This article is written by Vihanka Narasimhan, currently studying law at Jindal Global Law School, O.P. Jindal University. This article attempts to explain the concept of Limited Liability Partnerships in India and the world. The concept has also been compared with other forms of organisations for a comprehensive understanding of the subject matter.
This article has been published by Sneha Mahawar.
Up until a few decades, businesses were limited to being either a company, partnership or sole proprietorship. Each kind of organisation had its own advantages and disadvantages; for instance, Partnership and proprietorship were easier to form and operate but did not have a limited liability which was a prominent feature of a company. The development in the way businesses function has resulted in the formation of a Limited Liability Partnership (LLP) which could be termed as a fusion between the benefits of a company and a partnership. This article will tell you all about limited liability partnerships, their advantages and the procedure to set up an LLP.
Meaning and features of a Limited Liability Partnership (LLP)
LLP is a fairly new concept in the world of businesses. Section 3 of the Limited Liability Partnership Act, 2008 defines an LLP as “a body corporate formed and incorporated under this Act and is a legal entity separate from that of its partners.” In layman’s terms, it can be understood as an amalgamation of a company and partnership due to its business model which allows the organisation to reap the benefits of limited liability to the partners at relatively low costs compared to traditional models. This form of organisation is suitable for small and medium-size businesses.
Salient features of a Limited Liability Partnership
To understand the concept of limited liability partnership, let us understand its features which have been stated below: –
It is stated under Section 3(1) of the Limited Liability Partnership Act, 2008 that an LLP comes under the head of a ‘corporate body’. In simpler terms, it is a corporate entity that has a legal existence and such legal existence is a result of the registration of incorporation with a registered LLP office.
Separate Legal Entity
Section 3(1) of the Limited Liability Partnership Act, 2008, also mentions that an LLP is a separate legal entity. The term can be understood as ‘a person recognised by law.’ The term separate legal entity was discussed in the landmark case of Salomon vs Salomon & Co. Ltd. (1897) wherein it was established that an entity that has its own legal rights and obligations, separate from those running the business operations.
Section 3(2) of the Limited Liability Partnership Act, 2008, states that an “LLP”, just like a “joint-stock company”, has a “perpetual succession” i.e., it can only be formed and dissolved by a legal process. This also implies that the assets and liabilities of the LLP belong to itself irrespective of the retirement, insanity, insolvency or even death of one or more partners. In a nutshell, no partner is allowed to claim any part of the company in case of either continuance or winding up.
Mutual Agency can be described as a type of agreement between the partners of a firm in which the actions of one partner are binding on the others. In the case of an LLP, there is no mutual agency unlike in a traditional partnership firm. This implies that all the partners simply serve as an agent to the LLP and the action of one partner does not bind the other.
Artificial legal person
As an LLP is created by a legal process, it is assumed that it is a non-fictitious legal person with all the rights bestowed upon an individual. It however is deemed artificial as it has no physical existence, thereby becoming invisible, intangible and immortal. It cannot hence exercise rights like marrying and divorcing or be sentenced to jail or taking an oath.
Section 26 of the Limited Liability Partnership Act, 2008 states that every partner is regarded as an agent to an “LLP”, i.e.,They share a relationship of principal and agent. This however is not applicable amongst the partners as they do not serve as each other’s agents. In a nutshell, the liability of each partner is limited to the agreed amount in the LLP agreement.
It is not mandatory for an LLP to have a common seal. A common seal can be defined as an official seal of an organisation that is used to execute contracts. However, Under Section 14(c) of the Limited Liability Partnership Act, 2008, it is possible to create a common seal if desired under an authorised official of the organisation.
In order to form an LLP, it is crucial that the business should be formed in accordance of law with the aim of earning a profit. This implies that a Limited Liability Partnership cannot be formed for organisations that are charitable or not-for-profit in nature.
Composition of a Limited Liability Partnership
In order to form a limited liability partnership, it is mandatory to have at least two persons with no limitation to the maximum number of persons. The following ‘persons’ can be involved as partners:-
- Limited Liability Partnerships
- Foreign Limited Liability Partnerships
- Foreign Companies
Apart from the above conditions, it is mandatory that one of the partners is a resident in India.
Structure of a Limited Liability Partnership
The LLP Act states that an LLP shall be a ‘body corporate’ and a ‘legal entity’ which is separate from its partners. It is also given that the organisation would have perpetual succession. The term perpetual succession is defined by Merriam-Webster as “the capacity of a corporation to have continuous enjoyment of its property so long as it is legally in existence.”
