LLP, a legal form available world-wide is now introduced in India and is governed by the Limited Liability Partnership Act 2008, with effect from April 1, 2009. link (pdf) .
LLP combines the advantages of ease of running a Partnership and separate legal entity status and limited liability aspect of a Company.
Here are some of the main features of a LLP
- LLP is a separate legal entity separate from its partners, can own assets in its name, sue and be sued.
- Unlike corporate shareholders, the partners have the right to manage the business directly
- One partner is not responsible or liable for another partner’s misconduct or negligence.
- Minimum of 2 partners and no maximum.
- Should be ‘for profit’ business.
- Perpetual succession.
- The rights and duties of partners in LLP, will be governed by the agreement between partners and the partners have the flexibility to devise the agreement as per their choice. The duties and obligations of Designated Partners shall be as provided in the law.
- Liability of the partners is limited to the extent of his contribution in the LLP. No exposure of personal assets of the partner, except in cases of fraud.
- LLP shall maintain annual accounts. However, audit of the accounts is required only if the contribution exceeds Rs. 25 lakhs or annual turnover exceeds Rs.40 lakhs.
A LLP is indeed advantageous because of comparatively lower cost of formation, lesser compliance requirements, easy to manage and run and also easy to wind-up and dissolve, no requirement of minimum capital contributions, partners are not liable for the acts of the other partners and importantly no minimum alternate tax (as of date). But, LLP cannot raise money from the public.
The process for incorporating a LLP is pretty simple. The flow chart here depicts it clearly.
The Registrar of Companies (ROC) is the authority having jurisdiction over the incorporation. The steps required are:
- Decide on the Partners and the Designated Partners
- Obtain Designated Partner Identification Number (DPIN) and a digital signature certificate.
- Decide on the name of the LLP and check whether it is available.
- Draft the LLP agreement
- File the LLP Agreement, incorporation documents and obtain the Certificate of Incorporation.
In order to help you decide on which legal form to choose, here’s a feature comparison between the LLP, Partnership firm and a Company:
|Registration||Compulsory registration required with the ROC. Certificate of Incorporation is conclusive evidence.||Not compulsory. Unregistered Partnership Firm will not have the ability to sue.||Compulsory registration required with the ROC|
|Name||Name of a public company to end with the word “limited” and a private company with the words “private limited”||No guidelines.||Name to end with “LLP”” Limited Liability Partnership”|
|Capital contribution||Private company should have a minimum paid up capital of Rs. 1 lakh and Rs.5 lakhs for a public company||Not specified||Not specified|
|Legal entity status||Is a separate legal entity||Not a separate legal entity||Is a separate legal entity|
|Liability||Limited to the extent of unpaid capital.||Unlimited, can extend to the personal assets of the partners||Limited to the extent of the contribution to the LLP.|
|No. of shareholders / Partners||Minimum of 2. In a private company, maximum of 50 shareholders||2- 20 partners||Minimum of 2. No maximum.|
|Foreign Nationals as shareholder / Partner||Foreign nationals can be shareholders.||Foreign nationals cannot form partnership firm.||Foreign nationals can be partners.|
|Taxability||The income is taxed at 30% + surcharge+cess||The income is taxed at 30% + surcharge+cess||Not yet notified.|
|Meetings||Quarterly Board of Directors meeting, annual shareholding meeting is mandatory||Not required||Not required.|
|Annual Return||Annual Accounts and Annual Return to be filed with ROC||No returns to be filed with the Registrar of Firms||Annual statement of accounts and solvency & Annual Return has to be filed with ROC|
|Audit||Compulsory, irrespective of share capital and turnover||Compulsory||Required, if the contribution is above Rs.25 lakhs or if annual turnover is above Rs. 40 lakhs.|
|How do the bankers view||High creditworthiness, due to stringent compliances and disclosures required||Creditworthiness depends on goodwill and credit worthiness of the partners||Perception is higher compared to that of a partnership but lesser than a company.|
|Dissolution||Very procedural. Voluntary or by Order of National Company Law Tribunal||By agreement of the partners, insolvency or by Court Order||Less procedural compared to company. Voluntary or by Order of National Company Law Tribunal|
|Whistle blowing||No such provision||No such provision||Protection provided to employees and partners who provide useful information during the investigation process.|
But, LLP might not be a choice due to certain extraneous reasons, for example, DOT would approve the application for a leased line only for a company; Angels / VCs would be comfortable investing in a company.
The framework for incorporating a LLP is in place and currently registrations are centralized at Delhi.
Please leave your questions in the comments section.
Founder, Novojuris Services India Pvt. Ltd.
A legal consulting company focused on start-ups.
Disclaimer: This article is for informational purposes only and is intended but not promised or guaranteed to be correct, complete and up-to-date. This is not a legal advice or opinion.
Also see: Legal Resources for startups