undefined | unit 5 limited liability partnership act 2008

BRF

Unit-5

LIMITED LIABILITY PARTNERSHIP ACT, 2008.

Q1) What is a Limited Liability Partnership? State its main features.

A1)

A Limited Liability Partnership or LLP is a body corporate brought into existence as per LLP Act, 2008. An LLP has separate legal existence which is perpetual in nature. A Limited Liability Partnership, popularly known as LLP combines the advantages of both the Company and Partnership into a single form of organization. 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 mutual agreement, as is the case in a partnership firm. The liability of the partners, however, is limited. Hence, LLP is a hybrid between a company and a partnership.

Following are the main features of an 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.

2. Perpetual Succession: Unlike a partnership firm, a limited liability partnership can continue to exist 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.

3. 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.

4. 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.

5. 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.

6. 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.

7. 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.

8. 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.

9. 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.

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

11. 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.

12. 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.

Q2) Explain the advantages and disadvantages of LLP.

A2)

This form of organization offers the following benefits:

The process of formation is very simple as compared to Companies and does not involve much formality.

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.

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.

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.

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.

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.

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 off. 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.

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.

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.

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.

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

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.

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

Disadvantages of LLP

The major disadvantages of Limited Liability Partnership are listed below:

An LLP cannot raise cash from Public.

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

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

No separation of Management from owners.

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.

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

Q3) Discuss the procedure of incorporation of a limited liability partnership.

A3)

Registration of LLP is compulsory, unlike the traditional partnership.

Section 11 of the LLP Act, 2008 states that:

For a limited liability partnership to be incorporated:

a) Two or more persons associated for carrying on a lawful business with a view to profit shall subscribe their names to an incorporated document;

b) The incorporation document shall be filed in such a manner and with such fees, as may be prescribed with the Registrar of the State in which the registered office of the limited liability partnership is to be situated; and

c) There shall be filed along with the incorporation document, a statement in the prescribed form, made by either an advocate, or a Company Secretary or a Chartered Accountant or a Cost Accountant, who is engaged in the formation of the liability partnership and by anyone who subscribed his name to the incorporation document, that all the requirements of this Act and the rules made there under have been complied with, in respect of incorporation and matters precedent and incidental thereto.

U/S 11 (2) the incorporation document shall-

a) Be in a form as may be prescribed

b) State the name of the limited liability partnership;

c) State its proposed business;

d) State the address of its registered office;

e) State the names and addresses of each of the partners;

f) State the name and address of the persons who are to be the designated partners of the LLP on incorporation;

g) Contain such other information concerning the proposed LLP as may be prescribed.

If a person makes a statement under clause (c) of sub-section (1) which he-

a) knows to be false; or

b) does not believe to be true,

shall be punishable with imprisonment for a term which may extend to two years and with fine which shall not be less than ten thousand rupees but which may extend to five lakh rupees.

Incorporation by registration (Section 12)

i) When the requirements imposed by clauses (b) and (c) of sub-section (1) of section 11 have been complied with, the Registrar shall retain the incorporation document and, unless the requirement imposed by clause (a) of that sub-section has not been complied with, he shall, within a period of fourteen days-

give a certificate that the limited liability partnership is incorporated by the name specified therein.

ii) The Registrar may accept the statement delivered under clause (c) of sub-section (1) of section 11 as sufficient evidence that the requirement imposed by clause (a) of that sub-section has been complied with.

iii) The certificate issued under clause (b) of sub-section (1) shall be signed by the Registrar and authenticated by his official seal.

iv) The certificate shall be conclusive evidence that the limited liability partnership is incorporated by the name specified therein.

Registered office of limited liability partnership and change therein (Section 13)

Every limited liability partnership shall have a registered office to which all communications and notices may be addressed and where they shall be received.

ii. A document may be served on a limited liability partnership or a partner or designated partner thereof by sending it by post under a certificate of posting or by registered post or by any other manner, as may be prescribed, at the registered office and any other address specifically declared by the limited liability partnership for the purpose in such form and manner as may be prescribed.

iii. A limited liability partnership may change the place of its registered office and file the notice of such change with the Registrar in such form and manner and subject to such conditions as may be prescribed and any such change shall take effect only upon such filing.

iv. If the limited liability partnership contravenes any provisions of this section, the limited liability partnership and its every partner shall be punishable with fine which shall not be less than two thousand rupees but which may extend to twenty-five thousand rupees.

Effect of registration (Section 14)

On registration, a limited liability partnership shall, by its name, be capable of-

suing and being sued;

acquiring, owning, holding and developing or disposing of property, whether movable or immovable, tangible or intangible;

having a common seal, if it decides to have one; and

doing and suffering such other acts and things as bodies corporate may lawfully do and suffer.

