Limited Liability Partnership - Concept & formation procedure

 

The Concept of LLP was well known in the united states since the 1990’s, but it was first known in India in 2009, with the enactment of the Limited Liability Partnership Act, 2008. The main idea behind the concept of LLP was to save the partners from being held liable for the debts of the company, and sell their assets in order to pay company debts. LLP being a different entity from its partners, the liability of the partners is limited to the amount of contribution or investment they decide to put in.

 

Its a legal entity having the features of a Company as well as a partnership firm. Just like companies, it can have the benefit of liability separate from the entity, i.e. no partner shall be liable for the misconduct of the other and like a partnership firm it has the advantage of flexibility in its internal structure. LLP is generally suitable for proprietors who intend to start up with low investment and low cost. Since there is no minimum capital requirement and also the cost of formation is less than that of incorporating a company.

 

Features of LLP

  1. Minimum 2 Partners: At least 2 Designated Partners are required to form an LLP, out of which at least one should be an Indian resident. But there is no limit for maximum partners. Thus it can have any number of partners. Partners can be individuals or corporate bodies.

  2. Contribution: The partners have to bring in some kind of contribution/investment for formation of LLP. Contribution can be monetary or in kind. Thus it can contribute either in cash, or any other movable or immovable, tangible or intangible property.

  3. LLP Agreement: It's a Contract made between the partners.The Partners of LLP need to have an agreement containing the rules and regulations and clauses about how the LLP will function example the profit sharing clauses, the appointment of new partner, or resignation of existing partner etc.

  4. Name ends with LLP: The Name of the LLP shall have the words “LLP” or Limited Liability Partnership at the end of its name, for ex. “Abc designs & Services LLP”



Some of the advantages of an LLP are

  1. Limited Liability: Unlike a general partnership, an llp is a separate legal entity from its partners. Thus the partners are not held liable for the liabilities of the llp. Any debts or liabilities against the company shall not be required to be paid at the cost of partner's assets. Whereas in general partnership the partners share the profit as well as the losses of the partnership

  2. Flexibility: LLP enjoy flexibility in maintaining its internal structure. Each can decide upon what amount of contribution they prefer to invest in the LLP. Partners can decide the terms and conditions to run the business. An LLP agreement is more flexible than a Company's document. It provides more flexibility as to what profits are allocated to individual members of the LLP from year to year basis.

  3. Easy to incorporate : Compared to incorporation of a company, an LLP is simple. The steps involved are somewhat similar to company incorporation, but the cost is less in case of Companies. The document work is also less in LLP formation as Compared to Companies.

  4. No Audit requirement till a certain limit: Unlike Companies, an LLP is not required to get its accounts audited unless its capital exceeds Rs 25 lakh or turnover exceeds Rs 40 lakh.

  5. No minimum capital required: LLp does not have a requirement of prescribed minimum capital. Partners can come together with any amount of investment in the form of money or kind and form an LLP.



Steps to incorporate an LLP:

  1. Apply for Digital Signature: Since all the forms are required to be filed online and signed digitally,  the partners need to create a digital signature for the same. It takes around 3 to 4 days to get a digital signature certificate.

 

  1. D.I.P.I.N: Designated Partner Identification is a unique identification number allotted to the designated partners. All the designated partners are required to obtain a designated identification number from the government.

 

  1. Name approval: The partners have to file the desired name of the LLP for approval from the ministry of corporate affairs. The names should be unique and not identical with the names of already registered Companies or LLP. The process of name approval takes around 5 to 6 days.

 

  1. Drafting &  of LLP Agreement: LLP agreement containing the clauses of regulating the LLP, defining the relationship of partners, set out the profit and loss sharing ratios, etc

 

  1. Filing for formation of LLP: once the desired name of the LLP is approved, the form for incorporation of LLP can be filed with the ministry of corporate affairs. The form contains the details about the proposed business activity of the company, Contribution of the Partners and consent letters of the partners stating their willingness to form an LLP. After filing for formation of the LLP, if all the documents are correct and filed properly, the ministry shall approve the same and issue a Certificate of Incorporation to the LLP.

 

  1. Filing of LLP agreement: Once the incorporation is approved, the LLP agreement on a stamp paper duly signed shall be filed with the ministry.



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Comment by CS Sneha on August 7, 2015 at 12:46pm

For long term perspective, faster growth and bigger funds a private Ltd would be advisable.

Comment by prasad on August 7, 2015 at 12:29pm

Which is better? LLP or PVT LTD?

Comment by CS Sneha on August 7, 2015 at 11:04am

Hi Prasad,

1. From taxation point of view LLP is beneficial if compared with private company. LLP is taxed just like a partnership firm and after deduction of partners remuneration.Also surcharge & Dividend distribution is not applicable to LLP's.

2. Addition of director/ partner is a simple process

3.Conversion of LLP into Pvt or Public Company is not allowed under the LLp act, and also no provisions are available in companies act, but the ministry of corporate affairs says" that enabling provisions would be required to be made in the Companies Act for such conversion. Necessary action in this regard would be taken when Companies Act would be revised". So we can expect the provisions of conversion of llp in near future as the formation of number of LLP's have increased.

4. LLP cannot issue IPO. Cannot raise funds from public

Comment by prasad on August 7, 2015 at 9:46am

Hello Sneha,

How beneficial LLP is, in terms of taxation, attracting funds, adding director/ partner, converting to Pvt/ public ltd., IPOs

- Prasad

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