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LIMITED LIABILITY PARTNERSHIP
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LIMITED LIABILITY PARTNERSHIP
In a limited liability partnership, or LLP, business partners have limited responsibility, which protects their personal assets in the event that the company accrues debts or liabilities.
Professionals like legal professionals, accountants, and consultants frequently employ limited liability partnerships (LLPs), but SMEs are also using them more and more.
For companies looking for low compliance obligations, operational flexibility, and protection for partners' personal assets, an LLP is the perfect form. Professionals and small businesses seeking a structured and effective business framework find it especially appealing.
Because LLPs can combine the resources, capital, and experience of several partners, this business structure also enables companies to take advantage of economies of scale. LLPs can lower costs per unit, simplify procedures, and bargain for better terms with suppliers by splitting operational duties and expenses.
Businesses can grow effectively, increase their market presence, and obtain cost advantages usually associated with larger enterprises thanks to this cooperative method.
The Ministry of Law and Justice notified the Limited Liability Partnership (LLP) Act on January 9, 2007. The Indian Parliament passed the LLP Bill on December 12, 2008, and the President of India approved it on January 7, 2009. This law is called the Limited Liability Partnership Act, 2008 (LLP Act, 2008).
The purpose of this law is to create rules for forming and managing Limited Liability Partnerships (LLPs), as well as for dealing with related matters.
The LLP Act, 2008 consists of 81 sections (one of which, Section 81, was removed on April 1, 2022) and 4 schedules.
The First Schedule explains the rights and responsibilities of both the partners and the LLP itself, in cases where there is no formal agreement between them.
The Second Schedule covers the process of converting a traditional partnership firm into an LLP.
The Third Schedule talks about how a private company can be converted into an LLP.
The Fourth Schedule outlines how an unlisted public company can be converted into an LLP.
MEANING OF LIMITED LIABILITY PARTNERSHIP
An LLP (Limited Liability Partnership) is a new type of business structure that offers the benefits of limited liability, meaning that the partners’ personal assets are protected. It’s a flexible business form that combines the advantages of a company and a partnership.
In an LLP, the business itself is a separate legal entity, which means it can own property, enter contracts, and be responsible for its debts. However, the partners' personal liability is limited to the amount of money they’ve invested in the business.
Think of an LLP as a mix between a company and a partnership — it provides the legal protection of a company, while still giving the partners the flexibility to manage the business like they would in a partnership.
CHARACTERISTICS OF LLP
1.Body Corporate
This Act created and incorporated LLP as a body corporate. According to Section 3 of the LLP Act, an LLP has perpetual succession and is a distinct legal entity from its partners. As a result, the existence, rights, and responsibilities of an LLP will not be impacted by a change in its partners.
2.Perpetual Succession
In the event that partners change, the LLP may still operate. The existence of an LLP is unaffected by the partners' retirement, insanity, death, or insolvency. It has the ability to hold property in its own name and enter into contracts.
3.Separate Legal Entity
According to Section 3 of the LLP Act, an LLP is a body corporate established and incorporated under the Act that has its own legal identity apart from its partners. The partners' responsibility is capped at their agreed-upon investment in the LLP, whereas the LLP is liable for the entirety of its assets. Put otherwise, LLP's creditors will only be LLP's creditors.
4.Mutual Agency
Individual partners are protected from shared liability resulting from another partner's poor business judgments or wrongdoing since no partner is held accountable for the independent or unapproved actions of other partners. Put differently, each partner will act as the LLP's exclusive agent. No partner's actions can bind other partners.
5.Common Seal
Since an LLP is an artificial person, its partners and designated partners may act on their behalf. If LLP chooses to have a common seal, it is permitted to do so [Section 14(c)]. Therefore, having a common seal is not required for an LLP. It will be affixed in front of at least two selected partners of the LLP and held in the custody of a responsible authority.
6.Limited Liability
According to Section 26, each partner in an LLP acts as the LLP's agent for the purposes of the business, but not as an agent of other partners. The partners' liability will be restricted to the amount they each agreed to contribute to the LLP. This kind of contribution could be intangible, tangible, or both.