Name (Section 15)

Every limited liability partnership shall have either the words "limited liability partnership" or the acronym "LLP" as the last words of its name.

No limited liability partnership shall be registered by a name which, in the opinion of the Central Government is-

undesirable; or

identical or too nearly resembles to that of any other partnership firm or limited liability partnership or body corporate or a registered trade mark, or a trade mark which is subject of an application for registration, of any other person under the Trade Marks Act, 1999 (47 of 1999).

Reservation of name (Section 16)

A person may apply in such form and manner and accompanied by such fee as may be prescribed to the Registrar for the reservation of a name set out in the application as

the name of a proposed limited liability partnership; or

the name to which a limited liability partnership proposes to change its name.

ii. Upon receipt of an application under sub-section (1) and on payment of the prescribed fee, the Registrar may, if he is satisfied, subject to the rules prescribed by the Central Government in the matter, that the name to be reserved is not one which may be rejected on any ground referred to in sub-section (2) of section 15, reserve the name for a period of three months from the date of intimation by the Registrar.

Q4) Discuss the extent and limitation of liability of liability partnership and also that of the partners.

A4)

Every partner of LLP, for the purpose of business, is the agent of LLP but not of other partners of LLP. (Section 26)

Extent of Liability of LLP (Section 27)

The LLP shall not be bound by any act done by a partner for which he had no authority and the person with whom he is dealing also knows that partner has no authority for doing such act.

The LLP will be liable in case the partner of LLP becomes liable to any person as a result of wrongful act or omission on the part of such person in the course of business of LLP or with its authority.

An obligation of LLP arising out of a contract or otherwise will be solely the obligation of LLP.

The liabilities of LLP shall be met or paid out of the properties of the LLP.

Extent of Liability of Partner (Section 28)

A partner will be personally liable for his own wrongful act or omission but shall not be personally liable for the wrongful act or omission of any other partner of LLP.

Holding Out (Section 29)

According to this Section, any person who represents himself to be a partner of LLP, whether in express or implied manner, will be liable to such person who on the faith of such representation gives credit to the LLP.

Unlimited Liability in Case of Fraud (Section 30)

According to this section, the LLP and its partners will have unlimited liability for those acts which they intend to carry out to defraud creditors or any other person to do such acts for fraudulent purpose. The LLP is liable to the same extent as the partner unless it is established by the LLP that such act was done without a knowledge or authority of LLP. Such defrauders are punishable with imprisonment extending to two years and minimum fine of fifty thousand rupees which may extend to five lakh rupees.

But LLP shall not be liable if the partner, designated partner or the employee has acted fraudulently without knowledge of LLP.

Whistle Blowing (Section 31)

The Court or Tribunal may reduce or waive any penalty leviable against any partner or employee of a limited liability partnership, if it is satisfied that-

such partner or employee of a limited liability partnership has provided useful information during investigation of such limited liability partnership; or

when any information given by any partner or employee (whether or not during investigation) leads to limited liability partnership or any partner or employee of such limited liability partnership being convicted under this Act or any other Act.

No partner or employee of any limited liability partnership may be discharged, demoted, suspended, threatened, harassed or in any other manner discriminated against the terms and conditions of his limited liability partnership or employment merely because of his providing information to the Tribunal or court.

Q5) Discuss the provisions of the LLP Act related to the contribution of partners in an LLP.

A5)

Contribution is the capital invested by the partners in the business of the LLP.

Form of contribution (Section 32)

A contribution of a partner may consist of tangible, movable or immovable or intangible property or other benefit to the limited liability partnership, including money, promissory notes, agreement to contribute cash or property and contract for services performed or to be performed.

The monetary value of contribution of each partner shall be accounted for and disclosed in the accounts of the limited liability partnership in the manner as may be prescribed.

Obligation to contribute (Section 33)

The obligation of a partner 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.

A creditor of a limited liability partnership, which extends credit or otherwise acts in reliance on an obligation described in that agreement, without notice of any compromise between partners, may enforce the original obligation against such partner.

Q6) What are the rights of partners in an LLP?

