India: Limited Liability Partnership -The Hybrid Structure

Background

The concept of limited liability partnership was first originated in United States and it came to India through Limited Liability Partnership Act, 2008. Its history is quite interesting. During the financial crisis of United States in the late 1980s and early 1990s hundreds of saving and loan firms were declared insolvent. This resulted in collapse of many accountancy and legal firms who thereafter faced enormous legal claims instigated by the US government. These claims led to burden on those partners of such firms who were not even responsible for the failure and were held liable to repay millions of dollars in compensation. Then in 1991 a new concept of limited liability partnership (LLP) was introduced in the city of Texas which gained popularity in majority of United States and eventually resulted in passing of LLP legislation.

The Company form of business is considered to be the most popular form of business in the industry but in case of professionals who render secretarial, legal, accountancy, and doctorate services, who not only have to comply with the legal entity structure but are also regulated by their respective governing statues of which they are members, for them Company form of business is not possible to start with as they are not allowed to operate as corporate body.

On the other hand the concept of partnership firm which does not provide limited liability and moreover where the personal property of all the partners is always at risk is not considered to be suitable for many.

Thus to overcome the drawbacks of company and partnership form of business there was a need of a hybrid form of entity which can have the characteristics of both, a partnership firm and a Company. As it is a universal truth that necessity is the mother of all inventions, hence India adopted the concept of Limited Liability Partnership which was already tried and tested by the countries like UK, US, China etc.

Limited Liability Partnership (LLP) is a newly introduced corporate entity type in India favorable for small and medium sized businesses. A LLP provides many of the benefits of a Private Limited Company while being easier to maintain compliances. Low registration fee and easy maintenance make LLP a first choice for many of the small businesses in India.

A limited liability partnership is a partnership form of business which has a separate legal entity from its partners having a perpetual succession. In India it is governed by Limited Liability Partnership Act, 2008 which was notified on 31.03.2009 and came into effect from 01.04.2009 which is amended from time to time. Being the separate legislation, the provisions of Indian partnership act, 1932 are not applicable to LLP. This is a great relief to the partners, particularly professionals like Company Secretaries, Chartered Accountants, Cost Accountants, Advocates and other professionals.

Characteristics and Features of an LLP

1. LLP is a blend of body corporate and a separate legal entity from its partners which has a perpetual succession;

2. LLP can own assets in its own name, and can also sue and be sued;

3. The partners of LLP have the right to manage the business directly, unlike the corporate shareholders which thereby means no Owner/ manager distinction;

4. Every LLP shall have at least 2 partners and there is no limit for the maximum numbers of partners. The partners to LLP can be an individual as well as body corporate;

5. One partner is not responsible or liable for another partner's, misconduct or negligence;

6. LLP should be formed with a profit motive; 7. The rights and duties of partners in an LLP are to be governed by the agreement between partners. The duties and obligations of Designated Partners shall be as provided in the law;

8. Partners of LLP are liable only to the extent of their contributions in the LLP

9. Every LLP shall use the words "Limited Liability Partnership" or its acronym "LLP" as the last words of its name;

Benefits and Advantages of LLP alluring start -ups:-.

There is no limit on number of owners of LLP

LLP requires minimum 2 partners but there is no limit on maximum number of partners unlike a private limited company wherein there is a restriction of not having more than 200 members.

Lower cost involved in formation of LLP

The cost of registering LLP is low as compared to cost of incorporating a private limited or a public limited company.

No requirement of conducting compulsory Audit in case of LLP

All the companies, whether private or public, irrespective of their share capital, are required to get their accounts audited. But in case of LLP, there is no such mandatory requirement. A Limited Liability Partnership is required to get their accounts audited only if:-

a) If the paid up capital of the LLP exceeds Rs. 25 Lakhs, or

b) If the annual turnover of the LLP exceeds Rs. 40 Lakhs

Lower compliance burden as compared to other forms of business structure

In case of Limited Liability Partnership, the only requirement is to file the Annual Return & a Statement of Accounts & Solvency as compared to other forms of entities which require large number of compliances.

Easy to windup

It is not only easy to start a LLP; it is also easier to wind up the same as compared to other business entities.

Procedure for incorporating a Limited Liability Partnership :

1. To incorporate a Limited liability Partnership, all designated partners of the proposed LLP shall obtain "Designated Partner Identification Number (DPIN)" by filing an application individually online in E-Form DIR -3 with Ministry of Corporate Affairs. In case any of the desired partners obtain Director Identification Number (DIN) then the same can be used as a DPIN.

2. The Information Technology Act, 2000 provides for use of Digital Signatures on the documents submitted in electronic form in order to ensure the security and authenticity of the documents filed electronically. This is the only secure and authentic way that a document can be submitted electronically. As such, all filings done by the Limited Liability Partnership (LLP) are required to be filed with the use of Digital Signatures by the person authorized to sign the documents.

Acquire DSC- The person authorized to sign the documents is required to obtain Digital signature certificate (DSC) the same can be acquired by a Certifying Authority, who has been granted a license to issue a digital signature certificate under section 24 of Indian Information Technology Act 2000.

Register DSC- After acquiring Digital Signature Certificate, the role check can be performed on MCA portal only once the signatories have registered their Digital Signature Certificates with LLP application.

3. To file an e-form or to avail any services on LLP portal, it needs to first require registering as a user in the relevant user category, such as registered and business user.

4. To apply for name of the proposed LLP to be registered, Form 1 for application for reserve tion or change of name to be filed with MCA Portal. Once the name is reserved for proposed LLP, Form 2 needs be filed for incorporation of the LLP along with required documents. Once the form is approved by the concerned official of the Ministry, an email regarding the incorporation and status of the form will changed to "Approved."

5. After incorporation of LLP, an initial LLP Agreement is to be filed within 30 days of incorporation of the Limited Liability Partnership. Form 3 shall be filed for the information with regard to Limited Liability Partnership and Changes, if any made in the agreement.

CONCLUSION

The Limited Liability Partnership Act, 2008 is recognition of the changing needs of the business environment in the current era. The incorporation of the LLPs will provide a helpful new option for startups like professional partnerships which are anxious about their exposure to liability. In view of the growth of Indian Service industry in recent times, startup LLPs would further contribute to the growth of the service industry and a large number of existing companies, public as well as private, are expected to convert into LLPs with a view to have access to the benefits of the LLP. Further the Government of India has made an Endeavour to create a facilitating environment for entrepreneurs, service providers and professionals by bringing such hybrid business structure to meet the global competition.

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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