partners of LLP are only liable for the portion of shares they own and no partner is responsible for the carelessness and wrongdoing of the other partner. The most important question is - How do partners of Limited Liability Partnership(LLP)receive income? The answer to this will be discussed in this blog.
What is a Limited Liability Partnership (LLP)?
A Limited Liability Partnership (LLP) is a partnership firm in which some or all of the partners have limited liability. Moreover, it has the characteristics of both companies and partnerships. In an LLP, no partner is responsible or liable for the bad behavior and negligence of another partner. The partners are only liable for the shares they own.
Partners are eligible for remuneration and maximum remuneration
The LLP agreement specifies that which partners can receive returns and which cannot. If the percentage of the profit or interest of a partner is clearly stated in the LLP agreement then they should be provided that amount regardless of whether the partner is working, inactive, sleeping, or not working. However, the Income Tax Act, 1961restricts the amount of remuneration LLP can pay-out to its partner. The maximum limits allowed on the remuneration of partners are as follow:
On the first Rs. 3 lakhs of book profit or, in the event of a loss, Rs. 1,50,000 or 90% of book profit, whichever is greater; on the remainder of the book profit – 60% of book profit.
The annual interest rate due to partners shall not exceed 12%.
Remuneration allowed to LLP
The LLP agreement also contains provisions for salaries and wages because it is an essential part of running a business. As a result, each partner wants maximum returns for the work done, and the partner should know the types of returns available in order to balance the agreement properly. The below are the three most common types of returns available to partner of LLP.
1. Interest in the capital
This is a payment method that is directly related to the capital of the partners that was put in when the company was just getting started. It has no relation to the present project going on in the company. When the partnership was formed, each partner is required to contribute a portion or percentage to the total share capital. Therefore, the interest return they received will be from the percentage of the amount they investe.
2. Remuneration on salary
This term refers to everything from incentives and commissions to a partner's or employee’s total compensation. It is given to the partners who work hard to assist the LLPs to grow and prosper. It is a remuneration system based on the amount of work completed and little on the capital contributed at the outset of the partnership.
3. Profit sharing
The return in the profit sharing becomes available when the LLP starts making profit. This return considers both the amount of work that has been put in and the capital that has been invested. As soon as the LLP begins to earn profit, that profit is reviewed, divided into pieces as per the amount of work performed, and capital is distributed among the partners as required.
Conclusion
The designation of partners and the provisions included in the LLP agreement filed during LLP partnership firm registrations and later through modifications determine eligibility for returns and remuneration of the partners in LLP. The partners must carefully analyze the designation and rights of each LLP member, before forming an LLP agreement. In addition, it should highlight that the Income Tax Act governs the tax ability of returns, LLP profits, and remuneration of partners regardless of the provisions and limitations on remuneration in the LLP Agreement.
The Wall