A6)

Partners in an LLP have the following rights:

i) Right to take part in the Conduct or Management of Business: Every partner, irrespective of the amount contributed by him, has an inherent right to participate in the conduct of enterprise of the firm. However, by mutual agreement, some partners may be restricted to take section but, the right to participate in the management must be on hand to all

ii) Right to be Consulted: Before taking up any major decisions, it is the right of the partners to be consulted and heard. Any disagreement is solved by majority decision. But, no change in the nature or constitution of the business can be performed without the consent of all partners.

iii) Right of Access To Books: Every partner has a right to have access to and to check out and copy the books of firm.

iv) Right to Share the Profits: Every partner has a right to share the profits equally, unless otherwise agreed upon, and bear the losses as well.

v) Right to Receive Interest on Capital: If the partnership deed so decides that a partner is entitled to obtain interest on capital at a fixed or certain rate, he has a right to receive it but, only out of profits.

vi) Right to be Indemnified: Every partner has a right to claim indemnity from the association in respect of payments made or liabilities incurred by him in the ordinary and suited conduct of business and in emergency to protect the company from loss, provided the act should be such as would have been done by a individual of ordinary prudence, in his own case and under similar circumstances.

vii) Right to Receive Interest on Advances: If an associate makes any advances beyond the amount of capital he has agreed to subscribe, he has a right to claim an interest at the rate of six percent per annum.

viii) Right to Act in Emergency: A partner has every proper and authority to act in emergency, in order to protect the firm from loss, and the firm would be bound through such an act, provided the act would similar in his own case, under identical situation.

ix) Right to Apply to the Property of the Firm for Business of the Firm: Subject to contract between the partners, every partner has a right to apply and use the property of the firm exclusively for business of the firm.

x) Right to Apply to the Property of the Firm for Business of the Firm: Subject to contract between the partners, every partner has a proper to apply and use the property of the firm exclusively for business of the firm.

xi) Right to Prevent Introduction of a New Partner: Every partner has a right to prevent the introduction of any new partner in the firm. No person can be admitted into partnership firm without the consent of all the partners.

xii) Right to Retire: A partner has a right to retire with the consent of all the partners. If the partnership is at will, he has the proper to retire by giving due notice in writing to all other partners.

xiii) Right Not to be Expelled: A partner has a proper not to be expelled by any majority of partners without any cause.

xiv) Right of an Outgoing Partner to Carry on a Competing Business: Every partners has a right to carry on a business, similar to the partnership business, after his retirement with certain restrictions being that he cannot use the firm name, represent himself as carrying on the business of the company or solicit the customs of persons who were dealing with the firm before he ceased to be a partner.

xv) Right of Outgoing Partner in Certain Cases to Share Subsequent Profits: If any partner of the firm dies or otherwise ceases to be a partner and the continuing partners continue to carry on business with the property of the firm, without any settlement being given to the outgoing partner, then in the absence of any contract, he himself or his representative are entitled to a share of profits made since he ceased to be a partner, as may be attributable to the use of his share of property or to activity at six percent per annum of his share in the property of the firms.

Q7) Draw comparison between Traditional Partnership and Limited Liability Partnership.

A7)

BASIS FOR COMPARISON	PARTNERSHIP	LIMITED LIABILITY PARTNERSHIP (LLP)
Meaning	Partnership refers to an arrangement wherein two or more person agree to carry on a business and share profits & losses mutually.	Limited Liability Partnership is a form of business operation which combines the features of a partnership and a body corporate.
Governed By	Indian Partnership Act, 1932	Limited Liability Partnership Act, 2008
Registration	Optional	Mandatory
Charter document	Partnership deed	LLP Agreement
Liability	Unlimited	Limited to capital contribution, except in case of fraud.
Contractual capacity	It cannot enter into contract in its name.	It can sue and be sued in its name.
Legal Status	Partners are collectively known as firm, so there is no separate legal entity.	It has a separate legal status.
Name of firm	Any name	Name containing LLP as suffix
Maximum partners	100 partners	No limit
Property	Cannot be held in the name of firm.	Can be held in the name of the LLP.
Perpetual Succession	No	Yes
Audit of accounts	Not mandatory	Mandatory, only if turnover and capital contribution overreaches 40 lakhs and 25 lakhs respectively.
Relationship	Partners are agents of firm and other partners as well.	Partners are agents of LLP only.

Q8) Differentiate between traditional partnership and Limited Liability Partnership (LLP).

A8)

The following points are vital so far as the difference between partnership and limited liability partnership (LLP) is concerned:

1. The partnership is defined as an association of individuals joined for earning profits from business, undertaken by all the partners or any one partner on behalf of all the partners. Limited Liability Partnership is a form of business operation which combines the features of a partnership and a body corporate.

2. The partnership is ruled by the Indian Partnership Act, 1932. On the contrary, Limited Liability Partnership Act, 2008 governs LLP in India.

