Understanding Limited Liability Partnership

Written by KnowYourGST Team under GST

A new trend has emerged after introduction of Limited Liability Partnership concept. More and more entrepreneurs have started opting for Limited Liability Partnership instead of normal Partnership Firm.

The Parliament passed the Limited Liability Partnership Bill on 12th December, 2008 and the President of India has assented the Bill on 7th January, 2009 and called as the Limited Liability Partnership Act, 2008, and many of its sections got enforced from 31st March 2009.

A need was felt for a new corporate form that would provide an alternative to the traditional partnership. Traditional Partnership has unlimited personal liability, it is not so in case of Limited Liability Partnership.

The Limited Liability Partnership (LLP) is viewed as an alternative corporate business vehicle. It provides the benefits of limited liability but allows its members the flexibility of organizing their internal structure as a partnership based on a mutually arrived agreement. The LLP form enables entrepreneurs, professionals and enterprises providing services of any kind or engaged in scientific and technical disciplines, to form commercially efficient vehicles suited to their requirements. Owing to flexibility in its structure and operation,the LLP is a suitable vehicle for small enterprises and for investment by venture capital.

A limited liability partnership (LLP) is a partnership in which some or all partners (depending on the jurisdiction) have limited liabilities. It therefore can exhibit elements of partnerships and corporations. In an LLP, each partner is not responsible or liable for another partner's misconduct or negligence. This is an important difference from the traditional partnership , in which each partner has joint and several liability. In an LLP, some or all partners have a form of limited liability similar to that of the shareholders of a corporation. Unlike corporate shareholders, the partners have the right to manage the business directly.

Meaning of LLP

A LLP is a new form of legal business entity with limited liability. It is an alternative corporate business vehicle that not only gives the benefits of limited liability at low compliance cost but allows its partners the flexibility of organising their internal structure as a traditional partnership. The LLP is a separate legal entity and, while the LLP itself will be liable for the full extent of its assets, the liability of the partners will be limited.

LLP is an alternative corporate business form that gives the benefits of limited liability of a company and the flexibility of a partnership.

Since LLP contains elements of both ‘a corporate structure’ as well as ‘a partnership firm structure’ LLP is called a hybrid between a company and a partnership.

Characteristics of LLP

  1. LLP is a body corporate: Section 3 of LLP Act provides that a LLP is a body corporate formed and incorporated under this Act and is a legal entity separate from that of its partners.
  2. Perpetual Succession: The LLP can continue its existence irrespective of changes in partners. Death, insanity, retirement or insolvency of partners has no impact on the existence of LLP. It is capable of entering into contracts and holding property in its own name.
  3. Separate Legal Entity: The LLP is a separate legal entity, is liable to the full extent of its assets but liability of the partners is limited to their agreed contribution in the LLP. In other words, creditors of LLP shall be the creditors of LLP alone.
  4. Mutual Agency: Further, no partner is liable on account of the independent or un-authorized actions of other partners, thus individual partners are shielded from joint liability created by another partner’s wrongful business decisions or misconduct. In other words, all partners will be the agents of the LLP alone. No partner can bind the other partner by his acts.
  5. LLP Agreement: Mutual rights and duties of the partners within a LLP are governed by an agreement between the partners. The LLP Act, 2008 provides flexibility to partner to devise the agreement as per their choice. In the absence of any such agreement, the mutual rights and duties shall be governed by the provisions of the LLP Act, 2008.
  6. Artificial Legal Person: A LLP is an artificial legal person because it is created by a legal process and is clothed with all rights of an individual. It can do everything which any natural person can do, except of course that, it cannot be sent to jail, cannot take an oath, cannot marry or get divorce nor can it practice a learned profession like CA or Medicine. A LLP is invisible, intangible, immortal (it can be dissolved by law alone) but not fictitious because it really exists.
  7. Common Seal: A LLP being an artificial person can act through its partners and designated partners. LLP may have a common seal, if it decides to have one [Section 14(c)]. Thus, it is not mandatory for a LLP to have a common seal. It shall remain under the custody of some responsible official and it shall be affixed in the presence of at least 2 designated partners of the LLP.
  8. Limited Liability: Every partner of a LLP is, for the purpose of the business of LLP, the agent of the LLP, but not of other partners (Section. 26). The liability of the partners will be limited to their agreed contribution in the LLP.
  9. Management of Business: The partners in the LLP are entitled to manage the business of LLP. But only the designated partners are responsible for legal compliances.
  10. Minimum and Maximum number of Partners: Every LLP shall have least two partners and shall also have at least 2 individuals as designated partners, of whom at least one shall be resident in India. There is no maximum limit on the partners in LLP.
  11. Business for Profit Only: The essential requirement for forming LLP is carrying on a lawful business with a view to earn profit. Thus LLP cannot be formed for charitable or non-economic purpose.
  12. Investigation: The Central Government shall have powers to investigate the affairs of an LLP by appointment of competent authority for the purpose.
  13. Compromise or Arrangement: Any compromise or arrangement including merger and amalgamation of LLPs shall be in accordance with the provisions of the LLP Act, 2008.
  14. Conversion into LLP: A  firm, private company or an unlisted public company would be allowed to be converted into LLP in accordance with the provisions of LLP Act, 2008.
  15. E-Filling of Documents: Every form or application of document required to be filed or delivered under the act and rules made thereunder, shall be filed in computer readable electronic form on its website www.mca.gov.in and authenticated by a partner or designated partner of LLP by the use of electronic or digital signature.
  16. Foreign LLPs: Section 2(1)(m) defines foreign limited liability partnership “as a limited liability partnership formed, incorporated, or registered outside India which established a place of business within India”. Foreign LLP can become a partner in an Indian LLP.

