Limited Liability Partnership – An Emerging Form of Business Organisation By CS Manish Mishra


Dear Professional Colleagues,

Limited liability Partnership (LLP) is a new form of business entity which enables you to enjoy the advantages of both partnership firm and company in one. Limited Liability Partnership is an alternative to traditional partnership firm which also enables its partners to enjoy limited liability towards the act of entity causing any obligation. Limited Liability Partnership is a body corporate with lesser compliance requirements as compared to a company. This article attempts to have a basic understanding of the concept of Limited Liability Partnership and why it has emerged as a pre-eminent form of business model option for new entrepreneurs and Small & Medium Enterprises.
 
INTRODUCTION
 
Limited Liability Partnership is a modern structure of business organization which possess the benefits of both a partnership firm and a company. This type of business model is suitable for those who want to carry on their business activities in form of partnership firm but without any personal liability towards any wrongful or unauthorized acts of other partners or business entity as a whole. Limited Liability Partnership has no upper cap for a maximum number of partners which is again an advantage to LLP over a partnership firm or a private company to employ more and more members as partners. Considering the ease of compliance norms as required to be met under Limited Liability Partnership Act, 2008 with fewer restrictions on business transactions as compared to complexities faced by companies formed/registered under Companies Act, 2013 or any previous company law, LLP is likely to be preferred by a large number of businessmen.
 
 
LEGISLATION
 
The Limited Liability Partnership Act, 2008, was enacted by Parliament in Fifty-Ninth Year of the Republic of India and received the assent of the President on 07.01.2009. The LLP Act, 2009 and Limited Liability Partnership Rule 2009 were notified on 31.03.2009 and 01.04.2009, respectively. The LLP Act, 2008 extends to the whole of India.
 
WHAT IS LLP?
 
Limited Liability Partnership has been defined under Section 2(1)(n) of the Limited Liability Partnership Act, 2008 as below:
 
“limited liability partnership” means a partnership formed and registered under this Act.
The legislation has made it evident that LLP is the combination of goods of Partnership Firm and Company in one. As per my interpretation of the law, an LLP has following salient features:-
 
  • Combination of features of both partnership firm and company.
  • Only two partners are required to incorporate an LLP.
  • No upper cap on a maximum number of partner.
  • Each Partner of the LLP shall have limited liability.
  • The Indian Partnership Act, 1932 is not applicable to LLP.
  • Limited Liability Partnership is a Body Corporate.
  • Limited Liability Partnership is a separate legal entity from that of its partners.
  • Perpetual succession.
  • Capacity to sue and to be sued in its own name.
  • Limited Liability Partnership is formed only for businesses with profit-making objectives. 
WHO CAN BE PARTNERS IN AN LLP?
 
Any individual or body corporate may be appointed as partners in a Limited Liability Partnership. However, an individual shall be disqualified for appointment as a partner to Limited Liability Partnership, if-

  • he/she has been found to be of unsound mind by a court of competent jurisdiction and the finding is in force;
  • he/she is an undischarged insolvent; or
  • he/she has applied to be adjudicated as an insolvent and his application is pending.
Limited Liability Partnership Should have Designated Partners.
 
  • Every LLP must have at least two designated partners who are individual and at least one of them is a resident of India.
  • Every proposed designated partner of a Limited Liability Partnership has to first obtain Director Identification Number (DIN) before his appointment which is also considered as Designated Partner Identity Number (DPIN).
  • Designated Partner shall be responsible for complying with the provisions of Limited Liability Partnership Act, 2008 and Rules made thereunder as may be amended from time to time.
PROCEDURE OF INCORPORATION OF LLP
 
According to section 11 of the LLP Act, 2008 an LLP can be incorporated by any two or more persons who associate themselves for carrying on a lawful business with a view to earning the profit by subscribing their names to an incorporation document which shall be filled and filed along with the fee. The registration process of LLP is very simple and can be understood in brief through a flowchart, which is as under:


 
EFFECT OF REGISTRATION

On registration, a Limited Liability Partnership shall become an artificial legal person which enjoys certain privileges which an individual or a body corporate may enjoy. An LLP being an artificial legal person in the eyes of law may sue or be sued. It may acquire, own or dispose of property, whether movable or immovable. The Limited Liability Partnership can have a common seal if it decides to have one like companies and are also capable of doing such other acts and things as bodies corporate may lawfully do.
 
