• LLP: Limited Liability Partnership

  • The Bullet Points Of The Limited Liability Partnership (LLP) Are As Follows:

    • The LLP:- It is a body corporate, a separate legal entity. It contains elements of both a corporate structure as well as a partnership firm structure and therefore it is called a hybrid between a company and a partnership. It is is a legal entity, separate from its partners. It operates on the basis of an Agreement. It is liable to the full extent of its assets. It is can continue its existence irrespective of changes in partners. It is is capable of entering into contracts and holding property in its own name. The management-ownership divide inherent in a company is not there in a limited liability partnership. The essential requirement for setting up LLP is carrying on a lawful business with a view to profit. The LLP cannot be formed for a charitable purpose. The provisions of Indian partnership act, 1932 or Companies Act, 1956 (As amended upto date) are not be applicable to LLPs. The LLPs, particularly those as may be engaged in the services or technology-based sectors, may provide services globally. This may require any number of its partners to locate them abroad. There is no need for the designated partners to out-number partners located abroad. The LLP structure is available in countries like United Kingdom, United States Of America, Australia, and Singapore. Various Committees have so far been formed and ample of recommendations have been received so far on the issue of LLP, some of such Committees are: Naresh Chandra Committee; Bhat committee (1972); Naik committee (1992); Expert committee on development of small sector enterprises headed by sh. Abid hussain in 1997, and study group on development of small sector enterprises (sses) headed by dr. S P Gupta (2001); Committee on regulation of private companies and partnerships headed by sh. Naresh Chandra (2003). Dr. J J Irani committee) (2005). The LLP Act 2008 allows Foreign Nationals including Foreign Companies & LLPs to incorporate a LLP in India provided at least one designated partner is resident of India. However, the LLP/Partners would have to comply with all relevant Foreign Exchange Laws/ Rules/ Regulations/ Guidelines. Every limited liability partnership shall have either the words “limited liability partnership” or the acronym “LLP” as the last words of its name. The name can be reserved by ROC on approval of Form 1, for a period of 3 months from the date of intimation by the Registrar. However, Foreign LLP/Companies have an option to reserve their existing names, under which they are operating outside India, for a period of 3 years in India, which can be further renewed on application to Registrar in Form 25. It has been provided in the Act that a document may be served on a LLP or a partner or designated partner by sending it by post or by any other mode (to be prescribed under Rules) at the registered office and any other address specifically declared by the LLP for the purpose in such form and manner as may be prescribed (in the rules). Thus, an LLP shall have option to declare one more address (other than the registered office) for getting statutory notices/letters etc. from Registrar. Persons, who subscribed to the “Incorporation Document” at the time of incorporation of LLP, shall be partners of LLP. Subsequent to incorporation, new partners can be admitted in the LLP as per conditions and requirements of LLP Agreement. A person may cease to be a partner in accordance with the agreement or in the absence of agreement, by giving 30 days notice to the other partners. A person shall also cease to be a partner of a limited liability partnership on his death or dissolution of the limited liability partnership. Notice is required to be given to ROC when a person becomes or ceases to be partner or for any change in partners. Every partner shall inform the LLP of any change in his name or address within a period of fifteen days of such change. The LLP, in turn, would be under obligation to file such details with the Registrar within thirty days of such change in Form 4. The partner’s contribution may consist of both tangible and/or intangible property and any other benefit to the LLP. The monetary value of contribution of each partner shall be accounted for and disclosed in the accounts of the limited liability partnership in the manner as may be prescribed in the rules. A partner may lend money to and transact other business with the LLP and shall have the same rights and obligations with respect to the loan or other transactions as a person who is not a partner. A partner’s economic rights (i.e. rights of a partner to a share of the profits and losses of the LLP and to receive distribution at the time of winding up) in the LLP shall be transferable. However, such a transfer shall not by itself cause the partner’s disassociation or a dissolution and winding up of the LLP. However, such transfer shall not entitle the transferee or assignee to participate in the management or conduct of the LLP’s activities. Therefore, the transferee would not be deemed to be a ‘partner’ of the LLP just because a partner has transferred him the ‘economic rights’. For becoming a partner of LLP, the manner specified in the LLP Agreement or the provisions of the Act would have to be followed. Since LLP shall be in the form of a body corporate, it is proposed that to address various situations applicable to LLPs as such, the relevant provisions of the Companies Act, 1956 may be made applicable to LLPs at any time in the future by Notification by Central Government, with such changes or modifications as appropriate. Both designated partners and ordinary partners, are mandatorily required to verify the details of their Designated Partners and Partners.  Designated Partner details include monetary value of contribution, Percentage (%) of profit sharing, residential status, occupation, number of companies/ LLPs in which the person is a director or designated partner.  
