Unit 2

Limited Liability Partnership Act – 2008

2.1 LIMITED LIABILITY PARTNERSHIP.

A Limited Liability Partnership or LLP is an alternative corporate business form which offers the benefits of limited liability to the partners at low compliance costs. It also allows the partners to organize their internal structure like a traditional partnership. A limited liability partnership is a legal entity, liable for the full extent of its assets. The liability of the partners, however, is limited. Hence, LLP is a hybrid between a company and a partnership.

Incorporation of an LLP

Limited Liability Partnerships have gotten quite popular in the last few years. In this article, we will focus on the process and steps along with the elements essential for the incorporation of an LLP (limited liability partnership).  The guidelines are provided by the Limited Liability Partnership Act (LLP Act), 2008.

2.2 PROCESS FOR THE INCORPORATION OF AN LLP

The following things need to be ensured for the incorporation of LLP:

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

Steps for the Incorporation of an LLP

• Reserve the name of the LLP. Applicant files e-Form 1 to ascertain the availability and register the name of the LLP. Once the Ministry approves the name, it reserves it for the applicant for a period of 90 days. Also, if the LLP is not incorporated within that time frame, the reservation is removed and the name is made available to other applicants.
• Incorporation of a new LLP. Applicant files e-Form 2 which contains the details of the proposed LLP along with details of the partners and designated partners
• Consent of the partners and designated partners to act in the said role.
• File the LLP Agreement with the Registrar within 30 days of incorporation of the LLP. Applicant files e-Form 3. According to Section 23 of the LLP Act, 2008, execution of LLP Agreement is mandatory.

On obtaining approval of the LLP Agreement, the process of Incorporation of LLP is complete.

2.3 SALIENT FEATURES OF LLP

LLP is a body corporate

According to Section 3 of the Limited Liability Partnership Act (LLP Act), 2008, an LLP is a body corporate formed and incorporated under the Act. It is a legal entity separate from its partners.

Perpetual Succession

Unlike a partnership firm, a limited liability partnership can proceed its existence even after the retirement, insanity, insolvency or even death of one or more partners. Further, it can enter into contracts and hold property in its name.

Separate Legal Entity

It is a separate legal entity. Further, it is absolutely liable for its assets. Also, the liability of the partners is limited to their contribution in the LLP. Hence, the lenders of the limited liability partnership are not the creditors of individual partners.

Mutual Agency

Another difference between an LLP and a partnership firm is that independent or unauthorized actions of one partner do not make the other partners liable. All partners are agents of the LLP and the actions of one partner do not bind the others.

LLP Agreement

The rights and duties of all partners are governed by an agreement between them. Also, the partners can devise the agreement as per their choice. If such an agreement is not made, then the Act governs the mutual rights and duties of all partners.

Artificial Legal Person

For all legal purposes, an LLP is an artificial legal person. It is created by a legal process and has all the rights of an individual. It is invisible, intangible and immortal but not fictitious since it exists.

Common Seal

If the partners decide, the LLP can have a common seal [Section 14(c)]. It is no longer mandatory though. However, if it decides to have a seal, then it is necessary that the seal remains under the custody of a responsible official. Further, the common seal can be affixed only in the presence of at least two designated partners of the LLP.

Limited Liability

According to Section 26 of the Act, every partner is an agent of the LLP for the purpose of the business of the entity. However, he is not an agent of other partners. Further, the liability of each partner is limited to his agreed contribution in the Limited Liability Partnership.

Minimum and Maximum Number of Partners

Every Limited Liability Partnership need to have at least two partners and at least two individuals as designated partners At any time, at least one designated partner should be resident in India. There is no maximum limit on the number of maximum partners in the entity.

Management of Business

The partners of the Limited Liability Partnership can manage its business. However, only the certain partners are responsible for legal compliances.

Business for Profit Only

A Limited Liability Partnership cannot be created for charitable or non-profit purposes. It is essential that the entity is formed to carry on a lawful business with a view to incomes a profit.

Investigation

The power to investigate the affairs of a Limited Liability Partnership resides with the Central Government. Further, they can appoint a competent authority for the same.

Compromise or Arrangement

Any compromise or arrangement like a merger or amalgamation desires to be in accordance with the Act.

Concept of LLP: Limited Liability Partnership enterprise, the world wide recognized form of business organization, has now been brought in India by enacting the Limited Liability Partnership Act, 2008. LLP Act was notified on 31.03.2009.

