LLP is a business structure that came into being with the passing of the LLP Act, 2008, and the notification of the LLP Rules, 2009. Section 3 of the LLP Act declares an LLP as a body corporate formed and incorporated under the Act and is a legal entity separate from its partners. LLPs are flexible legal and tax entity that allows partners to benefit from economies of scale by working together while also reducing their liability for the actions of other partners.
Limited liability partnerships (LLPs) allow for a partnership structure where each partner’s liabilities are limited to the amount they put into the business. Having business partners means spreading the risk, leveraging individual skills and expertise, and establishing a division of labor. Limited liability means that if the partnership fails, creditors cannot go after a partner’s assets or income. LLPs are common in professional businesses like law firms, accounting firms, and wealth managers.
Most LLPs are created and managed by a group of professionals who have a lot of experience and clients between them. By pooling resources, the partners lower the costs of doing business while increasing the LLP’s capacity for growth. They can share office space, employees, and so on. Most importantly, reducing costs allows the partners to realize more profits from their activities than they could individually.
Meaning of Limited Liability Partnership (LLP)
LLP is a Limited Liability Partnership and is a corporate business vehicle that provides the benefits of limited liability of a company to its members and also allows them to manage their internal management based on mutually arrived agreement as in the case of a partnership firm.
Partners have lower liabilities to any debt that may arise in the future in running the business. It contains elements of both a corporate structure as well as a partnership firm structure’ and is called a hybrid between a company and a partnership. The Partners are required to contribute towards the LLP as specified in the LLP Agreement.
Their share can be in any form i.e. tangible or intangible, movable or immovable property, monies, and cash. In terms of liability under a Limited Liability Partnership, the Company is liable for losses or debts incurred in running the business whereas the individual members of the LLP shall not be liable for such losses or debts.
Salient Features of Limited Liability Partnership
According to Section 3 of the Limited Liability Partnership Act 2008 (LLP Act), an LLP is a body corporate, formed and incorporated under the Act. It is a legal entity separate from its partners.
Perpetual Succession
Unlike a general partnership firm, a limited liability partnership can continue its existence even after the retirement, insanity, insolvency, or even death of one or more partners. Further, it can enter into contracts and hold property in its name.
Separate Legal Entity
Just like a corporation or a company, it is a separate legal body. Further, it is completely liable for its assets. Also, the liability of the partners has certain limitations in their contribution to the LLP. Hence, the creditors of the LLP are not the creditors of individual partners.
LLP Agreement
An agreement between all partners governs the rights and duties of all the partners. Also, the partners can devise the agreement as per their choice. If such an agreement is not made, then the Act governs the mutual rights and duties of all partners.
Artificial Legal Person
For all legal purposes, LLP is an artificial legal person. A legal process creates it and has all the rights of an individual. It is invisible, intangible, and immortal but not fictitious since it exists.
Common Seal
If the partners decide, the LLP can have a common seal [Section 14(c)]. It is not mandatory though. However, if it decides to have a seal, then the seal must remain under the custody of a responsible official. Further, the common seal can be affixed only in the presence of at least two designated partners of the LLP.
Limited Liability
According to Section 26 of the Act, every partner is an agent of the LLP for the business of the entity. However, he is not an agent of other partners. Further, the liability of each partner has limitations to his agreed contribution to the LLP. It provides personal liability protection to its partners.
Minimum and Maximum Number of Partners in an LLP
Every Limited Liability Partnership must have at least two partners and at least two individuals as designated partners. At any time, at least one designated partner should be resident in India. There is no maximum limit on the number of maximum partners in the entity.
Business Management and Business Structure
The partners of the LLP can manage their business. However, only the designated partners are responsible for legal compliance.
Business for Profit Only
Limited Liability Partnerships cannot be formed for charitable or non-profit purposes. The entity must be formed to carry on a lawful business to earn a profit.
Investigation
The power to investigate the affairs of an LLP resides with the Central Government. Further, they can appoint a competent authority for the same.
