LLPs - Practical aspects and FDI in LLPs

Introduction

On the horizon of business matrix, a new star is now sighted. Ease in operations of partnerships and armor of limited liability have been provided under a new format of business entity i.e. limited liability partnerships.

Because of the obvious advantages of an LLP for conducting business owned by multiple entities, many will fancy it. The new venture will embrace to this ownership platform. The limited liability partnership act, 2009 was much awaited as a solution providing flexibility of a partnership firm with limited liability, specially catering to the needs of small-scale enterprises and professionals.

Origin

The structure of LLP is available in other countries like USA, UK, various gulf countries, Australia and Singapore.LLP Act,2008 is broadly based on UK LLP Act,2000 & Singapore LLP Act,2005.However, the act has been enacted keeping in view the Indian requirements.

The recommendation of LLP has been expressed in the context of small enterprises by: Bhat Committee, Naik Committee, committee on regulation of private companies and partnerships headed by Sh.Naresh Chandra and Dr.J.J.Irani Committee.

Why the need of LLP

In the present era, there are two types of organizations existing in the business world:

A. Partnership Firm registered under Indian Partnership Act,1932

B. Company registered under Companies Act,1956

The limitations of the partnership firms and the rigidity of the companies has led to the birth of what we call it as LIMITED LIABILITY PARTNERSHIP (LLP).The various provisions of the companies act has led to a lot of litigations and divergent opinions of the court. The traditional partnerships are also considered unsuitable for multi-disciplinary combinations. In order to overcome the rigidity, limitations and the litigations LLP was introduced which came into effect from 1.4.2009. First LLP was formed on 2.4.2009 and since then LLP became a common business tool.

Concept of LLP

LLP is an alternative corporate business form that gives the benefits of limited liability of a company and the flexibility of a partnership. The LLP has perpetual succession irrespective of change in the partners. Like a company, it can enter into contract on its own and hold property in its name. It is a separate legal entity different from its partners. There is no concept of joint and several liabilities for the partners in LLP and the partners of LLP are not liable for each other's act.

Since LLP contains elements of both 'a corporate structure' as well as 'a partnership firm', LLP is a hybrid between a company and a partnership.

Since LLP is an ideal blend of partnership and company, it is a good substitute to the formation of a private limited company. It may not be a good substitute for small family owned business partnerships but is definitely a good substitute for the professional partnerships.

At the time when the concept paper on LLP was put on the website by MCA many people raised an obvious question. It was whether LLP can be formed for religious and charitable purpose? The LLP Act, 2009 came out with the law that LLP can be constituted for any business; however, the business must have a profit motive. In addition, there is no such restriction whether it can be formed only for professionals. It can be formed for any business but its ultimate and final objective should be to earn profits. Business here means any commercial activity like manufacturing, trading, export, consultancy, professional services, education, etc.

The key features of LLP, which make it as an embracing business tool, are as follows:

1. LLP shall have its legal status as a body corporate. LLP, like company enjoys perpetual succession.

2. LLP shall not have an upper limit on number of partners unlike partnership firms

While LLP will be a separate legal entity, liable to the full extent of its assets, the liability of its partners would be   limited to their agreed contribution to the LLP.

The various other features of LLP are explained through a comparison between LLP, partnership firms and company.

The various terms in relation to LLP can be explained as follows:

1. Designated partners:

Similar to partnership firms, designated partners are in general the partners of LLP. One can say that designated partners are similar to the 'active partners' of a partnership firm; however, designated partners are the ones responsible for all the compliance and the legal procedures of the LLP. LLP shall at least have two designated partners. Such designated partners shall be mandatorily required to have a designated partner's Identification Number (DPIN) on lines similar to the Director's Identification Number (DIN) in case of a company.
  

Who can be a designated partner?

Every LLP requires having two designated partners who shall be individuals of whom at least one shall be a resident of India. Incase if all the partners of an LLP are body corporate or in which one or more partners are individuals and body corporate, at least two individuals who are partners of such LLP or nominees of such body corporate shall act as designated partners.

2. LLP Agreement:

LLP Agreement means any written agreement between the partners of the LLPs or between the LLPs and its partners which determines the mutual rights and duties of the partners and their rights and duties in relation to that LLP (Section 2(1)(o) of LLP Act)

FORMATION OF LLP

The steps for incorporation of LLP are explained in a short manner considering the practical aspects. The registration and Incorporation of LLP are explained in Section 11 to 21 of Chapter III of LLP Act.

