Disadvantages of LLP over other forms of business organization

LLP Meaning

A Limited Liability Partnership firm (LLP) is a form of business organization with each partners liability limited to the contribution made by that partner in relation to the LLP, except in case of fraud, wrongs, malpractice, etc., in which case liability that can attach to the relevant partner may be unlimited.

LLPs are treated as persons in the eyes of law and are incorporated as persons, unlike normal partnership concerns which are not incorporated as persons in the eyes of law.

Every LLP shall have atleast two partners. There should be no maximum limit prescribed under the act. Minimum two designated partners who are individuals are mandatory. One of them shall be a resident in India. The incorporation document shall specify the name of the designated partners.

Disadvantages of LLP over other forms of business organization

The LLP form of business enterprise is not free from shortcomings. Some of them can be listed as follows :

Disclosure of financial information:

A considerable amount of financial information in respect of the LLP needs to be disclosed. The mandatory disclosure of financial information is a disadvantage, particularly for accounting and legal firms, which have traditionally shied away from disclosing their earnings.

At least two partners

There is a requirement of at least two partners. A person alone cannot from a LLP. However, for such cases, companies act is being amended to provide one person company.

Lack of Perpetuity :

LLP does not live in perpetuity, but lives for a stipulated period, usually for the life of the assets it owns.

More legal documents :

Since a LLP is a legal entity, the formation of a LLP requires more legal documentation than in a regular partnership.

Force to close LLP :

Where there are two partners, exit of one partner on account of death or otherwise would force the other to close the LLP where a new partner is not available or not admitted.

Loss of secrecy of information :

Filing of declaration of solvency by LLP may be taken as loss of secrecy of information and financial results, etc.,

Default Provisions

A LLP agreement is needed to avoid default provisions from applying and to cover situations not addressed by default provisions in the Act. LLPs may not be preferred by risk-averse businessmen and family business due to shared information, certain information in public domain and legal documentation, ROC filings, etc.,

Disclosure of details

Addresses of the partners and designated partners of LLP is to be disclosed in an incorporation document making it a matter of public record.

Untried Structure

The untried structure of LLP partnerships also reduces their attractiveness in the short team.

Money from public

Another important disadvantage of LLP is it cannot raise money from public.

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