The only factors excluding an individual from being capable of becoming a partner of an LLP are: –
- In case an individual has been found to be of unsound mind by the Court of a competent jurisdiction and the same holds true in present;
- In case an individual is an undischarged insolvent; or
- In case an individual has applied to be adjudicated as an insolvent and his application is pending
Responsibilities of partners in a Limited Liability Partnership
Section 2(g) of the Limited Liability Partnership Act, 2008 states that in an LLP, a “Partner” is regarded to be a person who becomes a “partner in the LLP in accordance with the LLP agreement.” The partners act as an agent to the LLP and hence are one of the most important parts in the functioning of the organisation. Some of the important duties and responsibilities of a partner have been mentioned below: –
- They need to carry on their limited liability with respect to the business in a manner which is –
- advantageous to both the business and the partner
- all the partners are faithful to each other
- to render true accounts and full information of all things affecting the firm to any partner
- In case of any fraud which has taken place in relation to the business due to one partner, it is his responsibility to indemnify for the same.
- Notification by the partners to the Registrar of companies with regards to the following situations: –
- Changes in LLP’s structure or business;
- Changes in partner’s names & residential addresses;
- Changes in registered office address;
- Filing of any annual return, statement of accounts and other documents specified under the provisions of LLP Act;
- To preserve and to produce documentation related to the LLP as and when necessary;
- To sign all the e-forms filed.
- The documents such as the statement of accounts & solvency should be signed by the designated partners of the company.
How to set up a Limited Liability Partnership
In order to set up a Limited Liability Partnership, one has to follow the following steps: –
Step 1: Obtaining the Digital Signature Certificate (DSC)
The first step is to acquire the digital signatures of all the designated partners. It is crucial as all the documents of the LLP are to be filed online as a result of which digital signatures are required.
Step 2: Applying for the Director Identification Number (DIN)
The next step is to apply for the DIN of all the designated partners or those intending to be designated partners of the proposed LLP. The application for the allotment of DIN has to be made in Form DIR-3.
Step 3: Approval of name for the LLP
A form by the name of Limited Liability Partnership-Reserve Unique Name (LLP-RUN) has to be filed in order to get a name that is unique in nature. A total of two names can be proposed in the form. The uniqueness can be checked on the MCA portal by using the free name search facility as it does not resemble any existing business organisation or trademark. The form will be then further processed by the Central Registration Centre under Non-STP. Straight through Process (STP) is the procedure used by India’s Ministry of Corporate Affairs (MCA) when it comes to approving electronic forms filed with it. The fees have to be paid in accordance with Annexure A. A person has the provision to resubmit the form in case of mistakes within 15 days.
Step 4: Incorporation of LLP
The form used in incorporation is known as the Form for incorporation of Limited Liability Partnership (FiLLiP). This particular file has to be filed with the registrar of the state in which the LLP is registered and as per Annexure A needs to be paid for the same. In cases where the name of the LLP has not yet been approved one has to fill it with the proposed name.
Step 5: Filing the LLP agreement
The Limited Liability Partnership act, 2008 governs the rights and duties created for the partners and between the partners and the LLP. The final step is to file an LLP agreement which has to be filed in the MCA Portal via Form no. 3 within 30 days of the date of incorporation. It is crucial that this is filed on a stamp paper, the value of which varies from state to state.
Drawbacks of setting a Limited Liability Partnership
Just as a coin has two sides, Limited Liability Partnerships have a few disadvantages. Some of them have been enlisted below: –
Unequal partner rights
Unlike a company where each share has an equal value, each partner does not have an equal voting value in LLP, meaning that equal rights are not employed. The rights of a partner depends on the LLP agreement.
At first glance it may seem like an advantage that there are minimal compliances while forming an LLP. It is crucial to note that irrespective of the LLPs business activities, it is mandatory to file an income tax return and MCA annual return each year. In case of failure of the same a penalty of Rs. 100 per day is levied on the LLP which sometimes appears to be costlier than the fines paid for violations in a company.
LLPs do have the concept of equity or shareholders as the organisation is simply composed of partners, which in turn makes it impossible for the investors to fund the business. This makes the business operations of an LLP rely on funding from promoters and debt funding.
