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If an LLP fails to file the annual income tax return and the Ministry of Corporate Affairs, then they need to pay a penalty of INR 100 per day, which can result in a major impact on the business activity of an LLP.
The investment issue is worth considering.
If you plan to bring in venture capital or institutional investors, an LLP may not be the structure investors expect.
An LLP is based around partners rather than shareholders, so bringing in outside equity investment can be less straightforward than with a company structure.
That doesn't mean an LLP can't grow. It just means the ownership and investment structure can be less convenient for certain types of businesses.
If you're building a business that you expect to fund through outside equity, I'd compare an LLP with a private limited company before registering anything.
One disadvantage I noticed is that an LLP isn't completely free from compliance.
You still have statutory filings, accounting requirements and other regulatory obligations. The exact requirements depend on the jurisdiction and the LLP's circumstances.
For a very small business with limited activity, the ongoing compliance can sometimes feel unnecessary compared with a simpler structure.
Also, the partners need to keep proper records and make sure the LLP agreement clearly explains things such as profit sharing, responsibilities and what happens if a partner leaves.
Here are some of the major disadvantages of an LLP:
One of the major disadvantages of an LLP includes disclosure of the personal and financial records to the public domain.
I have applied for an LLP, which is a limited liability partnership in some states. LLPs' biggest challenge is the variability in state and regulation, and recognition.
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I'd also distinguish between limited liability and complete protection from personal liability.
Generally, an LLP provides limited liability protection to its partners for the LLP's obligations, but there are circumstances where a partner can still have personal liability—for example, for their own wrongful acts or certain obligations.
Another practical issue is that changing the partner structure can require additional documentation and compliance.
If you're an NRI considering an Indian LLP, there may also be FEMA, tax, and foreign-investment rules to check depending on how the investment is made and the business activity.
I wouldn't choose the structure based only on the word "limited."