Introduction
In the changing world of Indian business, the Limited Liability Partnership (LLP) has become a popular and useful business structure. An LLP combines features of both a corporate structure and a partnership, addressing some of the shortcomings of each. It offers the ease of running a partnership with the legal protection of a corporation. This makes LLPs especially attractive to small and medium-sized businesses, start-ups, and professional service firms that want to manage risks while running their operations efficiently.
The concept of LLPs was formally introduced in India with the enactment of the Limited Liability Partnership Act, 2008. This legislation marked a significant shift in the Indian corporate framework, providing a structured yet flexible alternative to traditional partnership firms and private limited companies.
In this blog, we aim to discuss the LLP structure, exploring its key features, formation process, compliance requirements, and benefits by delving into the intricacies of LLPs.
What is an LLP?
Limited Liability Partnership (LLP) is a new form of business structure made by the amalgamation of the best features of a company and the best feature of the partnership. LLP is a body corporate that is formed and incorporated under the LLP Act and is a separate legal entity with respect to the partners and if there is any change in the partners, it shall not affect the rights or liabilities of the LLP [1]. The liability of the partners in the LLP is limited to the contribution they have made to the entity and one partner is not responsible for the act done by the other partners. LLP can be formed by two or more partners and an individual and the body corporate can be the partner in the LLP [2]. In the case of an individual, he should not be incapable of being the partner because of unsoundness of mind or if he is an undischarged insolvent or if he has applied to be adjudicated as insolvent and the application is pending [3].
Historical Context
Even before the introduction of the LLP Act in India, there were various jurisdiction where such law was already in place. The origin of LLP as a concept was first seen in Texas, USA in 1991. Thereafter, it spread to various jurisdictions including the UK, Singapore, etc.
In the Indian Context, it all started back then in 1957, when iron, steel and hardware merchants’ chamber of India made a suggestion to recognise the partnership with the limited liability which was rejected by the 7th report of the First Law Commission chaired by Mr. M. C. Setalvad. Later on, in 1997, expert committee report on small enterprises chaired by Abid Hussain also recommended legislation for LLP. Similarly, the Naresh Chandra Committee in 2003 and the JJ Irani Committee report on company law in 2005 also suggested for the introduction of LLP legislation in India.
With all this background and the changing dynamics of business operations across the globe, there was a need for legislation that particularly dealt with the aspect of Partnership with having the limited liability as that of members of the company. Therefore, the limited liability partnership bill was passed by both houses of parliament and received the assent of the president on 7th January 2009, and we get the concept of a separate legal entity in the case of Partnership.
Incorporation of an LLP
Any two or more persons wishing to conduct a lawful business, trade, profession, or service with the intent to make a profit can apply to incorporate an LLP. This includes limited companies, foreign companies, LLPs, and even non-residents.
Partner and Designated partners
An LLP can be incorporated with a minimum of at least two partners who can be Individuals or Body Corporate who come together to carry on the business and make profits [4]. Further for incorporating an LLP, of the total number of partners, at least two shall be Designated Partners, of which at least one must be an Indian Resident [5]. Every designated partner of the LLP shall obtain the Direction Identification number from the central government [6].
Deciding Name of the LLP
The next step in incorporating an LLP is to select a suitable name. The chosen name must be evaluated under specific guidelines and reserved by submitting Form 1 of Rule 18(5) of the Limited Liability Partnership Act 2008. The name must not be identical or too similar to an existing company or LLP registered in India. If a corporate entity is to be a partner in the LLP, a copy of the board resolution authorizing the incorporation must be attached to the application.
It should also not include words prohibited by the Emblems and Names (Prevention of Improper Use) Act, 1950, or be deemed ‘undesirable’ by the Central Government under Rule 18(2). If the department believes that a company's registered name misleadingly indicates the nature of its activities, potentially causing public harm, it may direct the company to change its name. A company must not conduct business under a name that falsely represents it as another entity. Even without fraud, the original company or firm can seek an injunction from the court to prevent this misrepresentation. The principles applicable to individuals trading under identical or similar names will also apply in such cases.
