India: LLPs In India - All You Want To Know

Last Updated: 15 December 2016
Article by Bhumesh Verma

Limited Liability Partnership ('LLP') is a form of enterprise that merges certain advantages of a partnership with those of a company. Viewed as an 'alternate or hybrid corporate vehicle', an LLP achieves the best of both corporate forms by granting to the members of the LLP, the flexibility of organizing their internal managerial structure as a partnership based on mutual-understanding, while limiting the liability of the partners to the extent of their interest in the partnership, which is corresponding to the separate legal personality of a company.

As a result of the advantages that the LLP model offers, legislations have been enacted in various jurisdictions to incorporate and regulate the functioning of LLPs. In India, however, LLPs received formal recognition through the Limited Liability Partnership Act, 2008 ("LLP Act") with effect from March, 2009 even though the theoretical inception of the concept of an LLP first occurred in 1957 as a recommendation by the 7th Law Commission of India.

India is witnessing an upward moving trend in LLP registrations and conversion of traditional unlimited partnerships to the LLPs giving it a sought-after status in the Indian corporate scenario.

Concept and History of LLPs in India

The first time the concept of an LLP was considered in India, it was in the form of a recommendation in the 7th Law Commission of India in 1957. It had been suggested that partnerships with limited liability should be recognised in India either by a special enactment or as a part of the existing Partnership Act. However, the suggestions were not accepted by the Commission.

In 1997, the Report of the Expert Committee on Small Enterprises chaired by Mr. Abid Hussain stated that if Limited Partnership Act was crated, it would also enable access to an additional source of funds and skills brought forth by management partnerships. At the time, a law for governing small businesses was being recommended by various Government committees without much avail.

In 2003, the Naresh Chandra Committee Report on Regulation of private companies and partnerships stressed on the need to introduce limited liability partnerships in India. It contains concrete suggestions on how this new form of business should function.

It was suggested that LLP form should be initially made available only to those providing defined professional services like lawyers, company secretaries, accountants and the like. To be eligible for this form of partnership, the profession must be governed by a regulatory Act that adequately controls and disciplines, errant professional conduct. Such professions may be notified by the Department of Company Affairs from time to time. Further, LLP may be extended, at a later stage, to other services and business activities once the experience gained with the LLP form of organisation has been evaluated and tested.

The J.J. Irani Committee in 2005 recommended enabling of new vehicles for business, such as Limited Liability Partnerships, through a separate legislation.

In January 7, 2009, the LLP Bill received the assent of the President and was thereafter notified in the Official Gazette and the LLP Act was put into force by the Central Government on March 31, 2009.

The need for the LLP Act was described by the Ministry of Corporate Affairs in the following words:

"With the growth of the Indian economy, the role played by its entrepreneurs as well as its technical and professional manpower has been acknowledged internationally. It is felt opportune that entrepreneurship, knowledge and risk capital combine to provide a further impetus to India's economic growth. In this background, a need has been felt for a new corporate form that would provide an alternative to the traditional partnership, with unlimited personal liability on the one hand, and, the statute-based governance structure of the limited liability company on the other, in order to enable professional expertise and entrepreneurial initiative to combine, organize and operate in flexible, innovative and efficient manner."

Nature of an LLP: The Cross-Breed Corporate Structure

In light of the fact, that this form of business enterprise combines the advantages of a company and a partnership, the corporate nature of an LLP and its mode of functioning makes it a unique structure.

LLP is a body corporate and a legal entity separate from its partners. It has perpetual succession which implies that the LLP can continue its existence irrespective of a change in partners. It is capable of entering into contracts and holding property in its own name.

Having a separate legal entity, it is liable to the full extent of its assets but liability of the partners is limited to their agreed contribution in the LLP. LLPs can participate in compromises, arrangements, mergers and amalgamations. Dissolution may be voluntary or may be ordered by the NCLT.

The Partners are considered agents of the LLP and not of each other. Designated Partners are responsible for managing the day to day business and other statutory compliances. Moreover, 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. Further, 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 may be required.

A partnership is an organisation in which the partners share equally in responsibility and liability. The primary distinction between an LLP and a general partnership is that partnership has no legal existence separate from the partners who constitute it, while an LLP exists as a legal entity separate from its partners.

