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Understanding Limited Liability Partnership in India

Limited Liability Partnership (LLP) is a hybrid between traditional partnership firms and companies, adopting the advantages associated with them and eliminating their disadvantages. LLPs have become popular in recent times due to the flexibility it offers along with protection of personal wealth of investors. Let's discuss the salient features of LLPs, its comparison with traditional partnerships and companies and the process of incorporation and conversion.
Written by:
Mehak Sharma
Published on
04-Jun-19

For modern businesses, traditional partnership firms prove to be risky for the personal wealth of investors on one hand and setting up a company entails expensive process followed by cumbersome regulatory requirements. There is a requirement of enterprise structure which is simple and yet sensitive to investor’s limitations and risks. An LLP serves the purpose by incorporating advantages of both - partnership firms and joint stock companies.

After years of deliberations, LLP was introduced in India via the Limited Liability Partnership Act, 2008 (LLP Act), which came into force in January 2009. It was a time when young professionals were keen on setting up their own enterprises or start-ups but were somewhat hampered by the disadvantages presented by partnership firms and corporations. LLP provided a unique blend and as per the estimates there is almost 1 lakh registered LLPs currently active in India and there is a growing trend of companies and partnership firms being converted into LLPs.

Table of Contents:

  1. What are Limited Liability Partnerships (LLP) and their salient features?

  2. Difference between LLP and a Company

  3. Difference between LLP and a partnership firm

  4. Advantages and Disadvantages of LLP

  5. Incorporation of LLP

  6. Conversion

  7. Conclusion

Incorporation of LLP

Consult: Expert Startup Lawyers in India

What are Limited Liability Partnerships (LLP) and their salient features?

As the name suggests, among other things, the defining feature of LLP is that it limits the liability of a partner to the extent of his contribution in the partnership (unlike in the traditional partnership firms) and is also easy to establish and dissolve (unlike a corporation). Other noteworthy features are:

Separate Legal Entity:

LLP is a body corporate and is a separate legal entity from its partners. This simply means that like any other corporation an LLP has a legal existence which is separate from its partners. It implies

  • LLP can file a suit in its name and a suit can be filed against LLP though it may be represented by any or all of its partners.

  • This also means that LLP will have perpetual succession. Unlike partnership firms, which dissolved when a partner is changed or has died, LLP continues to exist and will have perpetual succession irrespective of the change in partners.

  • LLPs can hold property in its name and is capable of entering into contracts.

 

Limited Liability:

While LLP, as a separate entity, will be liable to the extent to its entire assets, the liability of partners are fixed to the extent of their promised contribution in the LLP under the agreement. Such contribution may be tangible or intangible or both in nature. Additionally, a partner will not be responsible for independent and unauthorised action of another partner. Only those LLP or that partner which has been found to act with the intention to defraud creditors or commit fraud will be subjected to unlimited liability.

Composition:

LLP should have a minimum of two partners and there is no limit prescribed for the maximum number of partners allowed. A body corporate can also become a partner to an LLP. Additionally, at least two persons shall be appointed as designated partners, both of whom should be individuals and one of them should be resident of India. Such designated partners will be responsible for regulatory and legal compliance. In case of an LLP where all the partners are a body corporate, their nominee can act as designated partners.

Mutual Rights and Liabilities:

Mutual rights and liabilities between partners inter-se and between partners and LLP can be determined by an LLP agreement signed between partners and LLP. In the absence of LLP agreement rights and liabilities provided under schedule I of the LLP Act, 2008 will apply. It should be noted that every partner, for the purpose of business, acts as an agent of LLP i.e. he can bind LLP by its action and will be bound by the actions of LLP, but, unlike in the traditional partnership, he is not an agent of other partners i.e. he cannot bind other partners and cannot be bound by the actions of other partners.    

Annual Accounts and Investigation:

The LLP is required, unless exempted under the act, to maintain true and fair annual accounts of the LLP and submit it to the registrar of the company. Such accounts may be audited as per the law. The Central Government has powers to investigate the affairs of an LLP, if required, by appointment of competent Inspector for the purpose.

Conversion:

A partnership firm, a private limited company and public limited company (which is not listed on a recognised stock exchange) are permitted to convert themselves into LLP in accordance with the provisions of law.

Applicable Laws:

Primary law which is applicable is the LLP Act, 2008 and the allied rules. Additionally, the Central government may extend some of the provisions of the companies act to the LLPs by a notification. Indian Partnership Act, 1932 is not applicable.

Difference between LLP and a Company

Points of Difference

Company

LLP

Governing Law

Primarily, the law applicable to the company is the companies act, 2013 and the allied rules and notification

Primarily the law applicable to LLPs is the Limited Liability Partnership Act, 2008 and the allied rules and notifications

Name suffix

The public limited company should have ‘limited’ in the suffix of the name and private limited should have ‘private limited’

LLPs should have ‘LLP’ at the end of its name

Cost of Formation

Expensive process and is more than LLPs

Cost of establishment is more than that of traditional partnership firms but considerably less than that of a company.

Principle Document(s)

Memorandum of Association (MoA) and Articles of Association (AoA) are the two founding documents of a company.

LLP agreement is the principle document.

Composition

A minimum number of 2 and a maximum number of 200 members in case of private limited companies.

A minimum number of 7 and no maximum number of members for public limited companies.

A minimum number of 2 and no maximum number of partners is prescribed in the law.

Liability of members/partners

Shareholders are liable to the extent of the unpaid amount of their share capital.