Further post registration every Limited Liability Partnership has to ensure that all its invoices, official correspondence and publications bear the following:

a) Name, Registered Office Address and Limited Liability Partnership Identity Number (LLPIN), and

b) a statement that it is registered with Limited Liability.
 
MAINTENANCE OF BOOKS OF ACCOUNTS AND AUDIT
 
Just like other forms of entities, every LLP has to maintain proper books of account relating to its affairs for each year of its existence. The books can be maintained on a cash basis or accrual basis and should be according to double entry system of accounting.
 
The books of accounts of LLP should be maintained at its registered office and as of now, there is no provision in the LLP which allows keeping books of accounts at any place other than its registered office.
 
Every LLP has to get its books of accounts and financial statement audited once its turnover or capital contribution exceeds Rs. 40,00,000/- or Rs. 25,00,000/-, respectively.
 
ANNUAL FILINGS
 
Every LLP has to make following two annual filings:
 
1. Statement of Accounts and Solvency
 
Every LLP shall file within six months from the end of each financial year a Statement of Account and Solvency with the concerned Registrar of Companies in Form 8 such fee as may be prescribed under the Act.

Impact of Contravention

  • As per section 69 of the LLP Act, 2008, in case of delay of filing of said return an additional filing fees of Rs. 100/- per day of default shall be payable.
  • As per Section 34 of the LLP Act, 2008:
The LLP who is in default shall be punishable with fine which shall not be less than Rs. 25,000/- but which may extend to Rs. 5,00,000/-.
 
The designated partners of such LLP shall be punishable with fine which shall not be less than Rs. 10,000/- but which may extend to Rs.1,00,000/-.
 
2. Annual Return
 
Every LLP shall within sixty days of closure of its financial year file an annual return in Form 11 with the concerned Registrar of Companies.
 
Impact of Contravention

  • As per section 69 of the LLP Act, 2008, in case of delay of filing of said return an additional filing fees of Rs. 100/- per day of default shall be payable.
  • As per Section 35 of the LLP Act, 2008: 
The LLP who is in default shall be punishable with fine which shall not be less than Rs. 25,000/- but which may extend to Rs.5,00,000/-.
 
The designated partners of such LLP shall be punishable with fine which shall not be less than Rs. 10,000/- but which may extend to Rs.1,00,000/-.
 
MUTUAL RIGHTS & DUTIES OF PARTNERS
 
The Limited Liability Partnership Agreement acts as the principal document of the Limited Liability Partnership as in case of any company Memorandum of Association (MOA) and Articles of Association (AOA) are. It establishes the mutual rights and duties of each partner of the Limited Liability Partnership towards other partners and Limited Liability Partnership and also of Limited Liability Partnership towards its partners. However, the provisions of Limited Liability Partnership Act, 2008 and rules made thereunder shall prevail over the terms and conditions agreed as per LLP Agreement, if any of them are contradictory.
 
Every LLP has to file LLP Agreement within 30 days of its incorporation with the concerned Registrar of Companies in Form 3 with such fee as may be prescribed. If any change has been made by partners in its Limited Liability Partnership Agreement, then the said change must also be intimated to the Registrar within thirty days of its execution.
If any matter is not being addressed with respect to the mutual rights and duties of the partners and the mutual rights and duties of the Limited Liability Partnership and the partners, the provisions relating to such matter as are set out in the First Schedule of the Limited Liability Partnership Act, 2008 shall be applicable.
 
There are certain crucial parameters/requirement under the law to govern mutual rights and duties of the limited liability partnership and the partners, which are as follows:-

  1. Partner Obligation to Contribute: Every partner in an LLP who subscribes to the incorporation documents or is admitted post incorporation has to commit certain ‘contribution’ which can be defined as an obligation to contribute money or other property or other benefit or to perform services for a limited liability partnership shall be as per the limited liability partnership agreement in the event where any liability arises against such partner for his wrongful act or against Limited Liability Partnership where all partners are held equally liable.
  1. Extent of Liability of Partner: A partner of Limited Liability Partnership cannot be held personally liable for the wrongful act or omission of any other partner of the Limited Liability Partnership neither he is personally liable, directly or indirectly for an obligation of Limited Liability Partnership solely by reason of being a partner of the limited liability partnership. However, if any partner is found to be responsible for fraud then the liability of such partner shall be unlimited. Each partner is an agent of Limited Liability Partnership but not of other partners.
  1. Business Transactions of Partner with LLP: A partner may lend money to and transact other business with the Limited Liability Partnership and has the same rights and obligations with respect to the loan or other transactions as a person who is not a partner.
  1. Cessation of Partners Interest: A person may cease to be a partner of a Limited Liability Partnership in accordance with an agreement with the other partners or, in the absence of agreement by giving a notice in writing of not less than 30 days to the other partners of his intention to resign as a partner.
  1. Partner’s Transferable Interest: Any of the partners of the Limited Liability Partnership may transfer his right of sharing profits or loss of the Limited Liability Partnership either wholly or in part to any other person. However, transfer of such right by partner should not be construed as his disassociation with the Limited Liability Partnership. Also, such transfer of right by partners does not empower transferee to participate in the conduct of business or management of the Limited Liability Partnership.
CONVERSION
 