An LLP is treated as a company, inter alia, with respect to the extent of liability of the partners. However, in the case of taxation, it is treated as a partnership. For other purposes, the LLP has a partnership regulatory regime, which permits the partners the flexibility of internal organization based on mutual agreement. An LLP also has a simpler and less expensive process of formation as compared to a company.

 Advantages of an LLP

  • The organization and operation of an LLP is on the basis of the LLP agreement which is made on mutually agreed terms and conditions
  • The cost of registration for an LLP is lower as compared to that of incorporating a public or private limited company
  • As partners are liable only up to their agreed contribution, no joint liability is created by the independent and unauthorized acts of another partner
  • The registration process is comparatively simpler as compared to that of a company.
  • Remuneration of partners, voting rights etc. is all clear and as per the LLP agreement.
  • Unlike in the case of a company, there is no restriction on the limit of remuneration to be paid to a partner. The only requirement is that such remuneration must be authorized by the LLP Agreement and must not exceed the limit prescribed under it.
  • Partners are not liable to be sued for the dues against the LLP as the LLP can sue and be sued in its own name
  • There is greater flexibility and ease when it comes to becoming a partner, leaving the LLP or transferring interest in the LLP as per the LLP Agreement.
  • Partners are free to enter into any contract (unlike in a company where there are restrictions on the board regarding some specified contracts, in which directors are interested)
  • As an organization on account of stringent regulatory framework, an LLP will enjoy comparatively higher credit-worthiness than that of a partnership but lesser than a company.
  • There is no mandatory requirement to get the accounts audited like in the case of companies.
  • Unlike partnership firms and sole proprietorships, an LLP is a regulated body and can raise funds from private equity investors, financial institutions etc.
  • Tax Benefits:

a.   For income tax purposes LLPs are treated at par with partnership firms. Only the LLP is liable for payment of income tax and the share of its partners in LLP is not liable to tax. Provison of "deemed income" under income tax act is inapplicable to LLPs.

b.   Tax rate is lower than that applicable to companies

c.   LLPs are not subject to Dividend Distribution Tax as compared to companies, hence no tax liability arises when profits are distributed to its partners.

Disadvantages of an LLP

  • There is no provision relating to redressal in case of oppression and mismanagement unlike the provisions provided for in the case of a company
  • An act of one partner without the consent of the other partners may bind the LLP
  • Under certain cases, the liability may extend to the personal assets of the partners
  • Winding up as provided under Limited Liability Partnership (Winding Up and Dissolution) Rules, 2012 is a lengthy and expensive procedure and may come in the way of winding up business in case of exigencies
  • As an organization, an LLP has lesser credit-worthiness than a company.
  • An LLP is required to file Annual Statement of accounts and Solvency & Annual Return with Registrar of Companies every year. This requirement is absent in the case of a partnership.

Conclusion

The primary reasons for introducing LLP included the risk factor and the enhanced global competitive advantage to the Indian professionals. In the event of business failure, the liability would be limited to the partner responsible. There would be no recourse to attach the personal assets of the other members. This lowers the risk factor associated with unlimited liability in a partnership and introduced the limited liability concept of company law to make such bodies more adaptive to international competition. Functioning under this structure, it has made possible for a large pool of Indian professionals to provide various useful services to the International clientele.

The LLP structure has proven to be particularly advantageous for providing such professional services in the era of satisfying the global customers with utmost productivity. Hence, it would be a suitable vehicle for partnership among professionals who are already regulated such as company Secretaries, Chartered Accountants, Cost Accountants, Lawyers, and Architects, Engineers and Doctors etc., particularly accountants and auditors who are not legally permitted to operate as company.

Further, as India is attracting FDI in entrepreneurial projects carried through the LLP format, the same would encourage the small entrepreneurs in India to explore business ventures with foreign investment. Also, foreign entities having project offices in India consider reducing risk by employing the LLP structure. Any structure where different members want to control different segments and further bear full responsibility for their acts could conveniently use the LLP structure that includes infrastructure project SPVs where different partners bring in different expertise into the project.

To sum up, while some more fine-tuning of the LLP structure is required to mitigate certain conflicting situations, the regulation of the LLP corporate structure has genuinely been a boon to Indian business interests.

Research inputs by my colleague, Anandini Kumar.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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