In today’s modern world, nobody prefers to entertain a hovering liability over their heads, rather each and every individual prefers to organise a smooth ongoing business with no liability and simultaneous profit extraction. The concept of Limited Liability Partnership (LLP) is based on the same lines. The concept found its origin from US. As it is rightly described by the Ministry of Corporate Affairs the concept of Limited Liability Partnership (LLP) was brought into play in order to boost the economic growth of the country.
The Limited Liability Partnership is a business form, in which business can be carried on even if there is an alteration in the partners of the business. Limited Liability Partnership (LLP) is a separate legal entity, where the Limited Liability Partnership is liable in full to its assets, but the partners are liable for the contribution made by themselves individually only.
Further, the concept of joint liability is completely kept away in an LLP where the partners cannot be held jointly liable for the wrongful acts, misconducts, and business decisions, made by other partners. However, the LLP can be held liable as an entity for its other obligations. The rights and duties of the partners in an LLP are governed and regulated by an agreement held between the partners or the partners and LLP.
Structure of LLPs
The LLPs are governed by the Limited Liabilities Act, 2008. It’s a corporate body and is to be considered as a separate legal entity undergoing perpetual successions. There must be a minimum of at least two members required, with a motive to start a lawful business, in order to obtain profit in order to form an LLP, and there is no maximum no. of members prescribed. However the provisions of the Partnerships Act, 1932 are not applicable to LLPs.
A corporate body or an individual can be a partner to the LLP. There should be at least two “Designated Partners” who could also be held liable for legal compliances, besides their liabilities as partners. If a Limited Liability Partnership has only one individual or all corporate bodies as its members then the designated members, i.e. at least two individuals shall be chosen from the corporate bodies, who are nominated by the bodies themselves. However, every designated partner holds a specific identification number which is called Designated Partner’s Identification Number.
Registration of LLP
Process of Registration
Certain documents are necessary as part of the registration process to form an LLP. These documents are classified into two categories: partner documents and LLP documents. Section 11 of the LLP Act of 2008 mentions the following above-mentioned statement.
- PAN Card/ ID proof, residence proof, address proof, a photograph of the partners, passport if the partners are foreign nationals or NRIs are all important documents for partners.
- The LLP requires proof of registered office address as well as a digital signature certificate. From the time you acquire a DSC certificate to the time you file Form 3, it takes about 15 days.
Steps required for Registration of LLP
Obtaining a Certificate of Digital Signature
Every individual who wishes to be nominated as a partner of an LLP must first apply for a Digital Signature Certificate before proceeding with the rest of the registration process. This is necessary since all of the LLP’s documentation must be filed online and signed electronically. All forms filed online on the MCA portal require a DSC to be signed digitally.
Fill out an application for a Director Identification Number.
Once the DSC has been obtained, the designated partners must apply for the Designated Partner Identification Number using Form DIR-3 (DPIN). The partner must also include confirmation of identity and proof of domicile when filing Form DIR-3. All designated partners or those wanting to be designated partners of such prospective LLP should submit an application for a DIN.
Reservation for LLP Name
For any conversion of a company/firm into an LLP or the incorporation of a new LLP, an applicant must acquire a name reserved. An application must be submitted through the MCA Portal to reserve a proposed name.
Incorporation of LLP
Following the reservation of a name, the member must file an LLP Integrated Incorporation form through MCA Portal. This FiLLiP (Form for Incorporation of LLP) requires information and documents such as the LLP’s approved or proposed name, proof of address of the office registered under the LLP, the LLP’s planned activity, details of designated partners with their DPIN, subscriber’s sheet with consent, and the total contribution by the LLP’s partners with their monetary value, etc. The incorporation paperwork of an LLP is discussed in Section 11 of the LLP Act. The FiLLiP form must be submitted with the appropriate fee, as well as the Stamp Duty, as specified on the MCA Portal:
- The fee of Rs. 500 for an LLP with a contribution of less than Rs. 1 lakh.
- A fee of Rs. 2,000 is charged for an LLP with a contribution of between Rs. 1 lakh and Rs. 5 lakh.
- The fee of Rs. 4,000 for an LLP with a contribution of between Rs. 5 lakh and Rs. 10 lakh.
- A fee of Rs. 5,000 is charged to an LLP with a donation of more than Rs. 10 lakh.
Incorporation of Application
The Registrar of Companies (RoC) issues a Certificate of Incorporation on Form 16 under the Registrar’s seal after the LLP is officially registered. This Registrar has jurisdiction over the state in which the LLP’s registered office is located. The LLP Identification Number appears on the certificate (LLPIN).
Only two people are permitted to submit an application for an allotment. If the name that has been submitted is accepted by the appropriate authorities, then only it becomes the LLP’s name. The guidelines for incorporation by registration under an LLP are found in Section 12 of the LLP Act.
The mutual rights and duties of the members of the LLPs are further decided by an agreement which is either made between its members or between the LLP and its members. However, if there is no agreement, then the schedule 1 of the Limited Liability Partnership Act is to be followed which states the following things-:
- Both limited liability partnership members are entitled to a fair share of the limited liability partnership’s capital, gains, and losses.
- Every partner shall be indemnified by the limited liability partnership for payments rendered and personal liabilities incurred by him—
- in the usual and proper course of the limited liability partnership’s business; or
- in or around something that must be done to keep the limited liability partnership’s company or property running smoothly.
- Any partner is liable to the limited liability partnership for any losses incurred as a result of his misconduct in the conduct of the limited liability partnership’s company.
- Any partner can participate in the limited liability partnership’s management.
