What is Limited Liability Partnership(LLP) ?
By way of the Limited Liability Partnership Act, 2008 the worldwide recognized form of business organizations named Limited Liability Partnership entities was introduced in India. A Limited Liability Partnership combines the advantages of both the Company and Partnership in a single form of organization. The important difference from that of traditional partnership is that a partner in LLP is not responsible for misconduct or negligence of another partner. All partners will have a limited liability for the protection of each individual within the partnership which is similar to that of the shareholders of a corporation. In LLP the partners have the right to manage the business directly, unlike corporate shareholders. The personal liability of the partners for any errors, incompetence, negligence or omissions of the employees in LLP or other agents is also limited.
Nature of Limited Liability Partnership
- LLP is generally formed to carry on a lawful business, defined to include any trade, business or profession.
- LLP is a body corporate having a legal entity separate from its partners, also having a perpetual succession. Changes in the partners of an LLP shall not affect the rights, liabilities, and existence of the LLP.
- LLP can acquire, hold, develop or dispose of a property.
- LLP can sue, can be sued and may possess a common seal and do such acts as body corporate are lawfully allowed to do.
- Any liabilities associated to LLP is met out of the property of the LLP.
Process of Registration
Following is the step by step procedure to incorporate Limited Liability Partnership:
Step 1: Digital Signature Certificate (DSC)- Since all the documents for LLP registration are filed online, DSC is necessary for all the designated partners.
Step 2: Director Identification Number- It is necessary to apply for DIN of all the designated partners or those intending to be designated partner of the proposed LLP.
Step 3: Reservation of Name- MCA Portal system provides the list of closely resembling names of existing companies/LLPs based on the search criteria filled up. It is necessary to file for the reservation of name of the proposed LLP in Form 1.
Step 4: Incorporation of LLP- Form 2 is the application form for the incorporation of the LLP.
Step 5: File Limited Liability Partnership Agreement– LLP agreement is filed in Form 3 on the MCA Portal.
Documents Required to Register LLP
Documents of Partners:
- PAN Card/ ID Proof of the Partners
- Address Proof of the partners
- Residence Proof of Partners
- Passport (in case of Foreign Nationals/ NRIs)
Documents of LLP:
- Proof of Registered Office Address
- Digital Signature Certificate
Advantages of a Limited Liability Partnership
- Low cost of formation
- Easier management
- No minimum capital contribution is required
- No restriction as to the maximum number of partners
- Less compliance requirement
- Less Government intervention
- Multidisciplinary Professional LLP can be registered which wasn’t allowed earlier
- Audit requirement is only in case of contributions exceeding Rs. 25 lakh or turnover exceeding Rs. 40 lakh
- Easy to dissolve or wind-up
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Disadvantages of a Limited Liability Partnership
- LLP formation is not allowed for non-profit objectives and purpose
- Money cannot be raised from public
- One designated partner should be a citizen of India
- LLP provides for two partners, thus in case it has to be converted into a Private Limited, there have to be seven partners according to the Companies Act 1956
Drafting of LLP Agreement
LLP Agreement is a written agreement between the partners of the limited liability partnership or between the limited liability partnership and its partners which determines the mutual rights and duties of the partners and their rights and duties in relation to that limited liability partnership. According to the LLP Act, 2008 it is not mandatory to form an LLP Agreement. In the absence of such agreement the mutual rights of Partners and in relation to LLP will be determined as per Schedule I of the LLP Act 2008. It is advisable to have a legally drafted agreement from qualified professionals because every business and owners have their own way to manage and run the Business and therefore the standard clause of the agreement will not be applicable in majority cases.
Certain features that can be inserted in an agreement are:
- Form and Manner of Contribution between parties
- Profit and loss sharing ratio
- Business to be carried on
- Rights and Liabilities of Partner
- Admission and cessation of Partners
- Duties of Partners
- Partners accountable/ authorized for banking process
- Specific decisions like Investment, taking/giving a loan, disposition of property of LLP etc to be made by majority partners
- The requirement of disclosure of substantial interest of Partner in transactions to be entered by the LLP
- The manner of dispute resolution
Conversion of Existing Firms into LLP
- A firm may apply to the Registrar of Companies in the form prescribed along with the prescribed documents for converting itself into an LLP. It is important to note that all the partners of the firm become partners of the LLP.
- Assets and liabilities of the firm shall be transferred on LLP registration, to and vest in the LLP and the firm will stand dissolved.
- It is important to note that every official correspondence of the LLP should bear a statement (not later than fourteen days after the registration) that it was converted from a firm into an LLP, along with the date of registration. This activity shall be carried on for a period of twelve months commencing not later than fourteen days after the date of LLP registration.
Converting an Existing Private Limited Company or an Unlisted Public Company into LLP
An existing Private Limited Company or an unlisted Public Company may apply to the Registrar of Companies in the form prescribed along with the prescribed documents for converting itself into an LLP, provided the following conditions are fulfilled:
- At the time of making an application, there should be no security interest subsisting in assets of the company
- The partners of the LLP comprise all the shareholders of the company
After the conversion of all assets and liabilities of the company shall be transferred to the LLP and the company will stand dissolved. It is important to note that every official correspondence of the LLP should bear a statement that it was converted from a company into an LLP, along with the date of registration. This activity shall be carried on for a period of twelve months commencing not later than fourteen days after the date of Limited Liability Partnership registration.
To know more about conversion read: Conversion of Partnership into LLP
Note: In the case of a Foreign LLP it can establish a place of business in India and its regulatory mechanism will be as per the rules prescribed by the Central Government.
Compliances of LLP
Book of Accounts
It is mandatory to keep a Book of Account relating to its affairs each year, and it must be kept according to the double entry system of accounting at the registered office. If the turnover is more than Rs. 40 lakhs or capital is over 25 lakhs, the accounts must be audited by a Chartered Accountant.
Annual Return Filing
An LLP will have to file 2 types of MCA annual return each financial year, namely Form 8 & Form 11.
Part A in Form 8 consists of Statement of Solvency and Part B consists of Statement of Accounts, Statement of Income & Expenditure. This form is filed within 30 days from the end of 6 months of the financial year along with some prescribed fee, digitally signed by 2 designated partners and certified by a chartered accountant/company secretary/cost accountant.
To be filed within 60 days from the closure of the financial year with the prescribed fee, i.e. 30th of May each year. Form 11 contains information about the number of partners, a total number of partners, total contribution received by all partners, details of body corporate as partners and summary of partners.
Income Tax Return
Filing of income tax return each year is mandatory irrespective of revenue or profits.
Maintenance of Documents
All LLPs are required to maintain its incorporation document, names of partners and changes made, proof of fee payment, statement of account & solvency & annual return filed by LLP with the Registrar at its registered office.