7) Business Management
The LLP's partners have the authority to oversee its operations. However, legal compliance is solely the responsibility of the selected partners.
8) Artificial Legal Person
Because an LLP is formed through a legal procedure and is endowed with all individual rights, it is an artificial legal person. It can do anything that a normal person can do, with the obvious exceptions of being imprisoned, taking an oath, getting married or divorcing, and practicing a learned profession like medicine or chartered accountancy. Although an LLP is immortal, intangible, and invisible (it can be dissolved by the law alone), it is not a fake as it actually exists.
9) Minimum and Maximum number of Partners
Every LLP shall have at least two partners and shall also have at least 2 individuals as designated partners, of whom at least one shall be resident in India. The number of partner in a LLP can be unlimited
ADVANTAGES OF LLP FORM
One type of company model is the LLP form, which:
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. Easy to dissolve.
Partners [Section 5]
In an LLP, any person or corporate entity may be a partner. However, a person cannot become a partner in an LLP if:
(a) a court of competent jurisdiction has found him to be of unsound mind and the decision is in effect;
(b) he is an undischarged insolvent; or
(c) he has applied to be adjudicated as an insolvent and his application is still pending.
Minimum number of Partners
(i) Every LLP shall have at least two partners.
(ii) If an LLP's partner count is ever lowered below two and the LLP continues to operate for more than six months while the number is lowered, the individual who is the LLP's sole partner during that time and knows that the LLP is operating with him alone will be held personally responsible for the debts of the LLP accrued during that time.
Designated Partners [Section 7]
(1) A minimum of two authorized partners, at least one of whom must be based in India, are required for each limited liability partnership (LLP).
However, if all of the partners are bodies corporate or if one or more partners are both individuals and bodies corporate, then at least two LLP partners or nominees of those bodies corporate will act as designated partners.
2. (i) If the incorporation document
(a) identifies the individuals who will be appointed partners; these individuals will be designated partners upon incorporation; or
(b) states that each of the partners from time to time of LLP is to be designated partners, every partner shall be a designated partners;
(ii) any partner may become a designated partner by and in accordance with the LLP Agreement and a partner may cease to be a designated partners in accordance with LLP agreement.
3. A person must first provide the LLP his or her approval to act as a designated partner in the form and manner that may be specified before becoming a designated partner in any LLP.
4. Every LLP shall file with the Registrar the particulars of every individual who has given his consent to act as designated partners in such form and manner as may be prescribed within 30 days of his appointment.
5. To be eligible to be a designated partner, a person must meet any requirements and restrictions that may be specified.
6. Every designated partner of the LLP shall obtain a Designated Partner Identification Number (DPIN) from the Central Government as per provisions of sections 153 to 159 of the Companies Act, 2013 .
Liabilities of Designated Partners [Section 8]
Unless specifically stated otherwise in this Act, a designated partner is:
(a) in charge of carrying out all actions, matters, and tasks that the limited liability partnership must complete in order to comply with its provisions, including filing any form, return, statement, or similar report in accordance with those provisions and as may be specified in the limited liability partnership agreement; and
(b) subject to all penalties levied against the limited liability partnership for any violation of those provisions.
Changes in Designated Partners [Section 9]
Within 30 days of a vacancy occurring for any reason, a limited liability partnership may designate a new designated partner. The provisions of subsections (4) and (5) of section 7 will apply to the new designated partner; however, if no designated partner is appointed or if there is only one designated partner at any given time, each partner will be considered a designated partner.
Punishment for contravention of sections 7 and 9 [Section 10]
1) If the LLP contravenes the provisions of sub-section (1) of section 7 (meaning that the number of designated partners are less than two or none of the designated partner is a resident in India), the LLP and its every partner shall be liable to a penalty of 10,000 and in case of continuing contravention, with further penalty of 100 per day subject to maximum 1,00,000 for LLP and `50,000 for every partner of such LLP.