Drafting the LLP Agreement
The next crucial step in forming an LLP is to draft the LLP Agreement, which outlines the mutual rights and duties among the partners and between the LLP and its partners [7]. The basic contents of the Agreement include:
- Name of the LLP
- Names of Partners and Designated Partners
- Form of Contribution
- Profit Sharing Ratio
- Rights and Duties of Partners
- Proposed Business
- Rules for Governing the LLP
If no agreement is made, the default rights and duties as prescribed under Schedule I of the LLP Act will apply.
Although the LLP Agreement does not need to be signed at the time of incorporation, it must be filed in e-Form 3 within 30 days of incorporation. To prevent disputes regarding the terms and conditions after forming the LLP, it is advisable to draft and execute the LLP Agreement before incorporation.
Incorporation document
This stage involves filing the incorporation documents, partner consents, and declarations electronically with the Registrar of LLP. This requires payment of fees based on the total monetary value of the partners' contributions. The necessary forms include e-Form 2, which details the LLP, its partners, their contributions, and a declaration of compliance with the LLP Act, 2008. E-Form 3 provides information about the LLP Agreement between the partners, while e-Form 4 includes the consent of each partner, along with their address and identity proof. Additionally, the partners must subscribe their names and signatures on the subscription sheet, witnessed by a Chartered Accountant, Company Secretary, or Advocate in practice. E-Forms 3 and 4 must be filed within 30 days of incorporation. All e-forms need to be digitally signed by a Designated Partner and certified by a professional involved in the formation of the LLP.
Certificate of Incorporation
Once the Registrar is satisfied that all the formalities with respect to the incorporation have been complied with, he will issue a Certificate of Incorporation as to the formation of the LLP within 14 days from the date of filing of documents. The Certificate of Incorporation issued shall be conclusive evidence of formation of the LLP.
Benefits of LLP
Separate Legal Entity Concept
As compared to the earlier partnership where the liability of the partner was unlimited, now the concept of a separate legal entity is introduced as was in the company. Now the LLP is a separate legal entity from the partners and contracts can entered into in the name of the LLP instead of the partners. Because LLP is a legal entity, it can sue and be sued in its name.
Limited Liability of the Partner
In LLP the partner's liability is limited to the amount of contribution made by them in the LLP and is not liable for any loss in the business. If the LLP becomes insolvent in case of winding up then from the assets of the LLP, the debts will be paid off and the individual partner has no personal responsibility.
Less compliance and low cost
The LLP structure offers a low-cost and less compliance-intensive business environment. Key features such as the absence of a minimum capital requirement, simplified incorporation and management processes, exemption from mandatory audits for small LLPs, and less stringent record-keeping, collectively reduce the financial and administrative burden on LLPs. This makes the LLP structure particularly attractive for small and medium-sized enterprises and professional service firms.
Conclusion
The Limited Liability Partnership (LLP) has emerged as a robust and versatile business structure in the Indian corporate landscape, seamlessly blending the advantages of both partnerships and companies. With its introduction under the LLP Act, 2008, India embraced a modern framework that addresses many of the traditional limitations associated with partnerships while retaining their flexibility and simplicity.
As businesses continue to evolve and adapt to changing global dynamics, the LLP provides a practical and forward-thinking solution that caters to the needs of today’s entrepreneurs and professionals. Understanding the intricacies of LLP formation, compliance, and benefits is crucial for making informed decisions and leveraging this structure to its fullest potential.
[1] Section 3 of the LLP Act.
[2] Section 6 of the LLP Act.
[3] Section 5 of the LLP Act.
[4] Section 6 of LLP Act.
[5] Section 7 of LLP Act.
[6] Section 7 (6) of LLP Act.
[7] Section 23(1) of the LLP Act.