Difference between LLP and general partnership
|Basis||Limited Liability Partnership||General Partnership|
|Regulating Act||The Limited Liability Partnership Act, 2008.||The Indian Partnership Act, 1932.|
|No. of Partners||Minimum- 2Maximum- No limit||Minimum- 2Maximum- 20|
|Mutual Agency||A partner can bind the LLP by his own acts but not the conducts of the other partners.||A partner can bind the firm as well as other partners by his own conduct.|
|Agreement between the partners||LLP Agreement||Partnership Deed|
|Conversion||Conversion to private Limited company or Limited company is easy||Conversion to a company or LLP is a lengthy process.|
|Compliance||Mandatory to file the annual returns to MCA||Not Mandatory to file returns.|
|Liability||Limited to the amount invested||Unlimited liability|
|Dissolution||Winding up is either voluntary or by the order of the national company law tribunal.||Winding up takes place by· Mutual agreement· Certain contingency· By court order|
Difference between LLP and LLC
|Regulating Act||The Limited Liability Partnership Act, 2008.||The Companies Act, 1956|
|No. of members/ partners||Minimum- 2Maximum- No limit||Private company: Minimum – 2 members Maximum – 50 members |
Public company: Minimum – 7 members Maximum – No Limit
|Motive||Can be created to fulfil economic or non-economic motives.||Has to be profit-driven|
|Name||Must consist of LLP in the suffix.||Must consist of public limited or private limited as a suffix.|
|Minimum contribution required||Private company – Rs.1 lakh|
Public Company – Rs 5 lakh
|No provision specified|
|Management||The business is managed by the board of directors elected by the Shareholders under the companies act.||Managed by the partners on the basis of the LLP Agreement.|
|Whistle-blowing||No provision specified||Protection has been provided to the whistle-blowers under Section 31.|
Laws applicable on Limited Liability Partnerships in India
In India, the term Limited Liability Partnership (LLP) was first introduced in the year 2008 through a legislation of Limited Liability Partnership Act, 2008 which governs all the LLPs in the country. With such a distinct status, the contract amongst the partners in an LLP instead of being regulated by the Indian Partnership Act, 1932 are dealt with under this Act. One should also take note that the Central Government has the authority to make applicable any provision of Companies Act, 1956 to LLP with suitable modifications by issuing a notification.
A brief overview of Limited Liability Partnerships functioning in other countries
Limited liability partnerships are recognized all over the world which includes countries such as the United Kingdom, United States of America, Australia, Singapore etc. There are two types of LLPs, they are as follows: –
- Texas LLP model: In this model, the partners’ vicarious liability is limited to the wrongful acts of the partnership and not for liability arising in the ordinary course of business.
- Delaware model: In this model, all liability is shifted on LLP and the partners are not responsible for any action arising in tort, contract, etc.
In India, the LLP act is based more on the Delaware model than the Texas model. In order to understand LLP at a global perspective, let us look at the following countries: –
In Japan, Limited liability partnerships are known as ‘yūgen sekinin jigyō kumiai’. This concept was introduced in the year 2006 with the aim to innovate the structure of business organisations. It is interesting to observe that the LLPs in Japan do not have the concept of a separate legal entity but merely a contractual relationship between the partners like American LLPs. They also have a structure called ‘godo kaisha’ which is similar to the UK LLPs.
The concept of LLPs was introduced in the early 2000s in the United Kingdom. The provisions in Limited Liability Partnerships Act ,2000 were applicable in Great Britain and the provisions of Limited Liability Partnerships Act (Northern Ireland), 2002 were applicable in Northern Ireland which came into force in the year 2009. In the UK, LLP is recognised as a corporate body which has a perpetual legal existence independent of its members.
The concept of LLP was introduced in the late 90s. Each state has varying laws for LLPs bu most of the country follows Section 306(c) of the Revised Uniform Partnership Act (1997) (RUPA) grants LLPs a form of limited liability similar to that of a corporation however although in minority, some states hold partners in an LLP can be personally liable for contract.
In Singapore, the concept of Limited Liability Partnerships was introduced in the year 2005. This legislation is inspired by both US and UK models of LLP. Just like the UK, Singapore also regards an LLP as a body corporate.
Over time it has become evident that LLPs are certainly very profitable for business purposes as it is the union of the advantages of both a joint-stock company and a traditional partnership. It eliminates risks and encourages people to enter into partnerships, which in turn helps in the creation of new business ventures which are both economically and socially progressive. In a nutshell, one can say that the versatility of the concept has proved to be one of the major factors which have made it popular all around the world.
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