In this blogpost, Dhiren Sehgal, Student, Jindal Global Law School, Haryana writes about what is limited liability partnership, what is the meaning of contribution and whether partners are required to contribute a minimum capital in an LLP
What is limited liability partnership
Limited liability partnership, this sort of a business entity has been recognized by the way of limited liability partnership act, 2008. This form of a business entity combines both company and partnership into a single business entity. In a limited liability partnership partners can’t be held liable for each other’s negligible conduct, this is where a limited liability partnership differs from an unlimited partnership. In a limited liability partnership partners’ liability is limited to the extent of their shares within the partnership, which is in a way similar to what the shareholders in a corporation enjoy in terms of limited liability. But in a limited liability partnership the partners enjoy the right to manage and enjoy decision making and management of the business directly , which is not the case with the corporate shareholders.
Limited Liability Partnership is overseen according to the LLP Agreement, however without such agreement the LLP would be administered by the structure given in the Schedule 1 of Limited Liability Partnership Act, 2008 which depicts the matters relative to common rights and obligations of partners or contributors of the LLP and of the limited liability partnership and its partners. LLP has a different lawful entity, at risk to the full degree of its assets , the obligation of the partners would be constrained to their agreed contribution in the LLP. Further, no partner would be obligated by virtue of the autonomous or unapproved activities of the other partners, hence permitting individual partner’s to be protected from joint liability made by another partner’s wrongful business choices or wrong doings.
What does contribution mean
When we interpret the word contribution, it would mean to be ‘part or share.’ In the context of a limited liability partnership contribution would mean to be or could be termed as what a partner’s contribution is towards the limited liability partnership business or for the running or operation of the limited liability partnership business. In other words contribution in case of a limited liability partnership would mean the same as what share capital would mean in the case of a company. Therefore, in the scenario of a limited liability partnership, the contribution made by the partners can assist in judging of the ownership in the limited liability partnership.
Are partners required to contribute a minimum capital in an LLP
There is no necessity or compulsion to contribute a minimum capital for a partner, as per the Limited Liability Partnership Act, 2008 contribution is not a prerequisite for the formation of a limited liability partnership or for a partner to contribute a minimum capital to be a recognized partner in the limited liability partnership business. Also under the Act, a lot of flexibility has been offered to the partners by the way of the limited liability agreement through which the partners can brainstorm and decide the amount and form of contribution as per their respective comfort and convenience. However, the limited liability agreement must specify the contribution of the capital which is intended to be paid by all the members and the form in which it will be paid. As per the requirements enshrined under section 32(1) of the Limited Liability Partnership Act of 2008 the contribution can be made in the form of a tangible, movable or any form of immovable or intangible property or any other form of benefit to the limited liability partnership which can go on to include money, promissory notes and other agreements which can contribute cash or property and contracts for services performed or to be performed.
However the monetary value of the contribution of each partner is to be accounted for and is to be disclosed within the accounts of the limited liability partnership in any manner as may be prescribed in the agreement by the partners of the limited liability partnership. The valuation of the intangible contribution made by the partners shall be done and certified by a chartered accountant or a cost accountant who is practicing in nature or it can be certified by an approved valuer who belongs to a certified and maintained panel of the central government. Also, the monetary value of the contribution made by each contributor or partner has to be accounted for and is to be disclosed within the accounts of the limited liability partnership in the manner as prescribed in the agreement.
Also, whenever partner ceases to be a partner in the limited liability partnership, then, that partner is very much entitled to his share of contribution in the limited liability partnership. However if provided or mentioned otherwise then this entitlement isn’t guaranteed. The amount to be received on cessation of the partnership is to be equal to the amount of capital contribution of the former contribution made to the limited liability partnership. Similar to a partnership the contributors and partners in a limited liability partnership have the option to accrue and have interest on the contribution. However, there isn’t any limit prescribed under the act for the amount of interest to be paid to the respective partners by the limited liability partnership.
The capital contributed by the partners can be increased if you look at the provisions mentioned in the limited liability partnership agreement. However in order to increase your capital the requirements under the limited liability partnership act is very less, it only requires you to file form number 3 with the registrar of limited liability partnership in order to bring about an amendment in the particulars of the limited liability partnership agreement and also you’re required to pay the deficit or the difference amount in the fee payable on the increased capital or contribution and the fee paid earlier on the preceding capital or contribution and this has to be done through form number 3.
Similarly, the existent capital can be reduced as it can be increased, this also shall be done as per the provisions provided in the limited liability partnership agreement. This reduction can also be done by filling out form number 3 with the registrar of limited liability partnership in order to bring about an amendment in the particulars of the limited liability partnership agreement, and the payment of the regular filing fee is required according to the limited liability partnership act of 2008.
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