Advantages of LLP

  1. Is organized and operates on the basis of an agreement.
  2. provides flexibility without imposing detailed legal and procedural requirements.
  3. Easy to form.
  4. All Partners enjoy limited liability.
  5. Flexible capital structure.
  6. Easy to dissolve.

Distinction between LLP and Partnership Firm

S No Basis LLP Partnership Firm
1 Regulating Act The Limited Liability Partnership Act,
2008.
The Indian Partnership Act, 1932.
2 Body corporate It is a body corporate. It is not a body corporate.
3 Separate legal entity It is a legal entity separate from its members. It is a group of persons with no separate legal entity.
4 Creation It is created by a legal process called registration under the LLP Act, 2008. It is created by an agreement between the partners.
5 Registration Registration is mandatory. LLP can sue and be sued in its own name. Registration is voluntary. Only the registered partnership firm can sue the third parties.
6 Perpetual succession The death, insanity, retirement or insolvency of the partner(s) does not affect its existence of LLP. Members may join or leave but its existence continues forever. The death, insanity retirement or insolvency of the partner(s) may affect its existence. It has no perpetual succession.
7 Name Name of the LLP to contain the word Limited liability partners (LLP) as suffix. No guidelines. The partners can have any name as per their choice.
8 Liability Liability of each partner limited to the extent to agreed contribution except in case of willful fraud. Liability of each partner is unlimited. It can be extended upto the personal assets of the partners.
9 Mutual agency Each partner can bind the LLP by his own acts but not the other partners. Each partner can bind the firm as well as other partners by his own acts.
10 Designated partners At least two designated partners and at least one of them shall be resident in India. There is no provision for such partners under the Indian partnership Act, 1932.
11 Common seal It may have its common seal as its official signatures. There is no such concept in partnership.
12 Legal compliances Only designated partners are responsible for all the compliances and penalties under this Act. All partners are responsible for all the compliances and penalties under the Act.
13 Annual filing of documents LLP is required to file:
i) Annual statement of accounts
ii) Statement of solvency
iii) Annual return with the registration of LLP every year.
Partnership firm is not required to file any annual document with the registrar of firms.
14 Foreign partnership Foreign nationals can become a partner in a LLP. Foreign nationals cannot become a partner in a partnership firm.
15 Minor as partner Minor cannot be admitted to the benefits of LLP. Minor can be admitted to the benefits of the partnership with the prior consent of the existing partners.

Distinction between LLP and Limited Liability Company (LLC)

S No Basis LLP LLC
1 Regulating Act The LLP Act, 2008. The Companies Act, 2013.
2 Members/Partners The persons who contribute to LLP are known as partners of the LLP. The persons who invest the money in the shares are known as members of the company.
3 Internal governance structure The internal governance structure of a LLP is governed by agreement between the partners. The internal governance structure of a company is regulated by statute (i.e., Companies Act, 2013).
4 Name Name of the LLP to contain the word “Limited Liability partnership” or “LLP” as suffix. Name of the public company to contain the word “limited” and Private company to contain the word “Private limited” as suffix.
5 Number of members/ partners

Minimum – 2 members
Maximum – No such limit on the members in the Act.
The members of the LLP can be individuals/or body corporate through the nominees.

Private company:
Minimum – 2 members
Maximum – 200 members
Public company:
Minimum – 7 members
Maximum – No such limit on the members.
Members can be organizations, trusts, another business form or individuals.
6 Liability of members/ partners Liability of a partners is limited to the extent of agreed contribution except in case of willful fraud. Liability of a member is limited to the amount unpaid on the shares held by them.
7 Management The business is managed by the partners including the designated partners authorized in the agreement. The affairs of the company are managed by board of directors elected by the shareholders.
8 Minimum number of
directors/designated
partners
Minimum 2 designated partners. Private Co. – 2 directors
Public Co. – 3 directors

Incorporation Process

  1. Deciding Partners and Designated Partners
  2. Obtaining DPIN and Digital Signature Certificates (DSC)
  3. Checking the Availability of Name
  4. Drafting of LLP Agreement
  5. Electronic Filing of some Documents
  6. Issuing Certificate of Incorporation along with LLPIN (Limited Liability Partnership Identification Number)
Author
Posted by CA Ankit Sharma under Company-Law

I am CA, you can contact me for resolving all your tax queries. Reach me at ankitsharma1141@gmail.comContact

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