    • The Partners in a LLP:- The liability of the partners of the LLP 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 created by another partner’s wrongful business decisions or misconduct. Mutual rights and duties of the partners within a LLP are governed by an Agreement between the partners or between the partners and the LLP as the case may be. The LLP, however, is not relieved of the liability for its other obligations as a separate entity. Every partner of an LLP would be an agent of the LLP but not of the other partners. Liability of partners shall be limited except in case of unauthorized acts, fraud and negligence. But a partner shall not be personally liable for the wrongful acts or omission of any other partner. An obligation of the limited liability partnership whether arising in contract or otherwise, is solely the obligation of the limited liability partnership. The liabilities of LLP shall be met out of the property of the LLP. The Act provides that any person (not being a partner in any LLP), who by words spoken or written or by conduct, represents himself, or knowingly permits himself to be represented to be a partner in a LLP (known as ‘partner by Holding out’) is liable to any person who has on the faith of any such representation given credit to the LLP, whether the person representing himself or represented to be a partner does or does not know that the representation has reached the person so giving credit. It has further been provided that where any credit is received by the LLP as a result of such representation, the LLP shall, without prejudice to the liability of the person so representing himself or represented to be a partner, be liable to the extent of credit received by it or any financial benefit derived thereon. After a partner's death the business is continued in the same LLP name, the continued use of that name or of the deceased partner's name as a part thereof shall not of itself make his legal representative or his estate liable for any act of the LLP done after his death. For statutory compliances, at least one designated partner (DP) is available in India for at least six months for regulatory compliance requirements. The LLPs would have freedom to appoint more than one resident as DP. LLP as an entity would always remain liable for regulatory or other compliances. Civil liability on such a partner would be adjudicated by the courts under civil law which recognizes ‘foreign awards’. Criminal liability would require adjudication/ enforcement by the courts including using the extradition process. Position would be similar to the cases of directors of companies who are foreign nationals. There is no restriction on number of LLPs in which a designated partner may become designated partner, just as there is no restrictions on a person becoming director in any number of companies.
    • Advantage of an LLP: (i) It renders the benefits of limited liability of a company, as also the Flexibility of a partnership; (ii) It has perpetual succession; (iii) It provides flexibility without imposing detailed legal and procedural requirements; (iv) It enables professional/technical expertise and initiative to combine with financial risk-taking capacity in an innovative and efficient manner; (v) LLP has more flexibility and lesser compliance requirements as compared to a company;
    • Difference between LLP and partnership firm: Under “traditional partnership firm”, every partner is liable, jointly with all the other partners and also severally for all acts of the firm done while he is a partner. A partnership firm involves full joint and several liabilities of the partners. Under LLP structure, liability of the partner is limited to his agreed contribution. Further, no partner is liable on account of the independent or un-authorized acts of other partners, thus allowing individual partners to be shielded from joint liability created by another partner’s wrongful acts or misconduct. The traditional partnerships are also considered unsuitable for multi-disciplinary combinations comprising a large number of partners, seeking a flexible working environment but with limited liability. LLP structure would promote growth and enable such firms/enterprises expand their trade/business or services across states in india as also abroad.
    • LLP and a joint stock company: A basic difference between an LLP and a joint stock company lies in that the integral governance structure of a company is regulated by statute (i.e. Companies Act, 1956) whereas in an LLP, it would be by a contractual agreement between partners.
    • Who can form LLP: Any two or more persons associating for carrying on a lawful business with a view to profit may set up an LLP. The LLP is not restricted to certain classes of professionals alone.
    • Why LLP: India has witnessed considerable growth in services sector and the quality of our professionals is acknowledged internationally. It is necessary that entrepreneurship knowledge and risk capital combine to provide a further impetus to our impressive economic growth. Equally the services sector promises an economic opportunity similar to that provided by information technology (IT) over the past few years. It is likely that in the years to come Indian professionals would be providing accountancy, legal and various other professional/technical services to a large number of entities across the globe. Such services would require multidisciplinary combinations that would offer a menu of solutions to international clients.
    • Those who prefer to be LLP: (i) professionals and enterprises engaged in any scientific, technical or artistic discipline, for any activity relating to research production, design and provision of services; (ii) enterprises in new knowledge and technology based fields where the corporate form is not suited; (iii) professionals such as chartered accountants (cas), cost and works accountants (cwas), company secretaries (css) and advocates, etc.; (iv) venture capital funds where risk capital combines with knowledge and expertise; (v) small sector enterprises (including micro, small and medium enterprises); (vi) firms/enterprises engaged in biotech, information technology, intellectual property; (vii) producer companies in handloom, handicrafts sector; (viii) persons providing services of any kind.