Partners in LLPs are liable to the extent of their contribution to the LLP but they can be held personally liable in cases of intentional fraud or wrongful act.

Membership and ownership

There is a divide between who owns and who manages the company.

There is no such distinction between owners and managers.

Principal Agent Relation

Owners are not an agent of the company instead, directors act as the agent of the company

Partners are the agent of LLP but not of other partners.

Formalities

  • Companies have to follow accounting standards as prescribed by the central government through ICAI
  • Companies are required to have their accounts audited
  • Board meetings and general meetings should be held as prescribed in the act
  • No prescribed accounting standards
  • LLPs whose turnover is not more than 40 lakh rupees or whose contribution is not more than 25 lakhs rupees are not required to get their accounts audited.
  • There is no such requirement prescribed by law. Partners are free to decide such issues among themselves.

Top Read: Decide whether partnership is apt for your business or not

Difference between LLP and a partnership firm

Points of Difference

Partnership Firm

LLP

Liability of Partners

The partner’s liability is unlimited. They are jointly and severally responsible for the actions of the other partners and the firm and their liabilities can extend to their personal assets.

Partners in LLPs are liable to the extent of their contribution to the LLP but they can be held personally liable in cases of intentional fraud or wrongful act.

Principal Agent Relationship

Partners act as agent of the firm and that of the other partners

Partners are the agent of LLP but not of other partners.

Law Applicable

Indian Partnership Act, 1932

Limited Liability Partnership Act, 2008 and the allied rules and notifications

Registration

Optional

Compulsory registration of registrar of companies (ROC)

Separate Legal Entity

The partnership is not a separate legal entity without perpetual succession and no common seal.

LLP is a separate legal entity with perpetual succession and a common seal.

Composition

Minimum 2 and maximum 10 in case of banking partnership.

Minimum 2 and maximum 20 in case of other business.

A minimum number of 2 and no maximum number of partners is prescribed in the law.

Ownership of Asset

Partners jointly own the asset of the partnership.

Assets of the LLP belong to LLP and partners cannot claim ownership over them.

Formalities

  • No requirement to file annual statements
  • Annual statements need to be filed with ROC

Advantages and Disadvantages of LLP

There are various advantages and disadvantages associated with LLPs. Anyone interested in setting up an LLP should consider these:

Advantages

  • Process of incorporation of LLP is simpler than that of setting up a corporation under the Companies Act. It involves fewer expenses and formalities.

  • It has the best of both worlds – limited liability of partners and separate legal entity along with less regulatory requirement and flexibility of partnership firm.

  • Since LLP is a separate entity it is suitable for those businesses which involve incurring debts. It provides protection to the personal wealth of partners as their liability to the debt is limited to the extent of their contribution.

  • Rights and liabilities of the partners in LLP are based on the LLP agreement jointly signed by the partners. This provides a great degree of flexibility with respect to conduct of the business of LLP as compared to companies which are required to follow several statutory prescriptions.

  • The minimum amount of contribution prescribed for an LLP is 1 rupee. Instead, the minimum paid-up capital is 1 lakh in case of a private limited company.

  • LLP is taxed in the same manner as a partnership firm. Thus, they are not subject to Minimum Alternate Tax and Dividend Distribution Tax

Disadvantages

  • Though a partner is not an agent of another partner, still he acts as an agent of the LLP. Thus, any partner can bind the LLP with his actions and indirectly bind other partners through LLP.

  • LLP cannot raise money from the general public.

  • LLPs have to file annual statements with ROC and are also subject to audits in case the turnover exceeds 40 Lakhs or the contribution exceeds 25 lakhs.

Incorporation of LLP

If you wish to incorporate an LLP for your business follow the steps given below:

  1. Select at least 2 ‘designated partners’ who will fulfil the statutory requirement for the incorporation. Such designated partners will have to obtain ‘Designated Partner Identification Number’ (DPIN) by filling in E-form DIR -3. If the partners already have Director Identification Number (DIN), it can be used.

  2. Acquire Digital Signature Certificate (DSC) for the selected designated partners by applying directly to any of the approved 8 Certifying Authorities.

  3. Apply for the name of the LLP by filling in Form 1. After the name has been approved, file Form 2 for incorporation. Once the form has been approved by the concerned official of the Ministry, you will receive an email regarding the same and the status of the form will get changed to Approved.

  4. After incorporation of LLP, an initial LLP agreement is to be filed within 30 days of incorporation of LLP. The user has to file the information in Form 3

  5. After the approval of Form 3, all the requirement for incorporation of LLP gets complete.

Conversion

If you wish to convert partnership firm into LLP then you simply need to apply through form 17. It will be filed along with form 2.

If you need to convert your company into LLP then you need to apply through form 18 and it needs to be filed along with form 2.

Conversion of Partnership firm, Private limited company, and a public limited company is governed by schedule 2, 3 and 4 of the LLP acts, 2008 respectively.

Conclusion

LLP is emerging to be the go-to model for startups in India. In fact, there has been the continued growth of partnership firms and private limited companies converting their organisational structure into LLP. Ministry of Corporate Affairs (MCA) is making every effort to facilitate such registrations and conversion. Even then, experts at MyAdvo can help you to incorporate your LLP seamlessly and effortlessly. Highly trained team of MyAdvo can help you make decisions with respect to the form of company best suitable for your business and guide you in the following process. Contact to know more.   

 

Written by: Peeyush Agarwal

Dr. Ram Manohar Lohia National Law University, Lucknow (5th Year)