A Limited Liability Partnership, popularly known as LLP combines the advantages of both the Company and Partnership into a single form of organization. Limited Liability Partnership (LLP) is a new corporate form that enables expert knowledge and entrepreneurial skill to combine, organize and operate in an revolutionary and proficient manner.

It provides an alternative to the traditional partnership association with unlimited liability. By incorporating an LLP, its members can avail the benefit of limited legal responsibility and the flexibility of organizing their internal management on the basis of a mutually-arrived agreement, as is the case in a partnership firm.

2.4 CHARACTERISTICS OF AN LLP:

1. LLP is governed by way of the Limited Liability Partnership Act 2008, which has come into force with effect from April 1, 2009. The Indian Partnership Act, 1932 is not applicable to LLP.

2. LLP is a body incorporate and a legal entity separate from its partners having perpetual succession, can own assets in its name, sue and be sued.

3. The partners have the right to manage the business directly, unlike corporate shareholders.

4. One partner is not responsible or accountable for another partner’s, misconduct or negligence.

5. Minimum of 2 partners and no maximum limit.

6. Should be ‘for profit’ business.

7. The rights and duties of partners in an LLP, will be governed by the agreement between partners and the partners have the flexibility to devise the agreement as per their choice. The duties and obligations of Designated Partners shall be as provided in the law. 8 Limited liability of the partners to the extent of their contributions in the LLP. No exposure of personal assets of the partner, except in cases of fraud.

9. LLP shall maintain annual accounts. However, audit of the accounts is required solely if the contribution exceeds Rs. 25 lakh or annual turnover exceeds Rs. 40 lakh. A statement of accounts and solvency shall be filed by every LLP with the Registrar of Companies (ROC) every year.

2.5 ADVANTAGES OF LLP:

The first LLP was registered on 2nd April, 2009 and till 25th April, 2011, 4580 LLPs were registered. This form of Organisation offers the following benefits:

1. The process of formation is very simple as compared to Companies and does not involve much formality. Moreover, in terms of cost, the minimum fee of incorporation is as low as f 800 and maximum is f 5600.

2. Just like a Company, LLP is also body corporate, which means it has its own existence as compared to partnership. LLP and its Partners are distinct entities in the eyes of law. LLP is known through its own name and not the name of its partners.

3. An LLP exists as a separate legal entity different from the lives of its partners. Both LLP and persons, who own it, are separate entities and both function separately. Liability for repayment of debts and law incurred by the LLP lies on it, the owner. Any business with potential for lawsuits should think about LLP form of organisation and it will offer an added layer of protection.

4. LLP has perpetual succession. Notwithstanding any changes in the partners of the LLP, the LLP will remain the same entity with the same privileges, immunities, estates and possessions. The LLP shall proceed to exist till it is wound up in accordance with the provisions of the relevant law.

5. LLP Act 2008 gives an LLP flexibility to manage its very own affairs. Partners can decide the way they want to run and manage the LLP, as per the form of LLP Agreement. The LLP Act does now not regulate the LLP to large extent rather than allows partners the liberty to manage it as per their agreement.

6. It is easy to join or leave the LLP or in any other case it is easier to transfer the ownership in accordance with the terms of the LLP Agreement.

7. An LLP, as legal entity, is capable of owning its Separate Property and funds. The LLP is the real person in which all the property is vested and through which it is controlled, managed and disposed of. The property of LLP is not the property of its partners. Therefore, partners cannot make any claim on the property in case of any dispute amongst themselves.

8. Another main benefit of incorporation is the taxation of a LLP. LLP is taxed at a lower rate as in contrast to Company. Moreover, LLP is also not subject to Dividend Distribution Tax as compared to company, so there will now not be any tax while you distribute profit to your partners.

9. Financing a small business like sole proprietorship or partnership can be difficult at times. An LLP being a regulated entity like company can attract finance from Private Equity Investors, financial institutions etc.

10. As a juristic legal person, an LLP can sue in its name and be sued by others. The partners are not liable to be sued for dues in opposition to the LLP.

11. Under LLP, only in case of business, where the annual turnover/contribution exceeds Rs. 40 lakh Rs. 25 lakh are required to get their accounts audited yearly by a chartered accountant. Thus, there is no mandatory audit requirement.

12. In LLP, Partners, unlike partnership, are not marketers of the partners and therefore they are not liable for the character act of other partners, which protects the interest of individual partners.