  • Conversion From Firm Into Limited Liability Partnership
The provision of Section 55 of the Limited Liability Partnership Act, 2008 and rules made thereunder as may be amended from time to time read with Second Schedule to the Act allows partnership firms created under Indian Partnership Act, 1932 to convert itself into a Limited Liability Partnership

  • Conversion From Private Company Into Limited Liability Partnership
The provision of Section 56 of the Limited Liability Partnership Act, 2008 and rules made thereunder as may be amended from time to time read with the Third Schedule to the Act allows Private Companies incorporated under Companies Act, 2013 or any other previous Company Law to convert itself into a Limited Liability Partnership.

  • Conversion From Unlisted Public Company Into Limited Liability Partnership
The provision of Section 57 of the Limited Liability Partnership Act, 2008 and rules made thereunder as may be amended from time to time read with the Fourth Schedule to the Act allows Unlisted Public Companies incorporated under Companies Act, 2013 or any other previous Company Law to convert itself into a Limited Liability Partnership.

  • Conversion From Limited Liability Partnership Into Company
A Limited Liability Partnership may be converted into Company in accordance with the provision of Section 366 of Companies Act, 2013, however, the Limited Liability Partnership should have at least 7 partners before such conversion.
 
WINDING UP OF LIMITED LIABILITY PARTNERSHIP
 
A Limited Liability Partnership may be wound up either voluntarily by its partners or by the Tribunal and on winding up the Limited Liability Partnership shall get dissolved.
 
Further, in following cases Limited Liability Partnership may be wound up by Tribunal:

  • When Limited Liability Partnership has decided to get itself wound up by the Tribunal;
  • If the number of total partners of the Limited Liability Partnership goes below two for a term more than six months;
  • If that Limited Liability Partnership is found to have been acting acted against the interests of the sovereignty and integrity of India, the security of the State or public order ;
  • If any Limited Liability Partnership is have made default in filing the Statement of Account & Solvency in Form 8 or Annual Return in Form 11 for a period of any five consecutive financial years; or
  • If the Tribunal is of the belief that it is just and equitable that the limited liability partnership should be wound up.
RECOGNITION OF LIMITED LIABILITY PARTNERSHIP IN OTHER LEGISLATIONS

  • Income Tax Act, 1961:-
As per section 2(23) of Income Tax Act, 1961, the definition of “firm” includes firm registered under Indian Partnership Act, 1932 or a firm registered under LLP Act.

  • Central Goods & Service Tax Act, 2017
As per section 2 (84) of Central Goods & Service Tax Act, 2017, the definition of “person” includes Limited Liability Partnership.

  • The definition of Startups defined by Department of Industrial Policy & Promotion includes Limited Liability Partnership.
CONCLUSION
 
Limited Liability Partnership is an alternative corporate business form that offers the advantage of limited liability of a company and the flexibility of a partnership firm. Thus Limited Liability Partnership is a hybrid containing elements of both ‘a Company model’ as well as ‘a partnership firm model’, hence resulting in a very convenient business structure.
 
Limited Liability Partnership Act is a new legislation and like any other law, this would evolve over a period of time. This new concept could turn out to be a boom for Indian Economy. This new business structure shall bring India at par with the practices followed in the developed economy like the U.S.A. or U.K. It is also expected to help the small-scale industries in India facing the problem of inadequate finance by catering to their needs as it has done in other countries by making available to them more access to finance
 
It would be desirable if provisions from statutes like Companies Act or Insolvency Act are incorporated in the Act to provide a further safeguard against the depletion of assets by members. But as the aphorism goes, ‘a job well begun is half done’. Therefore, the coming of LLP in response to the growing needs of the national economy is a great beginning and the only requirement is to build on it to reap its maximum benefits. 

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