    • Statutory Compliances: LLPs have to strictly adhere to and observe the statutory provisions concerning the disclosures, audit and filing of return, etc. A minimum of two partners will be required for formation of an LLP. There will not be any limit to the maximum number of partners. Appointment of at least two “Designated Partners” shall be mandatory for all LLPs. “Designated Partners” shall also be accountable for regulatory and legal compliances, besides their liability as ‘partners, per-se”. Bodies Corporate can also become a partner in LLP. However, at least two Designated Partners have to be individuals, and out of the two, at least one of the Designated Partner has to be a resident of India. Every Designated Partner would be required to obtain a “Designated Partner’s Identification Number” (DPIN) on the lines similar to “Director’s Identification Number” (DIN) required in case of directors of companies. Enabling provisions have been made to prescribe under rules conditions, which would have to be fulfilled by an individual who is eligible to be appointed as a ‘designated-partner’. LLPs shall be registered with the Registrar of Companies (ROC), after following the provisions specified in the LLP Act. Every LLP shall have a registered office. An Incorporation Document subscribed by at least two partners shall have to be filed with the Registrar in a prescribed form. An LLP shall be under obligation to maintain annual accounts reflecting true and fair view of its state of affairs. A “Statement of Accounts and Solvency” in prescribed form shall be filed by every LLP with the Registrar every year. The accounts of every LLP shall be audited in accordance with Rule 24 of LLP, Rules 2009. Such rules, inter-alia, provide that any LLP, whose turnover does not exceed, in any financial year, forty lakh rupees, or whose contribution does not exceed twenty five lakh rupees, is not required to get its accounts audited. However, if the partners of such limited liability partnership decide to get the accounts of such LLP audited, the accounts shall be audited only in accordance with such rule. No mandatory insurance has been proposed in the Act. It would be difficult to assess insurance requirements of different types and sizes of LLPs. This would depend upon the nature of commercial risk attached with work or assignment handled by each. Applying common insurance requirements across a class of LLPs would result in increasing their costs of operation. Therefore, the underlying concern as to the credit worthiness of the LLP in the event of a contractual default is being addressed through statutory provisions for solvency declaration, disclosure of financial information and audit. Every LLP would be required to file annual return in Form 11 with ROC within 60 days of closer of financial year. The annual return will be available for public inspection on payment of prescribed fees to Registrar. Registrar would have power to obtain such information which he may consider necessary for the purposes of carrying out the provisions of the Act, from any designated partner, partner or employee of the LLP. He would also have power to summon any designated partner, partner or employee of any LLP before him for any such purpose, in case the information has not been furnished to him or in case the Registrar is not satisfied with the information furnished to him. The following documents/information will be available for inspection by any person:- Incorporation document, Names of partners and changes, if any, made therein, Statement of Account and Solvency and Annual Return. The fees for such inspection of an LLP is Rs 50/- and fees for certified copy or extract of any document u/s 36 shall Rs. 5/- per page. The provisions of the Act require LLPs to file the documents like Statement of Account and Solvency (SAS) and Annual Return (AR) and notices in respect of changes among partners etc. within the time specifically indicated in relevant provisions. The Act contains provisions for allowing LLPs to file such documents after their due dates on payment of additional fees. It has been provided that in case LLPs file relevant documents after their due dates with additional fees upto 300 days, no action for prosecution will be taken against them. In case there is delay of 300 days or more, the LLPs will be required to pay normal filing fees, additional fee and shall also be liable to be prosecuted. The Act also contains provisions for compounding of offences which are punishable with fine only. Central Govt may appoint inspectors to investigate the affairs of an LLP. The manner and procedure for conduct of investigation has been specified in the Act. The LLP structure is proposed to allow entrepreneurs and businessmen/servicemen to combine themselves with a view to run a business/service for profit in a more flexible manner than companies. The internal processes of LLPs shall be governed by the LLP Agreement. To protect interests of various stakeholders, following approach has been followed in the LLP Act:- (i) mandatory incorporation of LLPs with registrar with suitable due diligence to be followed by promotes/professionals at the time of incorporation; (ii) MCA-21 e-Governance process will be used for incorporation purposes which will help to track any unscrupulous promoter/partner of an LLP; (iii) Details of partners and any changes made therein shall be required to be filed with the registrar; (iv) Filing of