an LLP

Why do VCs refrain from investing in LLP?

VCs stands for Venture Capitalists and LLP stands for Limited Liability Partnership. These two terms are very important in the business field. As the business market boost up, the scope of these two also raises up with recent advancement of doing business. With the era of globalization, now we are in the world of global business methods, that helps the foreign investors as well as the native investors to invest in the different startups in order to earn and generate huge revenue.

I will first discuss the meaning of the terms ‘ Venture capital’ and ‘LLP’ in order to give a clear picture of these kinds of business.

VENTURE CAPITAL

It is a private or institutional investment made into early-stage / startup companies (new ventures). As defined, ventures involve risk (having uncertain outcome) in the expectation of a sizeable gain. Venture Capital is money invested in businesses that are small; or exist only as an initiative, but have huge potential to grow. The people who invest this money are called venture capitalists (VCs). The venture capital investment is made when a venture capitalist buys shares of such a company and becomes a financial partner in the business.

Venture Capital is the most suitable option for funding a costly capital source for companies and most for businesses having large up-front capital requirements which have no other cheap

Download Now

Alternatives. Software and other intellectual property are generally the most common cases whose value is unproven. That is why; Venture capital funding is most widespread in the fast-growing technology and biotechnology fields.

FEATURES OF VENTURE CAPITAL

  • High Risk
  • Lack of liquidity
  • Long term horizon
  • Equity Participation and capital gains
  • Venture Capital investments are made in innovative projects
  • Supplier of venture capital participate in the management of the company.

ADVANTAGES OF VENTURE CAPITAL

  • They bring wealth and expertise to the company
  • Large sum of equity finance can be provided
  • The business does not stand for the obligation to repay the money

DISADVANTAGES OF VENTURE CAPITAL

  • It is a lengthy and complex process
  • It is a uncertain form of finance
  • As the investors become owners, the autonomy of the founders is lost[1]

LIMITED LIABILITY PARTNERSHIP

Limited Liability Partnership entities, the world wide recognized form of business organization has been introduced in India by way of Limited Liability Partnership Act, 2008. A Limited Liability Partnership, popularly known as LLP combines the advantages of both the Company and Partnership into a single form of organization. In an LLP one partner is not responsible or liable for another partner’s misconduct or negligence, this is an important difference from that of a unlimited partnership. In an LLP, all partners have a form of limited liability for each individual’s protection within the partnership, similar to that of the shareholders of a corporation. However, unlike corporate shareholders, the partners have the right to manage the business directly.An LLP also limits the personal liability of a partner for the errors, omissions, incompetence, or negligence of the LLP’s employees or other agents.

Limited Liability Partnership is managed as per the LLP Agreement, however in the absence of such agreement the LLP would be governed by the framework provided in Schedule 1 of Limited Liability Partnership Act, 2008 which describes the matters relating to mutual rights and duties of partners of the LLP and of the limited liability partnership and its partners.

LLP has a separate legal entity, liable to the full extent of its assets, the liability of the partners would be limited to their agreed contribution in the LLP. Further, no partner would be liable on account of the independent or un-authorized actions of other partners, thus allowing individual partners to be shielded from joint liability created by another partner’s wrongful business decisions or misconduct.

Limited Liability Partnership Act, 2008 came into effect by way of notification dated 31st March 2009.

ADVANTAGES OF LLP

  • Low cost of formation
  • Easy to establish
  • LLP & its partners are distinct from each other
  • No requirement of any minimum capital contribution
  • Partners are not liable for the acts of partners
  • Less complication level
  • Less government interference
  • Easy to dissolve and wind up.

DISADVANTAGES OF LLP

  • Any act of the partner without the anither partner may bind the LLP
  • Under some cases, the liability can also be extend to the personal assets of the partners
  • Cannot raise money from Public.[2]
  • Inability to raise VC funding.

Why VCs are unwilling to invest in LLP

Now the question comes that after having so many advantages of LLP, why the Venture capitalists are unwilling to invest in it? The answer for this is because all ‘shareholders’ in an LLP must be partners,which have certain responsibilities towards the entity. No VC wants any of these responsibilities and would therefore invest in a private limited company instead. The other points to mention as to why LLP is not a good option for VCs are as follows:-

Limitations on starting an LLP

To form a LLP there is minimum requirement of members. Atleast 2 members have to be there in order to start it. LLP cannot be formed by the single person. Any NRI/Foreign national who want to form a LLP in India at least need one national resident. Two foreign residents cannot form it without having any national resident along with them.

It takes more days to form as it needs all partners signature for each and every document which is then need to attached to required e-forms. Therefore, self attestation of each partner on documents is more as to compare than formation of any pvt. Company.

Assets of LLP

Partners undertake to contribute some amount towards LLP firm which they contribute in the form of cash or assets while executing the LLP agreement. Once cash or assets are contributed to LLP, it cannot be returned to the partners of an LLP unless there is any specific provision mentioned in LLP agreement.

Difficulty in Transfer of Ownership

Transfer of Ownership is not easy as it can only be transferred after the consent of all the partners. The resolution to be passed by majority in numbers of the partners in some of these mentioned cases:- increase or decrease in contribution, increase or decrease of designated partners, alteration of working partners, amalgamations, shifting of the registered office of firm, opening or closing of bank account.

Offences and Penalties

LLP has its own Act and contains provisions for offences and penalties. Some provisions of the Act are:

  1. For default and non/compliance on procedural matters such as delay in filing of e-forms, one has to pay default fee on daily basis for which the default continues,
  2. Such default fee is payable at the rate of rupee one hundred per day after the expiry of the date of filing up to a period of three hundred days.
  3. The offences can result in either:- paying fine or imprisonment with fine of the offender.

Permission of FDI in LLP

Foreign company or individual can invest in LLP in India but it requires prior government approval. As per FDI Policy, FDI in LLP is allowed only through Government route, FDI in LLP under automatic route is not permissible. Further FDI in LLP through Government route is allowed to only those sectors where 100% FDI is allowed under automatic route under the FDI policy.

Limitation in External Commercial Borrowing (ECB)

LLP is not allowed to raise External Commercial Borrowing (ECB). Thus LLP cannot take commercial loans from its foreign partners. FII’s (Financial Institutional Investors), banks from outside India, any financial institution outside India or any other entity outside India.

CONCLUSION

Though LLP is one of the best business startup option for any investor but it has some major demerits which give a hurdle to many. Venture capitalists refrain themselves to invest in LLP simply because of its complex formation and also of its sharing responsibilities of being a partner. They simply opt for private companies rather than LLP due to less responsibilities and liabilities.

The unwillingness of VCs can be clearly seen through the demerits of LLP which are discussed above. If they have a choice of having lesser complexities and flexible legal formalities, they would definitely choose Pvt. company over LLP.

References:

[1] http://www.edupristine.com/blog/venture-capital

[2] http://www.llponline.in/what_is_llp.php

RELATED ARTICLESMORE FROM AUTHOR

LEAVE A REPLY

Please enter your comment!
Please enter your name here