LIMITED LIABILITY PARTNERSHIP - AN ADVANTAGEOUS BUSINESS ENTITY

[Dr. Sanjiv Agarwal]

LLPs in India are now a reality with Limited Liability Partnership Act, 2008 coming in to force w.e.f. 31.3.2009. the conversion of companies in to LLP has also been allowed w.e.f. 31.5.2009.

Salient Features of LLP Act in India

The salient features of LLP Act, 2008 and LLPs in India are  as under:

(i)   Any two or more persons can form LLP for the purpose of carrying on any business, profession, vocation or occupation. Even a limited company, any LLP, non-resident, for­eign company or foreign LLP can be a partner in LLP.

(ii)  Every LLP should have at least two desig­nated partners, at least one of whom should be a resident Indian. Designated partners shall be responsible for compliance with all legal requirements of the LLP Act, Rules and other Laws applicable to LLPs in India. They will be like directors in any company.

(iii) Every designated partner shall have a unique number - Designated Partner Identifications Number (DDIN).

(iv)  LLP has members but no directors or shareholders.

(v)  LLP has unlimited capacity and objects and third parties need not be concerned about its objects and restrictions etc, unlike in case of a company where memorandum of association specifies main and other objects.

(vi)  LLP will not have share capital and will not be governed by any company law provisions on share capital.

(vii)  LLP can not be listed on any stock exchange as it can not raise capital from the market.

(viii)  LLP should be  registered with the Registrar of Companies (ROC) by filing the prescribed form of Incorporation Document and on payment of the prescribed fees. The Incorporation Document is to be accompa­nied by a statement about legal compliance signed by an Advocate or a Chartered Accoun­tant or a Company Secretary.

(ix)  Upon incorporation, LLP shall be treated as a body corporate and will be considered as a legal entity separate from its partners. It shall have perpetual succession like a company.

(x)  Partners of LLP shall be governed by LLP Act, 2008 and not by Indian Partnership Act, 1932.

(xi)  The procedure for obtaining the name of LLP is similar to that in Companies Act.

(xii)  Every LLP should disclose its name, address, LLP status and number on all communications and correspondence.

(xiii)  The maximum limit of 20 partners (for business or pro­fession) and 10 partners (for banking busi­ness), which applies to partnerships shall not apply to LLP. It will be possible for advocates, char­tered accountants or other professionals to form LLP for rendering various services including management consultancy services and there can be more than 20 partners in such LLPs.

(xiv)  In a registered LLP, partners should  enter into a partnership agreement in writing, stating contribution of each partner, share of each partner in profits and losses, interest/remuneration payable to each part­ner and other rights and duties of partners of LLP. This agreement is required to be filed with ROC office. Thus, mutual rights and duties of designated partners and partners and LLP are well defined.

(xv)  LLP has total flexibility on internal structure and management and there are no requirements for boards/ general meetings or resolutions for taking business decisions, as in the case of companies.

(xvi)  An agreement is to be executed when there are changes in partners or changes in the terms and conditions of the partner­ship. Such agreement is also required to be filed with the ROC office.          

(xvii)  Every partner of LLP is an agent of LLP. However, he is not an agent of any other part­ner. LLP does not recognize the concept of joint and several liability. The liability of each partner shall be limited to the extent of his contribution as specified in the partnership agreement. This is the peculiar feature of LLPs. The liability of LLP is limited to the extent of its assets. Debts incurred are the debts of LLP.

(xviii)  Minor can not be appointed as a designated partner of a LLP with limited liability. There is no provisions to provide excuse or immunity to minor partner from any penal provisions.

(xix)  LLPs have to maintain its books of accounts either on cash or on accrual basis. Such ac­counts have to be audited every year in such a manner as may be provided by Rules. LLP has to file audited statements with ROC office within six months of close of the financial year (i.e., on or before 30th September). It is also required to file an Annual Return with ROC office in the prescribed form within 60 days of close of the financial year (i.e., 31st May). of each year.

(xx)  Any existing partnership firm can be converted into LLPby complying with the procedure laid down in the Second Schedule to the LLP Act.

(xxi)  Any private limited company or a public unlisted company can be converted into a LLP by following the procedure laid down in the Third/Fourth Schedule to the Act.

(xxii)  The Central Government is authorized to frame various Rules providing for procedure for winding - up of  LLP / dissolution of LLP.

