Limited liability partnership (llp)

 

Limited Liability Partnership

 

 

Introduction

 

Limited Liability Partnership (LLP) is a corporate business vehicle that enables professional expertise and entrepreneurial initiative to combine and operate in flexible, innovative and efficient manner, providing benefits of limited liability while allowing its members the flexibility for organizing their internal structure as a partnership. This is a hybrid of partnership and company form  of business.

 

 

LLP in India

 

The president gave assent to the Limited Liability Partnership Bill on 7^th January, 2009. The enactment of Limited Liability Partnership Act 2008 was done and notified on 31.03.2009. The concept of LLP was first introduced in India in 2009 with the registration of the first LLP on 2.04.2009. Since then, over 10,000 LLPs have been formed so far as per the records of the Ministry of Corporate Affairs.

 

 

 

LLP in other countries

 

The concept of LLP first emerged likely in the early 1990s in United States of America, where initially, LLP was introduced in only two states.

 

 

LLPs are now common in many countries across the globe including Canada, China, Greece, Germany, Japan, Kazakhstan, Poland, Romania, Australia and various Gulf Countries.

 

 

Characteristics

 

• A body corporate with separate legal entity and perpetual succession.
• It is liable to the full extent of it assets but liability of the partners is limited to their agreed contribution in the LLP.
• No partner is liable on account of the independent or un-authorized actions of other partners, thus individual partners are shielded from joint liability.
• Organized and operates on the basis of an agreement (the mutual rights and duties of the LLP and its partners are governed by the agreement between the partners or between the LLP and the partners, known as ‘LLP Agreement’). In absence of an agreement as to any matter, the mutual rights and liabilities shall be as provided under Schedule I of the LLP Act.
• Provides flexibility without imposing detailed legal and procedural requirements.
• Enables professional/ technical expertise and initiative to combine with financial risk taking capacity in an innovative and efficient manner.
• Ideal for medium businesses, professionals, joint ventures, but not available for charitable organizations.

 

 

Advantages of LLP

 

·        No major investment

• Limited liability and less financial risk
• Commercially efficient vehicle
• No personal liability
• Internal flexibility
• No statutory compliances
• Perpetual succession
• Scope of expansion and growth

 

     Limitations of LLP

 

·        Cannot raise public money

·        Stringent rules on FDI

·        Compulsory disclosure of financial information

·        Lack of awareness among general public

 

 

Recent changes

 

The MCA (ministry of Corporate Affairs) is continuously striving to bring about improvements in the field of regulations governing LLP and their formation. Integration of the LLP site (www.llp.gov.in) with the MCA site (www.mca.gov.in) is one of the major changes that have taken place in LLP w.e.f. 11^th June 2012. Now all filings relating to LLPs have to be done through the MCA site only. The merging up of the sites has further simplified the procedure of formation of LLP and other filings related thereto.

 

Requirements of an LLP

 

·        Minimum of two partners are required for formation of an LLP, however, there is no limit to the maximum number of partners (a corporate body may also be a partner).

·        An initial LLP Agreement is to be filed within 30 days of incorporation of LLP. The user has to file the information in Form 3.

·        A “Statement of Accounts and Solvency” in the prescribed form shall be filed by every LLP with the Registrar every year.

·        Annual Return in Form 11 is required to be filed with the Registrar of Companies within 60 days of closer of the financial year. (Central Government has the authority to appoint inspectors to investigate the affairs of an LLP.)

 

 

Procedure for Formation of LLP

 

• Online Registration:  Register on ‘www.llp.gov.in’, the website developed by the Ministry of Corporate Affairs.
• Application for DIN or DPIN: All designated partners of the proposed LLP shall obtain DPIN (Designated Partnership Identification Number). One needs to file e-form for obtaining DIN or DPIN. In case one already has a DIN (Director Identification Number), the same can be used as a DPIN.
• Acquire/ Register DSC: All filings done by the LLPs are required to be filed with the use of Digital signatures by the person authorized to sign the documents. For this purpose a licensed Certifying Authority (CA) issues the DSC (Digital Signature Certificates) and then this DSC needs to be registered with LLP application.
• New User Registration: To file an e-form or to avail any paid service on LLP portal, first one must be registered as a user in the relevant user category, such as registered and business user.
• Reservation of name of LLP: Form 1 may be filled up by any partner or designated partner in the proposed LLP, where upto six choices can be indicated.
• Incorporation of LLP: once the form has been approved by the concerned official of the Ministry, an e-mail regarding the same will be received and the status of the form will get changed to ‘Approved’.
• Filing LLP Agreement: After incorporation of LLP, an LLP Agreement is to be filed within 30 days of incorporation. And also information regarding changes in LLP Agreement, if any, made therein.