The steps are as follows :

STEP 1: Deciding the designated partners and uploading the digital signature certificate on the website : www.llp.gov.in

STEP 2: Obtaining the DPIN by filing the E-FORM 7 and paying Rs.100 as fees for obtaining the DPIN

STEP 3: Checking the availability of the name and reservation of name by filing FORM NO.1 giving the 6 proposed names. The name must bear the words "LLP".

STEP 4: Incorporation of LLP by filing the FORM NO.2 i.e., incorporation document and the statement along with the payment of the fees based upon the monetary value of the contribution of the partners

STEP 5: Filing of the LLP Agreement and partner details in FORM NO.3 & FORM NO.4

FDI in LLP

Foreign Direct Investment (FDI) has been a hot topic for discussion among various experts, media channels and among the government officials for some while now. The number of LLPs registered has increased in the past few years. Since LLP is a hybrid of the partnership structure as well as corporate structure, the foreign investors would have definitely thought that since LLP emulates most of the features of a company then why not invest in a flexible business organization called as LLP. Even though the FDI in a company is favorable, FDI in an LLP would definitely not mean losing money. Therefore, here is a closer view considering the FDI in LLP.

Who can invest? Any individual resident outside India; A company incorporated outside India
Who cannot invest? FIIs, LLP incorporated outside India, a trust registered outside India

Entry route for Investment FDI in LLPs would be allowed only through the government route i.e in those sectors where 100% FDI is allowed. However, FDI in LLP is prohibited in agricultural/plantation activity, print media or real estate business, activities where 100% FDI is not allowed, activities where there are FDI linked performance related conditions

The following points should be kept in mind keeping in view the FDI in LLP :

· Only cash considerations are allowed at present for FDI in LLP

· LLP cannot raise money through public, also cannot issue FCCBs, ADRs or GDRs

· LLP cannot make downstream investment in another LLP

· LLPs are not permitted to avail ECBs

THE Conversion process

A. Conversion of existing firms and companies to LLP

Any existing partnership firms, private limited companies or a public listed company can convert itself into an LLP by following the prescribed procedures as laid down under section 55 to 58 of LLP Act,2008 read with 2^nd, 3^rd and 4^th schedule of the LLP Act,2008. Following is the procedure for the mentioned conversion:

STEP 1 : Application for conversion( by all partners/members as the case may be) in:

FORM 17 – Conversion from partnership firm to LLP
FORM 18 – Conversion from private company to LLP
FORM 19 – Conversion from unlisted public company to LLP
              

STEP 2 : Payment of fees as the case may be

STEP 3 : Intimation to ROC for such conversion in FORM 14 within 15 days

STEP 4 : Submission of the incorporation documents to ROC

STEP 5 : Receipt of Certificate of Registration from ROC in FORM 19

An important point must be kept in mind while converting a listed/unlisted company to LLP. The company in order to convert itself into an LLP must not have any security interest on its assets subsisting.

B. Conversion from LLP to company

Even though such provisions are not yet made effective conversion from LLP to company is possible under section 565 of Companies Act, 1956.

Limitations of LLP

Although LLP is a solution to the unlimited liability partnerships and to the rigidity of the Companies Act, there is a major limitation to LLP. Many consider LLP Act as a plethora of penalties. LLP act is inadvisable for the small-scale enterprises. The penalties as prescribed in LLP Act ranges from Rs.100 to Rs.5, 00,000 once at a time. The reasons for such penalties can be contravention of any section, false declaration of any document, contravention of legal compliances, non-compliance with the annual return, etc

Conclusion and important points

1. Compliances are almost similar in the LLP Act as compared to the companies act. However, if we look at the various advantages of an LLP as compared to a company, we can opt for LLP instead of a company despite all the paper formalities and procedures.

2. The business organization incorporating itself as an LLP must have the words "LLP" in its name.

3. The provisions of Indian Partnership Act, 1932 are not applicable to the LLP.

4. LLP is not advisable for small-scale enterprises.

5. LLP act lays down high amount of penalties even for the smallest of the defaults. Moreover, penalties are not linked with the prescribed fees as given under Companies act, 1956.