LIMITED LIABILITY PARTNERSHIP (LLP)

LIMITED LIABILITY PARTNERSHIP (LLP)

“LIMITED LIABILITY PARTNERSHIP (LLP) has become a preferred form of organization among entrepreneurs as it incorporates the benefits of both partnership firm and company into a single form of organisation.”

A LLP is a new 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 organizing 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.

Advantages Of LLP
  • Separate legal entity: An LLP has a separate legal entity, just like companies. The LLP is distinct from its partners. An LLP can sue and be sued in its own name. The contracts are signed in the name of the LLP, which helps to gain the trust of various stakeholders and gives the customers and suppliers a sense of confidence in the business.
  • Limited liability of the partners: The partners of the LLP have limited liability. The liability of the partners is limited to the contributions made by them. This means that they are liable to pay only the amount of contributions made by them and are not personally liable for any loss in the business. If an LLP becomes insolvent at the time of winding up, only the LLP assets are liable for clearing its debts. The partners have no personal liabilities, and thus they are free to operate as credible businessmen.
  • Low cost and less compliance: The cost of forming an LLP is low compared to the cost of incorporating a public or private limited company. The compliances to be followed by the LLP are also low. The LLP needs to file only two statements annually, i.e. Annual Return and a Statement of Accounts and Solvency.
  • No requirement of minimum capital contribution: The LLP can be formed without any minimum capital. There is no requirement of having a minimum paid-up capital before going for incorporation. It can be formed with any amount of capital contributed by the partners.
Disadvantages Of LLP
  • Penalty on non-compliance: The compliance that is to be followed by LLP is minimal. But, if these compliances are not completed on time, then the LLP will have to pay a heavy penalty. Even if the LLP does not have any activity in the year, it is required to file returns with the Ministry of Corporate Affairs (MCA) annually. If it fails to file the returns, then a heavy penalty will be imposed on the LLP.
  • Winding up and dissolution of LLP: A minimum of two partners is required to form an LLP. If the minimum number of partners is below two for six months, then the LLP will be dissolved. It may be dissolved if the LLP is unable to pay its debts.
  • Difficulty to raise capital: The LLP does not have the concept of equity or shareholders like a company. Angel investors and venture capitalists cannot invest in the LLP as shareholders. This is because the shareholders must be partners in the LLP and have to take up all the responsibilities of a partner. Thus, angel investors and venture capitalists prefer to invest in a company rather than an LLP making it difficult for the LLPs to raise capital.

Recent Amendments and LLP Incorporation Process

Major amendments have been made under the LLP incorporation Rules vide Limited Liability Partnership (Second Amendment) Rules, 2018. The Ministry of Corporate Affairs (MCA) vide its Notification dated 18th September, 2018 introduced a revamped LLP-incorporation procedure which came into force from 2nd October, 2018.

Major highlights of the amended LLP incorporation process include the introduction of specified LLP-RUN services (similar to RUN service for Company Incorporation) for Reservation of Name for the proposed LLP. Along with LLP-RUN, MCA also introduced Form FiLLiP i.e. Form for Incorporation of LLP. Form FiLLiP is similar to form SPiCe for Company Incorporation.

LLP Formation Procedure

The procedure for the formation of an LLP is very similar to that of a Private Limited Company incorporation procedure. A minimum of two Partners are required to start the LLP formation procedure and a registered office location is required within India.

It is important to remember that FDI in LLP is allowed only with the prior approval of the Reserve Bank of India (RBI). Therefore, it is recommended that NRI’s and Foreign National promoters opt to incorporate a Private Limited Company, where 100% FDI is allowed under the automatic route.

LLP Formation Documents Required

  • PAN Card of the Partners
  • Address Proof of the Partners
  • Utility Bill of the proposed Registered Office of the LLP
  • No-Objection Certificate from the Landlord
  • Rental Agreement Copy between the LLP and the Landlord

The PAN Card of the Partners and the Address Proof of the Partners are required to start the LLP formation procedure. The documents pertaining to the Registered Office of the LLP can be submitted after obtaining name approval for the LLP from the Registrar of Companies.

Elements Essential for the Incorporation of an LLP

  • Complete and submit the Incorporation document in the prescribed form, with the Registrar electronically.
  • Have at least two partners, either individual or body corporate.
  • Have a registered office in India for sending and receiving communication.
  • Appoint at least two individuals as designated partners. They will be responsible for doing all acts, matters, and things as required to be done by the LLP. Also, the designated partners should be resident in India.
  • Each designated partner should hold a Designated Partner Identification Number (DPIN) allotted by the Ministry of Corporate Affairs (MCA).
  • Execute the agreement between the partners or between the LLP and its partners. Further, if an agreement is not present, the provisions in the First Schedule of the LLP Act, 2008 are applied.
  • Name of the LLP. It is important to note that the name should be distinct. The LLP cannot have a name which another LLP or Partnership firm or Company is currently using.

Process for the Incorporation of an LLP

  1. Appoint/nominate partners and designated partners.
  2. Obtain the DPINs and Digital Signature Certificates (DSCs).
  3. Register a unique LLP name (applicant can indicate up to 6 choices).
  4. Draft the LLP Agreement.
  5. File the required documents, electronically.
  6. Apply for the Certificate of Incorporation along with LLPIN (Limited Liability Partnership Identification Number).

The contents of an LLP agreement

  • Name of the LLP
  • Names and addresses of the partners and designated partners
  • The form of contribution and interest on contribution
  • Profit sharing ratio
  • Remuneration of partners
  • Rights and duties of partners
  • The proposed business
  • Rules for governing the LLP

Pre-requisites for Incorporating a LLP

  • Minimum two partners (Individual or body corporate).
  • Minimum two designated partners who are individuals and at least one of them should be resident in India.
  • Digital signature certificate
  • LLP Name
  • LLP Agreement
  • Registered office

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