3. The incorporation of the partnership is voluntary, whereas the registration of the LLP is obligatory.

4. The document that guides the partnership is called Partnership Deed. As adversarial to limited liability partnership, the LLP agreement is the charter document.

5. A partnership company cannot enter into a contract in its name. On the other hand, the LLP can sue and be sued in its name.

6. A partnership has no separate legal status aside from its partners, as the partners are individually known as a partner and jointly known as firm, unlike LLP which is a separate legal entity.

7. The partner’s liability is limited to the extent of the capital contributed through them. As against this, the partners of a partnership have unlimited liability.

8. Partnership can be started with any name of choice. Conversely, the limited liability partnership must use the phrase “LLP” by the end of its name.

9. Any two persons can start a partnership or LLP. The maximum number of partners in a partnership firm is confined to 100 partners. In contrast, there is no limit of maximum partners in LLP.

10. LLP has perpetual succession whereas a partnership may dissolve any time.

11. The maintenance and audit of books of accounts is not mandatory for a partnership, As against this, the LLP is required to maintain and audit books of accounts if turnover and capital contribution overreaches 40 lakhs and 25 lakhs respectively.

12. The partnership firm cannot hold property in its name. Conversely, the LLP is allowed to held property in its name.

13. In a partnership, the partners act an agent of the partners and the firm. On the other hand, the partners are agents of partners in case of LLP.

Q9) Discuss the provisions related to conversion to LLP. Also state the effects of such conversion.

A9)

Following is the procedure by which firms, private companies and unlisted public companies can convert to LLP.

Conversion from firm into LLP (Section 55): A firm may convert into LLP in accordance with the provisions of this chapter and the Second Schedule of this Act.

Conversion from private company to LLP (Section 56): A private company may convert to LLP in accordance with the provisions of this chapter and the Third Schedule.

Conversion from unlisted public company to LLP (Section 57): This section provides that the unlisted public company may convert into LLP in accordance with the provisions of this chapter and the Fourth Schedule.

Registration and Effect of Conversion (Section 58)

The Registrar, on being satisfied that all rules and provisions have been adhered to, may register the documents submitted to it and shall issue the Certificate of Registration in the form as the Registrar may determine.

Such conversion will also produce the following effects on and from the date of registration:

There shall be LLP by the name specified in the Certificate of Registration.

All tangible, intangible, moveable, immovable property, all assets, interest, rights, privileges, liabilities and obligations and the whole of the undertaking of the firm or company so converted shall be transferred to LLP without further act or deed.

The firm or company shall be deemed to be dissolved and removed from the records of the Registrar of firms or the Registrar of the Company.

Q10) Explain the procedure of winding up of LLP.

A10)

Section- 63, 64 and 65 of LLP Act 2008, regulates the process of winding up an LLP.

• A Limited Liability Partnership being an artificial person can't die a natural death. It comes into existence through legal proceedings and therefore ceases to exist in the same manner.

• Winding up means closing up of a company’s concerns, which may be by purpose of insolvency or otherwise, by the realization of assets, payment of liabilities and distribution of surplus if any amongst the partners of LLP.

• The winding up of an LLP can also be either Voluntary or by Tribunal and LLP, so wound up may be dissolved.

• Dissolution is an event whereby the name of LLP is removed from the register of LLP’s and the fact is notified

Winding Up by using Tribunal

Winding up of LLP can be initiated by a Tribunal for the following reasons:

The LLP wants to be wound up.

There are less than two partners in the LLP for a period more than 6 months.

The LLP is not in a position to pay its debts.

The LLP has acted against the interests of the sovereignty and integrity of India, the safety of State or public order.

The LLP has not filed with the Registrar Statement of Accounts and Solvency or LLP Annual Returns for any five consecutive financial years.

The Tribunal is of the opinion that it is just and equitable that the LLP should be wound up.

Voluntary Winding Up

LLPs can also be wound-up easily with the approval of 3/4th of the partners. To start the liquidation process for a LLP, a higher part of the designated partners will have to make a declaration that the LLP has no debt or that it will be competent to pay the debts in full within a period of not more than 1 yr from the start of winding up. Further, the LLP partners must declare that the LLP is not being wound up to defraud any man or woman or persons. This declaration for winding up of the LLP must be prepared along with a statement of assets and liabilities until the most recent practicable date right before the making of declaration for winding up. A valuation of the assets related to the LLP organized by a valued must also be submitted, if there are assets in LLP. Voluntary winding up will be deemed to begin on the date of passing of resolution for the reason of voluntary winding up.

The Central Government may make rules for the provisions in relation to winding up and dissolution of limited liability partnerships.

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