Mutual Agency
Another difference between an LLP and a partnership firm is that the independent or unauthorized actions of one partner do not make the other partners liable. All partners are agents of the LLP and the actions of one partner do not bind the others.
Disadvantages of LLP
Here are some disadvantages of an LLP:
Lack of Secrecy
Public disclosure is the main disadvantage of an LLP. The documents filed through the MCA portal are public documents. Any person can pay a small fee of INR 50 and can get a copy of the LLP’s incorporation documents (but not the LLP agreement), financial statements, etc. This is not an issue in the case of sole proprietorship or traditional partnership firms, where documents and financials are not available for public inspection.
Limited Funding Alternatives
LLPs have limited alternatives when it comes to raising funds. LLPs can either borrow debt from financial institutions or via a loan from partners. Also, Foreign Direct Investment (FDI) in LLP is more restrictive as compared to companies. Neither an LLP can issue Employee Stock Options (ESOP). For these reasons, LLP is not the most ideal choice for startups who want to hyper-grow, seek seed or venture capital funding, or issue shares to their employees.
Penalty for Non-compliance
Though the compliance requirements for an LLP would be minimal, it is essential to adhere to them, or else it can lead to heavy penalties. Even if an LLP does not have any activity, Form 8 and Form 11 are required to be filed annually. In case of non-compliance, an additional fee of INR 100 per day, per form is applicable.
There is no cap on the additional fee, and it could run into lakhs if an LLP has not filed them for a few years. Also, the LLP and its DPs would be liable for a fine that can extend up to INR 5 Lakhs! In the case of a proprietorship or traditional partnership firm, there is no requirement for filing annual forms and the business need not bear non-compliance expenses.
Penalty for Improper Use of Words “Limited Liability Partnership”
Punishable with a fine which shall not be less than Rs. 50,000 but which may extend to Rs. 5,00,000.
Penalty for Filing False Incorporation Document
Punishable with imprisonment for a term which may extend to 2 years and with a fine which shall not be less than Rs.10,000 but which may extend to Rs. 5,00,000.
Key Highlights
- The LLP company needs to file the annual return within 60 days from the end of the close of the financial year. They also have to file the income tax return every year.
- In case if taxpayer’s turnover or gross receipts exceed a specified limit then they may also be required to undergo a tax audit.
- Any delay in filing Form-8 and Form-11 of LLP you need to pay the penalty of Rs. 100 per day per Form.
- Annual compliance filing is mandatory for any LLP. Whether having a business or not.
- All LLPs need to file Form-8 annually which is known as “Statement of Accounts and Solvency.”
- LLPs also need to appoint an auditor within 30 days of incorporation.
- If the LLPs engaged in international transactions then they have to file Form-3CEB.
- Annual Compliance for LLP requires the necessary documents such as financial statements, bank statements, and partner details as attachments.
- The partners in an LLP need to take responsibility for maintaining a proper book of accounts.
- Notably, LLPs are not required to audit their books of account except where their yearly turnover is above Rs. 40 lakhs.
- The LLP company provides limited liability protection to its partners. It can also protect their assets during financial scandals.
- The LLPs also have the option of keeping an account book on a cash basis.
- Annual return submitted in Form-11 gives the details about the LLP’s partners, capital contribution, and financial status.
- With affordable pricing, Legal251 completes all your compliance requirements of an LLP.
End Notes!
The name of the LLP, name and address of partners and designated partners, business object, place of business, and all other essential details of the LLP will be placed in the Agreement. Other clauses will be a form of contribution and interest on contribution, profit sharing ratio, rights, and duties of partners in case of admission, resignation, retirement, cessation, expulsion, proposed business, and rules governing the LLP.
Once the LLP Agreement is reviewed and agreed upon by the partners, it will be executed by payment of stamp duty. The agreement will be executed by payment of stamp duty, which depends on the respective State Stamp Act where the registered office of the Limited Liability Partnership is situated. Then with signature by partners and attestation by the witnesses, the agreement will be executed.