annual documents like (SAS and Annual Return) with the Registrars will be mandatory; (v) Such documents will also be open for public inspection; (vi) Audit of all LLPs (except small LLPs which may be exempted by way of notification by Central Govt) shall be mandatory; (vii) Provisions have been proposed in the Act to empower Registrar to conduct scrutiny of documents filed with him and for calling of any other relevant information from LLP or its partners/officials and also for summoning of LLPs’ partners/officials in certain cases. The LLP Act contains enabling provisions pursuant to which a firm (set up under Indian Partnership Act, 1932) and private company or unlisted public company (incorporated under Companies Act) would be able to convert themselves into LLPs. Provisions of clause 58 and Schedule II to Schedule IV to the Act provide procedure in this regard. This would not be allowed under LLP Act. For an LLP to convert into a Company, 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. It has been provided in the Act that on conversion of a firm/private company/unlisted public company into LLP, any approval, permit or licence issued to the firm/private company/unlisted company under any other Act shall, subject to the provisions of such other Act under which such approval, permit or licence was issued, be transferred in the name of converted entity viz LLP. Stamp Duty payable on Filing of e-form 1 (including MOA & AOA), 5 and 44 can be paid through MCA21 system. Since Stamp Duty is the subject reserved for the States, the LLP Act does not contain any provision for treatment of stamp duty issues. The stamp duty payable will depend upon the relevant Stamp Act prescribed by the State Government/Union Territory. Provisions of section 60 to 62 of the Act provide for the manner in which compromises or arrangements including mergers and amalgamations involving LLPs shall be allowed. It is proposed to provide the provisions and procedures required to be complied with when the affairs of an LLP are to be wound-up and dissolved, by enabling the Central Government to make rules under the LLP Act, 2008.   
    • LLP Agreement: - The mutual rights and duties of partners inter se and those of the LLP and its partners shall be governed by the agreement between partners or between the LLP and the partners. This Agreement would be known as LLP Agreement.  As per provisions of the LLP Act, in the absence of agreement as to any matter, the mutual rights and liabilities shall be  governed by the Schedule-I to the Act. Therefore, in case any LLP proposes to exclude provisions/requirements of Schedule I to the Act, it would have to enter into an LLP Agreement, specifically excluding applicability of any or all paragraphs of Schedule I. Contents of LLP Agreement, as may be prescribed, shall also be required to be filed with Registrar, online. Contents of LLP Agreement or any changes made therein, if any, may be filed in Form 3 and details of partners/designated partners may be filed in Form 4 in accordance with LLP Rules, 2009. The Act empowers Registrars to strike off names of LLPs which are not carrying on any business or operation. They will be under obligation to give an opportunity of being heard to LLP concerned. Details for manner of striking off would be prescribed through rules. Since LLPs would be governed by LLP Agreement it would be possible for LLPs to make suitable clauses in such Agreement prescribing time limits or duration of LLPs. In such cases, provisions for striking off names could be used. Besides, the Act empowers Central Government to make rules in respect of winding up and dissolution of LLPs. It is proposed to prescribe a simple procedure for voluntary winding up of LLPs under such rules. 
    • Whistle Blowers: The following acts are crime by their very nature: (i) Making by any person a false statement at the time of incorporation of LLP (ii) carrying on business of LLP with intent to defraud or for any fraudulent purposes and (iii) making, knowingly, false statements or omitting any material fact, in any return, documents etc. For defaults/ non-compliance on procedural matters such as time limits for filing requirements, penalties have been provided such as default fee, payment of fine as well as imprisonment of the offender. The Judicial Magistrate of the first class, or, as the case may be, the Metropolitan Magistrate shall have jurisdiction to try offences under the LLP Act. The offences which are punishable with fine only can be compounded by the Central Government, by collecting a sum not exceeding the amount of maximum fine prescribed for the offence. The Act contains provisions empowering Central Government to compound any offence punishable with fine only by collecting a sum not exceeding the amount of maximum fine prescribed for the offence. Enabling provisions have also been made in the Act in respect of protection to “Whistle Blowers”. 
    • ROC, LLP, 3rd Floor, Paryavaran Bhavan, CGO Complex, New Delhi-3, Website: www.llp.gov.in : The LLP Act contains enabling provisions for use of electronic mode for filing of documents with Registrars. Details have been specified in the LLP Rules, 2009. Authentication of documents as per Information Technology Act, 2000 has also been recognized in the LLP Act. The filing and inspection of documents with the Registrar is allowed pursuant to LLP Act, 2008/ LLP Rules, 2009. 

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