This article has been written by Kshitij Kothari, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho.
When a group of individuals wish to start a business by bringing some kind of assets (building, stationary, land, furniture, or cash), they pool together their resources and efforts and aim to start a much larger business which sole proprietor might not, therefore in this respect, a partnership is a more suitable form of business organization. Also, the group of individuals has to keep in mind a clear picture of what business structure to adopt to know their rights and liabilities as business owners and to know what they as well as their clients, investors and creditors can expect.
Therefore to encapsulate all these aforementioned purposes, many business organizations are opting for Limited Liability Partnership registrations that became the second most well-liked registration entity in terms of the partnership. A Limited Liability Partnership (LLP) is an alternative company legal entity that provides the advantages of restricting the liability of a corporate entity and also the flexibility of a partnership.
Prerequisites before starting an LLP
The relevant documents are a crucial foundational stone for running a new business. An LLP agreement can be created as the first step to frame partner expectations, obligations, and responsibilities before the partners begin operating their business together and set up the LLP. But there are some prerequisites to which the individuals who are forming the LLP must adhere to.
STAGE 1 – PRE INCORPORATION
Nature of the business
The individuals entering into an LLP shall have an idea of business and the process of execution where their entity can provide for some sort of goods and services. But generally, an LLP works best for startups and small businesses that are run by partners and want to have nominal regulatory compliance.
Two or more partners
In every LLP agreement, the individuals entering into forming an LLP shall confirm that there are at least two designated partners, though there is no upper limit, and at least one of them is a resident in India. The “resident in India” means that persons shall have stayed in India for a period of not less than one hundred and eighty-two days during the immediately preceding one year.
Qualification of becoming a partner
An individual has considered a partner of LLP if such an individual is capable of becoming a partner. The individual shall not be capable of becoming a partner of an LLP, in the event (i) he/she has been of unsound mind by a court of competent jurisdiction and the finding is still in force; (ii) he/she is declared to be an insolvent; (iii) he/she has applied for adjudication as an insolvent and the application is pending. Apart from that, consent must be sought from such partners to act in the capacity of designated partners.
Having a registered address
Every LLP shall have a registered address where all the communications, notices, and post letters are to be delivered, though an alternative address can be used for LLP. Moreover, at the time of incorporation, it is essential to submit proof of ownership or right to use the office as its registered office with the Registrar of Companies.
Registration for DPIN
Many case partners raise money from third parties and run away. Therefore to trace them, every person who is entitled as designated partners for LLP, shall obtain a Designated Partner Identification Number (DPIN). Therefore the DPIN helps to maintain a public register of administrators and renders them traceable, just in case they try to fraud someone and then run away.
Digital Signatures Certificate
To authorize all the documents and applications digitally signed by the authorities, one of the designated partners needs to opt for a digital signature certificate. After submitting the online application for DPIN, a signed physical copy of Form 7 (Application for allotment of Designated Partner Identification Number) has to be submitted to the Ministry of Corporate Affairs along with certified copies of address proof and Identity proof of the individuals (designated partners who are entering into LLP). Digital Signature can be obtained from any of the Certifying Authorities in India.
STAGE 2 – APPROVAL OF NAME
Unique LLP Name
Every LLP should have a novel name below which it’s registered and will carry on its business. The name should neither be trademarked by any other corporate entity nor sound so similar that it’d moderately confuse associate degree unsuspecting outsider.
For more information, I request you to visit this site: http://www.mca.gov.in/MCA21/dca/downloadeforms/Section20_21dec2009.pdf.
Once the LLP name is approved by the Ministry of Corporate Affairs (MCA), the entity is required to file Form 1 (also known as Application for reservation or change of name) for the registration of LLP’s name.
Verification of Form 1
After filing Form 1, the Registrar of Companies verifies Form 1 by authenticating the attached documents (such as PAN card of the partners, registered address, etc). In case there is anything that needs to be filed, the concerned authority will ask the partners to complete the suggestions. Once the suggestions are made in order, the Registrar of Companies will give its approval for the LLP to be incorporated.
STAGE 3 – INCORPORATION
Filing of Form 2
After the approval by the Registrar of Companies, another form needs to be filed i.e., Form 2 (also known as Incorporation document and subscriber’s statement). Form 2 is essential to be officially recognized as a formal corporate entity by the government. Form 2 shall be signed by each designated partner and witnessed by a Chartered Accountant.
Certificate of Incorporation
Once Form 2 is approved by the Registrar of Companies, a certificate is issued specifying that the limited liability partnership is incorporated by the name approved by the Ministry of Corporate Affairs, and the certificate shall be signed by the Registrar and authenticated by his official seal.
The LLP will be considered to come into existence from the date the Certificate of Incorporation is issued. Furthermore, the designated partners will have to draft an LLP agreement which will specify the mutual rights and duties of partners inter se and those of the LLP. It also lays out the ownership interest in the LLP, fixes the profit and loss distribution of each partner, establishes the LLP for ordinary business scenarios, and includes other necessary rules about how the LLP will be operated and manage the business.
Moreover, the LLP will then open the gates for applying for PAN, Bank accounts, and the other tax or regulative registrations or licenses that are required for the successful operation of the business. This agreement incorporates both contingency plans as well as elucidates the LLP’s daily operations. An LLP Agreement is becoming a well-liked suggestion for entering into a business venture as the LLP provides some protection to the partners concerned within the business.
Once the LLP agreement is drafted and signed by the designated partners, a copy of the agreement shall be submitted to the Registrar of Companies in Form 3 (also known as Information with regard to the limited liability partnership agreement and changes, if any, made therein). After all these aforementioned formalities, the designated partners can successfully run and operate their business in accordance with the rights and obligations mentioned in the LLP agreement and the conditions prescribed in the Limited Liability Partnership Act, 2008.
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