Limited Liability Partnership – An overview

CA. Amit Daga (Finance Controller CA. CS. CFA. CIFRS. M.COM. ) (9017 Points)

06 June 2009

With the growth of the Indian economy, the role played by its entrepreneurs as well as its technical and professional manpower has been acknowledged internationally. It is felt opportune that entrepreneurship, knowledge and risk capital combine to provide a further impetus to India’s economic growth. In this background, a need has been felt for a new corporate form that would provide an alternative to the traditional partnership, with unlimited personal liability on the one hand, and, the statute-based governance structure of the limited liability company on the other, in order to enable professional expertise and entrepreneurial initiative to combine, organize and operate in flexible, innovative and efficient manner.

In 1991 Texas enacted the first LLP statute, largely in response to the liability that had been imposed on partners in partnerships sued by government agencies in relation to massive savings and loan failures in the 1980s. The Texas statute protected partners from personal liability for claims related to a copartner's negligence error, omission Incompetency, or malfeasance. It also permanently limited the personal liability of a partner for the errors, omissions, incompetence, or negligence of the partnership's employees or other agents. By the mid-1990s, at least twenty-one states and the District of Columbia had adopted LLP statutes.

Keeping in mind the need of the day, the Parliament enacted the Limited Liability Partnership Act, 2008 which was published in the official Gazette of India on January 9, 2009 and has been notified with effect from 31 March 2009. However, the Act, has been notified with limited sections only. The rules have been notified in the official gazette on April 1, 2009.

The salient features of the LLP Act 2008 inter alia are as follows: -

General

1. The LLP has an alternative corporate business vehicle that would give the benefits of limited liability but allows its members the flexibility of organizing their internal structure as a partnership based on an agreement.

2. LLP shall be a body corporate and a legal entity separate from its partners. It will have perpetual succession.

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

4. LLP is managed as per the LLP Agreement, however in the absence of such agreement the LLP would be governed by the framework provided in Schedule 1 of Limited Liability Partnership Act, 2008.

5. The Indian Partnership Act, 1932 shall not be applicable to LLPs.

6. The Registrar of Companies (Roc) shall register and control LLPs also.

Partners

1. Every LLP shall have at least two partners and shall also have at least two individuals as Designated Partners, of whom at least one shall be resident in India.

2. There shall not be any upper limit on number of partners in an LLP unlike an ordinary partnership firm where the maximum number of partners can not exceed 20.

3. No partner would be liable on account of the independent or un-authorized actions of other partners or their misconduct. The liabilities of the LLP and partners who are found to have acted with intent to defraud creditors or for any fraudulent purpose shall be unlimited for all or any of the debts or other liabilities of the LLP;

LLP Agreement

For the purpose of forming a LLP, there should be agreement between the partners interested in forming the LLP to be known as LLP Agreement. The said Agreement forms the basis of the formation of LLP and lays down its founding structure. The LLP agreement is an agreement between the Partners and between the LLP & its partners.

The basic contents of Agreement are:

· Name of LLP

· Name of Partners & Designated Partners

· Form of contribution

· Profit Sharing ratio

· Rights & Duties of Partners

In case no agreement is entered into, the rights & duties as prescribed under Schedule I to the LLP Act shall be applicable. It is possible to amend the LLP Agreement but every change made in the said agreement must be intimated to the Registrar of Companies.

LLP Name

Selection of the name for the proposed LLP to be incorporated is one of the important process of the entire incorporation process, ideally the name of the LLP should be such which represents the business or activity intended to be carried on by the LLP. Before selecting the name of the LLP, it is necessary to evaluate the proposed name under the following given criteria:

LLP with Similar Name/ Prohibited Word/ Words Based on Approval/ Names reserved for Foreign LLP/Companies

Financial Disclosures

1. The LLP shall be under an obligation to maintain annual accounts reflecting true and fair view of its state of affairs.

2. A statement of accounts and solvency (SAS) and Annual Return shall be filed by every LLP with the Registrar every year.

3. Audit requirement only in case of contributions exceeding Rs. 25 lakh or turnover exceeding Rs. 40 lakh

Assignment & Transfer of Partnership Rights

1. Rights of a partner to share profits and losses of LLP & to receive distributions are transferable either wholly or in part.

2. Transfer of right does not cause disassociation of the partner or dissolution and winding up of LLP

3. Transfer of right does not entitle the transferee or assignee to participate in the management or conduct of activities of LLP or access information concerning the transactions of LLP.

Conversion to LLP

A firm, private company or an unlisted public company is allowed to be converted into LLP in accordance with the provisions of the Act.

Merger, Amalgamation

Provisions have been made for corporate actions like mergers, amalgamations etc.

Winding up & Dissolutions

The winding up of the LLP may be either voluntary or by the Tribunal to be established under the Companies Act, 1956. Till the Tribunal is established, the power in this regard has been given to the High Court.

Voluntary Winding up: Under this, the partners may between themselves decide to stop and wound up the operations of the LLP.

Compulsory winding up- A limited liability partnership may be compulsorily wound up by the Tribunal,—

1. if the limited liability partnership decides that limited liability partnership be wound up by the Tribunal;

2. if, for a period of more than six months, the number of partners of the limited liability partnership is reduced below two;

3. if the limited liability partnership is unable to pay its debts;

4. if the limited liability partnership has acted against the interests of the sovereignty and integrity of India, the security of the State or public order;

5. if the limited liability partnership has made a default in filing with the Registrar the Statement of Account and Solvency or annual return for any five consecutive financial years; or

6. if the Tribunal is of the opinion that it is just and equitable that the limited liability partnership be wound up.

Advantages:

· Renowned and accepted form of business worldwide in comparison to Company.

· Low cost of Formation.

· Easy to establish.

· Easy to manage & run.

· No requirement of any minimum capital contribution.

· No restrictions as to maximum number of partners.

· LLP & its partners are distinct from each other.

· Partners are not liable for Act of other partners.

· Less Compliance level.

· No exposure to personal assets of the partners except in case of fraud.