 

 

Conversion of other entities into LLPs

 

The LLP Act 2008 allows the existing partnership firms/ an existing private company/ unlisted public company to convert into an LLP. A foreign LLP can also establish its place of business in India by filling Form 27. However, LLP Act prohibits an LLP from converting itself into a Company, though the Companies Act 1956, allows such conversions.

 

Merging and Winding up of LLPs

 

The manner, in which LLPs shall be allowed to amalgamate or merge, has been provided in the provisions of Section 60 to 62. Sections 63, 64, & 65 provide the provisions and procedures required to be adhered to when the affairs of LLPs are to be wound up (voluntary winding up as well as winding up by tribunal) or to be declared as Defunct.

 

 

 

Taxation of LLPs

 

The taxation of LLPs has not been provided in the LLP Act. The Finance Bill 2009 has made provisions in this regard, pursuant to which the taxation scheme of LLPs has been proposed to be introduced in the Income Tax Act.

 

 

Offences and Penalties

 

The Union Government has been empowered by the provisions contained in the LLP Act, to compound any offence punishable with fine only by collecting a sum not exceeding the amount of maximum fine prescribed for the offence; imprisonment too has been provided for in respect of violations.

Enabling provisions have also been made in the Act in respect to protection to “whistle blowers”.

 

 

FDI in LLP

 

The FDI (Foreign Direct Investment) in LLP has been allowed by the DIPP (Department of Industrial Policy and Promotion), subject to following restrictions:

·        FDI will be allowed only in LLPs which are engaged in the sector where 100% FDI is allowed through automatic route and where no performance linked restrictions, like minimum capitalization, etc., is imposed;

·        No FDI in LLP is allowed, if the investing-LLP is engaged in agricultural/plantation, print media or real estate;

·        An Indian company having FDI can invest in a LLP, provided that both the investing company and investee LLP are engaged in sector where 100% FDI is allowed through automatic route and where no performance linked restrictions, like minimum capitalization, , is imposed;

·        LLPs with FDI cannot make downstream investments;

·        Foreign contribution/investment is allowed in LLP if the contribution comes in the form of cash consideration by inward remittance or debit to NRE/FCNR accounts maintained by the authorized dealers;

·        If a LLP has FDI, then it can have a designated partner which is a company incorporated under the Companies Act, 1956 (Indian) and not any other body like LLP or trust;

·        For such LLP, the designated partner in order to be resident in India should satisfy the requirements prescribed in Foreign Exchange Management Act, 1999 in addition to requirements prescribed under proviso to Section 7 (1) of Foreign Exchange Management Act, 1999;

·        The designated partners are liable for compliances with LLP and subject to penalty, if any.

 

 

 

Need for LLPs in India

 

The role played by the entrepreneurs as well as the technical and professional manpower of India has been internationally acknowledged with the economic growth of the country. Therefore, combination of entrepreneurship, specialized knowledge and risk capital would act as an impetus for Indian Economy.

Lack of awareness among the common people about LLP form of business is a major cause of this form not being as popular as the partnership or company form of business. Though more than 10,000 LLPs have been formed so far, the figure is much less than the existing number of partnership and company form of business in India. LLPs provide combined advantages of traditional partnership and statute-based governance structure of Limited Liability Company.

In this regard, LLP is a perfect business form with its flexibility in operation, limited liability and other advantages, for the small and medium enterprises (which are most common in Indian economic structure) as well as for investment by venture capital. Thus there is an urgent need for a boost in the formation of LLPs in India for a more strong economy.

 

 

 

Conclusion

 

From the above article it can be concluded that LLPs are a hybrid between a company and a partnership as they contain the elements of both “a corporate structure” as well as “a partnership firm structure”. Because of this reason, LLPs are increasingly becoming the preferred vehicle of business for small and medium enterprise in India, particularly in the tertiary sector and organizations involving Professionals.