(xxiii)  Winding - up of LLP could be either voluntary or by Tribunal's order.

(xxiv)  LLP Act provides for compromise or arrangement including merger and amalgamation.

(xxv)  Registrar of Companies shall be empowered to collect prescribed fees for filing documents with ROC office and for levying penalties for defaults on the part of LLP.

(xxvi) Presently, the LLP Act does not deal with tax aspects of LLP. The Income-tax Act 1961 is expected to be amended for this purpose. It is likely that LLP maybe considered as 'firm' and all the provisions of the Income-tax Act applicable to firms may  apply to LLP.    

(xxvii) LLP may grant standard securities, fixed asset security or a floating charge for borrowings etc.

(xxviii) The provisions of Partnership Act, 1932 do not apply to LLPs.

The primary intention of LLP is that its external structure should mirror that of the limited company but in terms of conduct of internal affairs it would be similar to traditional partnership.

Over view of LLP Act

LLP Act, 2008 is comprised in 81 sections divided in 14 Chapters, and supported by rules and forms. The Act also has four Schedules dealing with partnership agreement and conversion of partnership firms, private companies and public unlisted companies into LLPs.

The LLP Act, 2008 (Act No 6 of 2009) received the President's assent on 7, January 2009 and extends to whole of India. It shall come into force in whole or in parts from the date (s) to be notified by the Central Government.(i.e.31.3.2009)

 Advantages of Limited Liability Partnerships

Various advantages of the Limited Liability Partnership form of business structure can be enumerated as under -

(a)   A Limited Liability Partnership provides limited liability benefit to its partners. Though personal liability would arise in case of fraudulent or wrongful acts or omissions, a partner is not personally liable for such acts or omissions of other partners.

(b)   Internal flexibility is another advantage of the LLP business structure. As in general partnership, the internal structure of LLP can be organized as per mutual agreement.

(c)   The requirements as to board meetings, resolutions, annual meetings, etc. are not there in case of LLP. There is lesser  paperwork in case of LLPs, as even the execution  of a partnership agreement is not mandatory.  The filing requirements are also less and simpler as compared to a company.

(d)   The managerial remuneration, salaries and other compensation, distribution of profits paid to partners are not questionable by any authority as in the case of companies.

(e)   There is no limit as to the maximum number of members in a Limited Liability

Partnership as is the case with firms, which provides for enough room for expansion and growth, particularly to professional firms.

(f) A partner's liability shall be limited i.e, liabilities of LLP shall be met out of LLP itself.

(g) LLPs shall be pass through entities for taxation purposes.

(h) LLPs provide for perpetual succession of business, unlike a partnership firm where partner's exit affects the constitution .

(i)  LLPs provide flexibility to define partnership relationship and inter se rights, duties and obligations by way of agreement.

(j)  Compliances in case of LLP are simpler and less, providing ease of operations.

(k)  As LLPs can also be formed by converting existing firms or businesses- be it a firm or company, continuity of existing business is ensured by forming a LLP.

(l) LLPs would provide an opportunity to small businesses not seeking to access capital market to participate in joint ventures, access technology, enable business strategies and face global competition as LLPs provide commercially efficient vehicle to do business.

(m) Since LLP is a separate legal entity, its existence is not affected by the entry or exit of partners

(n) LLPs name is protected as in case of companies. There can not be two LLPs by the same name.

Disadvantages of Limited Liability Partnerships

The Limited Liability Partnership form of business enterprise is however, not free from shortcomings some of which are as under -

(a)   There is a requirement of at least two partners. A person alone cannot form a LLP. However, for such cases, Companies Act is being amended to provide or one person company.

(b)  Where there are two partners, exit of one partner on account of death or otherwise would force the other to close the LLP where a new partner is not available or not admitted.

(c)  A considerable amount of financial information in respect of the Limited Liability Partnership needs to be disclosed.

(d)  A LLP agreement is needed to avoid default provisions from applying and to cover situations not addressed by default provisions in the Act.

(e)  Filing of declaration of solvency by LLP may be taken as loss of secrecy of information and financial results etc.

(f)  LLPs may not be preferred by risk averse businessmen and family businesses due to shared information, certain information in public domain and legal documentation, ROC filings, etc.

In sum, LLPs offers competitive advantages over other forms of business organizations.