Indian startups deserve an easier shot at success

Source: Livemint

Relevance- Regarding Limited Liability Partnerships (LLPs), their significance and need for further reforms.

Synopsis:  Recently, the Limited Liability Partnership (Amendment) Bill, 2021, got the approval of Lok Sabha. Need for it and the changes introduced.

Background

An enactment of law in 2008 allowed the emergence of large joint-stock companies as LLPs, with the liability of all investors limited to the extent of their investment. Thousands of limited liability partnerships (LLPs) sprang up. These could take loans and expand without anyone’s personal assets put at stake.

However, financial risk is not the only kind there exists. In a rule-dense country, entrepreneurs also need to worry about the hazards of compliance failure.

Changes proposed

• To qualify as a small LLP, the country’s cap on business turnover will be raised sharply to ₹50 crore from ₹40 lakh and the limit on partner contribution to ₹5 crore from ₹25 lakh.
• Fraud penalties will be hardened, with prison sentences going up to 5 years and fines up to ₹5 lakh.
  • However, the likelihood of a partner being dragged up for relatively trivial offences is to be reduced for ease of doing business.
• The revised LLP law will have fewer penal provisions, cut to 22 from 24, and 12 of these violations will no longer be deemed criminal.
• The Bill also proposes special LLP courts for speedy trials and dispute resolution.

Issues 

1]. Many of LLPs deal in intangibles and have few hard assets for lenders to claim. For them to be credit-worthy as a class, they must comply with stiffer regulations than they’d need to without a liability limit. It’s not just a long check-list of structure-specific dos and don’ts that daunts many budding startups in India.

2]. Compliance burden: Most small businesses struggle to comply with rules and filing requirements that can range from enforcement at the municipal level all the way up to central diktats. Energy spent on these often gets in the way of productive pursuits.

Conclusion

Our startups have been a bright spot in an otherwise weakening economy. They deserve an easier shot at success.

Terms to know:

• Limited Liability Partnerships (LLPs)