2) If the LLP contravenes the provisions of sub-section (4) of section 7 (failure to file the consent of appointment of designated partner within 30 days of his appointment), the LLP and its every designated partner shall be liable to a penalty of 5,000 and in case of continuing contravention, with further penalty of `100 per day subject to maximum 50,000 for LLP and 25,000 for every designated partner.
3) If the LLP contravenes the provisions of sub-section (5) of section 7 or section 9, the LLP and its every partner shall be liable to a penalty of 10,000.
- FAQ
1. What is an LLP?
The characteristics of a company and a partnership are combined in a hybrid business structure called a Limited Liability Partnership (LLP). It offers its partners limited liability, which shields their own assets from company debts.
2. What are the main advantages of forming an LLP?
i) Limited Liability: Business debts cannot affect partners' personal assets.
ii) Independent Legal Entity: An LLP is a separate legal entity from its partners.
iii) No Minimum Capital Requirement: There is no minimum capital. commitment needed for LLPs.
iv) Flexibility in Management: Unlike corporations, limited liability partnerships (LLPs) offer flexibility in both structure and management.
v) Tax Benefits: LLPs, as opposed to corporations, are taxed on profits and are exempt from the Dividend Distribution Tax (DDT).
3. How is an LLP different from a partnership?
Although two or more people work together in both an LLP and a partnership, the main distinction is that partners in a partnership have unlimited liability, which means they are personally liable for the debts of the company. In contrast, each partner's liability in an LLP is capped to the amount they have agreed to contribute.
4. What is the minimum number of partners required to form an LLP?
There must be a minimum of two designated partners in an LLP. The number of partners has no upper limit.
5. Who can become a partner in an LLP?
Any person or corporate entity, such as a business, may join an LLP as a partner. Both Indian and international people or corporations can be partners because there are no nationality-based restrictions.
6. What is the role of the Designated Partner in an LLP?
At least two designated partners are required for an LLP, and one of them needs to be an Indian resident. According to the LLP Act of 2008, designated partners play a comparable role to directors in a company and are in charge of compliance. They are in charge of daily operations and compliance standards.
7. What are the key documents required to form an LLP?
i) An LLP agreement is a formal document that describes the partners' relationship.
ii) Form FiLLiP, the incorporation document, was submitted to the Ministry of Corporate Affairs (MCA).
iii)Proof of Address: Evidence of the address of the registered office.
iv) Partners' Information: Proof of partners' identities and addresses.
8. What are the compliance requirements for an LLP?
i) Annual Filing: LLPs are required to submit financial statements (Form 8) and an annual return (Form 11) to the MCA.
ii) Income Tax Return: LLPs, whether or whether they are profitable, are required to submit income tax returns every year.
iii) Audit: If an LLP's turnover or capital contribution above Rs. 40 lakhs or Rs. 25 lakhs, they must have their accounts audited.
9. What are the tax implications for an LLP?
i) Tax Rate: LLPs pay 30% in taxes on their taxable income, minus any relevant exemptions.
ii) No Dividend Distribution Tax: Unlike corporations, limited liability partnerships (LLPs) do not pay Dividend Distribution Tax (DDT) on their profits.
iii) GST Compliance: An LLP is required to abide by the Goods and Services Tax (GST) laws if its turnover surpasses the threshold.
10. What happens if a partner wishes to exit an LLP?
A partner can leave an LLP by quitting, giving another partner their stake, or by following the conditions outlined in the LLP agreement. The allocation of assets and liabilities upon exit will usually be governed by the partnership agreement.
11. How are profits and losses shared in an LLP?
The LLP agreement establishes how earnings and losses are divided. Generally, unless the agreement specifies otherwise, this is proportionate to each partner's contribution.
12. Can an LLP be converted into a private limited company?
It is possible to change an LLP into a Private Limited Company. The Registrar of Companies (ROC) must approve the conversion process, and the appropriate provisions of the Companies Act of 2013 must be followed.