13. As compared to a private company, the numbers of compliances are on a lesser side in case of LLP.

2.6 DISADVANTAGES OF LLP:

The major Disadvantages of Limited Liability Partnership are listed below:

1. An LLP cannot raise cash from Public.

2. Any act of the partner without the other may bind the LLP.

3. Under some cases, liability may extend to personal assets of partners.

4. No separation of Management from owners.

5. LLP may not be a choice due to certain extraneous reasons. For example,, Department of Telecom (DOT) would approve the application for a leased line solely for a company. Friends and relatives (Angel investors), and venture capitalists (VC) would be comfortable investing in a company.

6. The framework for incorporating a LLP is in place but currently registrations are centralized at Delhi.

2.7 BASIS FOR COMPARISON PARTNERSHIP AND LIMITED LIABILITY PARTNERSHIP (LLP)

2.8 DISSOLUTION OF LLP

An LLP gets dissolved in the following circumstances:

Death or Bankruptcy of one or more partners

By Order of Court / compulsory judicial decision

Expiry of term

Discontinuation of Partnership

Attainment of object

The basic step for the dissolution of a limited liability partnership (LLP) consists of three key stages:

Adoption and submission of a dissolution resolution

Liquidation

Deletion of the company from the Commercial Register

When a LLP is formed, it is formed by signing a partnership agreement between them, the terms of conditions of LLP consists of clause called termination clause or dissolution clause which states the procedure to be followed to dissolve the LLP, the process of dissolving LLP depends on the dissolution provisions enumerated in the partnership agreement and the partnership laws applicable to the state where the business is registered. Usually, the partnership agreement sets certain dissolution rules, that may include how to do voting and how the voting rights are to executed and related rules and regulations which governs the decision to dissolve the partnership.

Step 1: Notice

The very first step is to call a meeting of the partners by issuing a notice to all the partners as stipulated in the partnership agreement. Usually the in-partnership agreement the notice requires at least 30 days of time period. Notice is to be served should be in writing to the partners o held the partners meeting. In accordance with the partnership agreement, the notice is required to be sent along with the agenda.

Step 2: Voting

Vote to dissolve the partnership is to be conducted and usually, it’s is decided by majority vote, whereby if the majority agrees to dissolve then the LLP is dissolved unless the general partnership agreement establishes a predetermined date for dissolution. The manner of voting could be show hand, or by direct asking or as per the provisions of the agreement. Thereafter the votes are recorded in the meeting minutes, the records of the meeting are thereafter recorded and filed.

Step 3: Appointment of the agency to conduct liquidation

The LLP itself appoints one or more general partners to wind up the partnership’s business otherwise the partners hire an outside agency to carry on the business affairs. In case the partners cannot reach to unanimous decision to appoint an outside agency, in such scenario the LLP can ask the court to supervise liquidation or hire a liquidation trustee.

Step 4: Certificate of cancellation

The certificate of cancellation is to be filed with the state business registrar. The certificate of cancellation is to be filed with the same state office where the partnership’s certificate of limited partnership was obtained. The certificate of cancellation shall contain the following information:

1. The name of the partnership,

2. The date the certificate of limited partnership was filed, and

3. The effective date of cancellation.

The form can be downloaded to prepare the certificate from the secretary of state’s website or the comparable state agency which is authorized to deal the business registrations. Thereafter the appropriate registration fees are required to be paid.

Step 5 Settlement of liabilities

The LLP is required to settle out all the partnership’s outstanding obligations such as given below:

1. Tax bills if the partnership owes state sales or

2. Employment taxes.

3. Pay all existing creditors and

4. Set aside money to cover any contingent liabilities, let’s say ongoing payment disputes

The partners are required to liquidate the LLP’s assets. Basically, the partners primarily responsibility for dissolution are involved in this.

Step 6: Payout of outstanding left after settlement of assets

At the time of formation of the Partnership firm, the partners must have put in some capital or contribution to the LLP. Hence after completing the liquidation and paying out the liabilities the leftover of the company asset is required to be returned in the ratio of the contribution made by the partners. If the remaining assets cannot cover all of the partners’ contributions, distribute the available money proportionally.

Step 7 Closure

1. For full and final Closure all partnership accounts are required to close.

2. All the business registrations should be closed.

3. Inform all the clients, customers and vendors of the dissolution of the LLP.

Step 8

File the Complete final tax forms for the LLP and give final K-1s to partners.