Understanding Limited Liability Partnership and its Incorporation

“Two is better than one” basically this concept is foundation of a traditional partnership firm where two or more persons get together to carry on some lawful business and share profit and loss among themselves as agreed upon by them.

Partnership Firm as a form of business has its own restriction and have limited reach among public, in order to enhance the business through partnership a hybrid form of business structure was introduced that has basic features of partnership merged with the features of a Company.

Enactment of LLP Act, 2008

Business in form of LLP is not a new concept; countries like UK, USA, Australia, and Japan were already practicing business in form of LLP before its introduction in India as a form of business.

In India, The Limited Liability Partnership Bill, 2006 was introduced in the Rajya Sabha on 15th December, 2006 and was referred to the Standing Committee on Finance on 27th December, 2006 by the Hon’ble Speaker, in consultation with Chairman, Rajya Sabha for examination and report thereon. This was passed by the Rajya Sabha on 24th October, 2008. The Bill was passed by Lok Sabha on 12th December, 2008.

It received assent of the President of the India on 7th January 2009 as LLP Act, 2008 and has been in effect since 31stMarch 2009.

What are the Advantages of LLP Formation?

The basic intent of creating such new form of business is to overcome the limitations of partnership firm such as liability of partners are unlimited and their personal property can also be attached in case of any legal dispute.

Small businessmen, Professionals like Chartered Accountant, Company Secretary etc. who generally practice in form of partnership now gets an edge by introduction of LLP where they get flexibility and ease of management of a Partnership Firm along with a corporate structuring with limited liability and other perks.

Some of the advantages of LLP Registration are summarised below:

  1. LLP is a body corporate having a separate legal entity and perpetual succession.

  1. Being regulated by Limited Liability Partnership Act, it provides more sense of security to its partners and other stakeholders of the LLP.

  1. It enjoys organisational flexibility in its operation since its internal working is governed through a deed which can be modified as per the mutual will of all partners.

  1. LLP gets priority in funding from private investor or banks over sole proprietorship or partnership.

  1. LLP firm registration does not require much hassle and easily gets incorporated.

  1. LLP structuring suits in various industries like small enterprise, professional group, services sector etc.

  1. Incorporating LLP does not require any minimum capital for contribution.

How LLP is Structured and Managed?

A partnership arrangement between two or more than two partners who gets them registered under The Limited Liability Partnership Act, 2008 whereby partners intends to carry an objective clearly mentioned through an agreement is known as an arrangement of Limited Liability Partnership.

Below given are some features of LLP as provided under LLP Act, 2008 (“Act”).

  1. Status of body corporate: Section 3 of the Act states that LLP is a body corporate which enjoys status of separate legal entity and perpetual succession meaning thereby partners of LLP are considered separate from LLP and partners may come and go but LLP will remain in existence.

  1. Use of word LLP: Every entity incorporated as LLP under LLP Act 2008 must add word “LLP” or “Limited Liability Partnership” at the end of its name in accordance with Section 20 of the Act.

  1. Designated Partners and Partners: LLP shall have at least two designated partners who are individuals and at least one should be resident in India as per Section 7 of the Act further Body corporates can also be partners of LLP where nominee of such body corporates will be considered as designated partner.

  1. LLP Agreement: All the mutual rights and liabilities of partners will be governed by LLP contract including its objectives, duties, manner of induction and cessation, termination and other important clause as per definition of LLP agreement given under Section 2(o) of the Act.

  1. Contribution: The contribution of each partner shall be accounted for and disclosed in the accounts of LLP along with its nature and amount. Contribution can be tangible or intangible, movable or immovable including money, promissory notes and other agreement to contribute cash or property as per Section 32 of the Act. Obligation of partner to contribute money or property shall be as per the LLP agreement.

  1. Responsibility of Designated Partners: Designated partner of the LLP is basically responsible for overall functioning and management of the LLP including conducting audit, intimation to Registrar in any change in LLP, Filing annual return, statement of assets and liability etc. and they shall be held liable for strict penal provision in case of non-compliance by the LLP.

  1. Relationship of Partners: The mutual rights and duties of the partners of LLP and LLP and its Partners will be governed by LLP agreement as defined under Section 23 of the Act.
  1. Partner Status: As per Section 26 of the Act, every Partner of LLP is agent of LLP for the purpose of carrying business of LLP.

  1. Liability of Partners: Partners are not held personally liable directly or indirectly solely for the reason of being partners, unless they have acted without authority and breached clauses of partnership by wrongful act as per Section 28 of the Act.

  1. Liability of LLP: In accordance with Section 27(1) of the Act, LLP is not bound by anything done by its partners outside scope of their authority however if partners exercising their authority acts illegally than LLP will be liable for the wrongful acts of the partner. The liabilities of LLP shall be met out of the property of the LLP.

  1. Unlimited Liability in case of Fraud: Section 30 of the Act states that, If any LLP or its partners act intentionally to defraud its creditors or any other party then the liability of LLP and partners who acted with intent of fraud shall be unlimited for all or any of the debts or other liabilities of the LLP further penal provisions will also be applicable in such scenario.

  1. Maintenance of Books and Accounts: LLP shall maintain proper books of account on cash or accrual basis and as per double entry system of accounting at its registered office address in accordance with Section 34 of the Act.

  1. Audit: The accounts of every LLP shall be audited in accordance with Section 34 of the Act and Rule 24 of LLP, Rules 2009 (“Rules”).

As per rule 24 of LLP Rules 2009 below given is the criteria for LLP to conduct audit:

Turnover>Rs. 40 Lakhs

Contribution>Rs.25 lakhs

If any LLP want to gets its account audited even if the limit is not exceeding, it can do so after following rules given in LLP Rules 2009.

  1. Obligation of LLP to intimate events to the Registrar: As we know management and administration of LLP is governed through LLP Act 2008 and to keep a proper check on LLP, Act requires LLP to make certain disclosures and give proper intimation of events occurring in LLP.

What is the process to register LLP

Section 4 of the Act and rule 11 of the Rules states for procedure for incorporation of a LLP which is represented as below:

  1. Apply for Digital Signature (DSC) of proposed partners of the LLP, generally class 2 DSC serves the purpose for filing forms at the portal of Ministry of Corporate Affairs. However, Controller of Certifying Authorities has issued a guidance note on 26th November 2020, stating that procurement of new class 2 DSC shall discontinue from 1st January 2021.

  2. No new 2nd Class digital signature can be issued after December 2020 but people can get their digital signature renewed before 31st December 2020 and same shall remain valid till the time it doesn’t expire and only class 3 dsc would be procured and used.

  1. Ascertain name of the LLP and check the availability of the same in accordance with Section 4 of the Act and rule 18 of the Rules and file name application in Form Run LLP

  1. After name approval file LLP-FiLLiP with Central Registration Centre for application of incorporation on LLP and file relevant documents like subscribers consent, consent of partners, details of LLP etc.

    Alternatively FiLLiP can be filed for Reservation of Name, application and allotment of DIN and incorporation. Maximum 2 designated partner all are allowed to apply for DIN through this Form.

  1. After scrutinising of documents Registrar will approve the incorporation and issue certificate of registration to LLP

  1. After incorporation LLP is required to file Form 3 to file LLP agreement within 30 days from the date of incorporation.

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