This article was written by Rahul Saraswat, a student of Gujarat National Law University, Gandhinagar.
One of the popular and highly preferred categories of entity for doing business in almost all the economic sector in the majority of countries worldwide is Limited liability Company (LLC). It is highly recommended and easy to operate as the name suggests all the partners in LLC have limited liability. The government of India introduced this long awaited form of a company in the world of Indian corporate in 2009 by the act of Limited liability partnership act (LLP), 2008. It is the type of partnership in which partners (depending on the jurisdiction) have limited liability; one partner is not liable for the act of other partner’s. First we should understand its origin. The origin of this popular partnership began in 1980 in USA, due to the collapse of real estate and energy prices in Texas, hundreds of US saving and loan firms were declared insolvent. As a result of the collapse many accountancy and legal firms faced legal claims instigated by the US government. So due to traditional form of partnership through which those firms were functioning, partners those who were not responsible for the failure of the saving and loan firms were made liable to pay millions of dollars in compensation. So to come up with this problem the government of Texas in 1991 came up with the concept of Limited liability partnership (LLP). LLP combines the advantage of both a company and a partnership into a single form of organisation. LLP agreement is of fundamental importance as it defines the terms and condition of partnership. However in the absence of such agreement it is governed by the schedule 1 of the LLP act, 2008. LLP limits the personal liability of the partner for the errors, omissions, incompetence or negligence of the LLP’s employees or the agents. The greatest advantage of the LLP is the flexibility to do business. Instead of being bound by legal provisions, LLP’s are free to create their own rules of management, which was not possible in case of companies. As a result, a lot of companies stated to convert them into LLP. LLP is managed by partner themselves who are called “Managing Partners”. There is also concept of designated partner in LLP, but they are responsible for compliance of LLP act, income tax act etc. LLP is an alternative corporate business form that gives the benefit of limited liability of a company and the flexibility of partnership. It has perpetual succession and have a common seal and can sue and be sued in its own name. It is capable of holding property in its own name and can also do contract. Thus LLP act as a hybrid between a company and a partnership. LLP provide a new corporate form in the country. it is widely accepted because it operates on an agreement. Under LLP model, CA, CS, or even lawyers can set up there firm which can act as one stop shop for people to avail of various professional services, thus the flexibility of the LLP made it popular. The framework of LLP is not restricted to professional services alone it extends to several business activities also. Indian LLP structure is broadly based on UK LLP and Singapore LLP structure. Tax would be levied on the LLP and the partners would be exempt from tax, taxation similar to that of partnership.
Advantages of LLP:
- Low cost of Formation
- Easy to manage and run
- No requirement of minimum capital contribution
- No cap on no. of partners
- Easy to dissolve and wind-up
- Audit requirement only in case of contribution exceeding Rs. 25 lakhs or turnover exceeding Rs 40 lakh.
- Partner’s liability depends on their contribution i.e. Limited liability.
- Less compliance level.
- LLP is flexible and governed by rules framed by partners.
Disadvantages of LLP
- Under some cases, liability may extend to person assets of partners.
- Cannot raise money form public.
Why to prefer LLP over traditional partnership?
The basic difference between the LLP and the traditional partnership is the ‘Liability’ of the partners. In a partnership firm each and every partner is jointly liable i.e. each partner works as an agent of other partners. But in LLP the liability of partner is limited to their contribution. Each partner is independent of other partner’s act.
In traditional partnership any Indian citizen residing in India can be a partner, including a minor. A partnership firm must have minimum 2 partners to create a firm and maximum 20 partners as has been mentioned in companies act. On the other hand LLP must have minimum 2 partners and there is no cap on maximum no. of partners. Any Indian citizen residing in India can form LLP,. Minors are excluded from LLP
The profits of a partnership firm are taxed at 30% + educational cess. And there is no annual return filing requirement for a partnership firm. Whereas LLP are taxed same as that of partnership, but LLP must file annual return with MCA.
Partnership firm are registered with Registrar of Firm (ROA). A partnership deed is required to register a partnership firm. Whereas the LLP are registered with Ministry of Corporate Affairs (MCA). Each partners is allocated a DIN i.e. Director’s Identification No.
The share of LLP can be transferred but the transferee does not become the partner automatically. Also LLP can be converted into a Limited company or private limited company. On the other hand partnership’s share can be transferred to other person but after obtaining permission form all other partners.
3 key reason to go for LLP:
- Limited liability
- Each partner is associated With DIN and is regarded as Director
- Unlimited no. of partners.
Procedure to register LLP
It is easy and flexible to register LLP in India, we can learn this in 5 steps:
- Step 1- Partners
- Step 2- DIN and DSC
- Step 3- Name filing
- Step 4 – Agreement
- Step 5 – filing of incorporation documents
Salient features of LLP:
- It is separate legal entity separate from its partners/designated partners.
- It has perpetual succession and common seal
- LLP can purchase movable and immovable property in its name
- No partner is liable or accountable for the act of other partner.
- A private firm of company can be converted into LLP.
- The winding up of LLP is either voluntary or by High Court.