- No partner shall be entitled to remuneration for engaging in the limited liability partnership’s company or management.
- No one can be added as a partner until all of the current partners agree.
- Any matter or dispute concerning the limited liability partnership shall be determined by a resolution approved by a majority of the partners, with each partner having one vote for this reason. However, the limited liability partnership’s form of operation cannot be changed without the agreement of both partners.
- Any limited liability partnership must ensure that its decisions are reported in minutes within thirty days of making them and that the minutes are stored and preserved at the limited liability partnership’s registered office.
- For each partner or his legal representatives, each partner must have true accounts and full information on all matters concerning the limited liability partnership.
- If a partner operates a company that is similar to and competes with the limited liability partnership without the limited liability partnership’s permission, he must account for and fork overall profits made in that business to the limited liability partnership.
- Any partner must account to the limited liability partnership for any profit gained without the limited liability partnership’s consent from any transaction involving the limited liability partnership, or from any use by him of the limited liability partnership’s property, name, or any business relation.
- No partner can be expelled by a majority of the partners unless the right to do so has been expressly granted by the partners.
- Any conflicts between partners arising out of a joint liability partnership arrangement that cannot be resolved in accordance with the terms of the agreement will be referred to arbitration in accordance with the Arbitration Act.
LLP in India
The draft bill for introducing LLP in India was based on the recommendations of the J.J. Irani Committee and the Naresh Chandra Committee-II. On December 7, 2006, the Cabinet approved the Bill, which was then tabled in the Rajya Sabha on December 15, 2006. Following that, the Department Related Parliamentary Standing Committee which further suggested some modifications to the draft Bill, 2006. The committee’s final report was sent to the Ministry of Corporate Affairs.
Finally, on May 1, 2008, the Cabinet approved the Limited Liability Partnership (LLP) Bill, 2008. The bill was passed by both Houses of Parliament with no amendments. On January 7, 2009, the President gave his assent to the bill. The Limited Liability Partnership Act, 2008, was published in India’s official gazette on January 9, 2009, and it went into effect on March 31, 2009. The LLP Act of 2008, as amended, governs the establishment and regulation of limited liability partnerships, as well as matters related to them.
Advantages of having LLP
Separate Legal Entity
A Limited Liability Partnership (LLP) is a separate legal entity. It can sue and be sued since it possesses assets in its own name. Furthermore, one partner is not liable or responsible for the misbehaviour or neglect of the other.
No owner/manager distinction
An LLP is made up of partners who own and operate the company. A private limited company, on the other hand, may have directors who are not shareholders. As a result, venture capitalists avoid the LLP form.
In terms of their rights and responsibilities, the partners are allowed to design the agreement according to their own will.
The partners’ responsibility is restricted to the amount of money they put into the LLP. Unless fraud is discovered, the partner’s personal assets are protected from the LLP’s liabilities.
Few Compliance Requirement
Because there are only three compliances per year, an LLP is significantly easier and less expensive to administer than a private limited company. A private limited business, on the other hand, must comply with numerous regulations and have its books audited.
Easy to Wind-up
In comparison to a private limited company, an LLP is not only easier to create but also to wind up. While this process still takes two to three months, closing a private limited business can take up to a year.
Protecting the Partnership name
By registering an LLP at Companies House another company can be prevented from registering the same name.
Disadvantages of having an LLP
Inability to raise VC funding
An LLP form would be unattractive to venture capitalists. This is because all LLP’s ‘shareholders’ must be partners, and partners have certain responsibilities to the entity. No VC wants to be responsible for any of these things, thus they’ll only invest in a private limited firm.
Rights of Partners
A limited liability partnership (LLP) can be set up so that one partner has more rights than the other. As a result, it is not a one-vote-per-share structure. As a result, if higher shareholders opt to steer the business in a manner that adversely impacts their interests, some smaller partners may feel betrayed.
The compliance requirements for an LLP are simple, but if you don’t meet them, you could face higher fines than you would with a private limited company. For a single year, the fines might reach Rs. 5 lakhs.
Not recognized in every State
Limited liability partnerships are not recognised as legal business arrangements in every state, unlike general partnerships. The formation of a limited liability partnership is restricted in some states to professionals such as doctors and lawyers. Other states permit the formation of an LLP but put strict tax restrictions on the entity, both during its establishment and thereafter. Furthermore, many parties see LLPs as having less credibility as “real firms” than corporations, regardless of the state in which they operate.
As long as the name is accessible at Companies House, an LLP can be registered under whatever name its members select. Although it is common to see the members’ names included in the LLP name, it is not required. Members must determine whether they want the name “Limited Liability Partnership” in full or the “LLP” abbreviation recorded at Companies House when registering the LLP.
The Limited Liability Partnership Act of 2008 was enacted in response to the changing needs of businesses in today’s world. The establishment of the LLP, if effectively administered, will give a useful new option for professional partnerships concerned about their liability risk. Given the recent rise of the Indian service industry, LLPs are projected to contribute even more to that expansion, and a substantial number of existing organisations, both public and private, are likely to convert to LLPs with a view to have access to the benefits of LLP. The Indian government has made an effort to create a conducive atmosphere for entrepreneurs, service providers, and professionals to compete in the global market; nevertheless, it remains to be seen how beneficial the transformation is.
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BY BHANU PRATAP SAMANTARAY | NATIONAL LAW UNIVERSITY, ODISHA
KOUSTUBH MOHANTY | DAMODARAM SANJIVAYYA NATIONAL LAW UNIVERSITY, VISHAKHAPATNAM