All you need to know about Limited Liability Partnership (LLP)

Introduction to Limited Liability Partnership(LLP) Registration

Limited liability partnerships, or LLPs, are based on an equitably new but quite an innovative concept. While they haven’t been around for long and came into existence to close some major drawbacks in the laws throughout the world that left many who work as partners in a business revealed to major financial risks. However, an Limited Liability Partnership (LLP) comes with a huge range of benefits over the other traditional types of businesses. Evidently, it’s also much more convenient to manage, and these are probably some major reasons for the reference in increase growing popularity of LLPs throughout the world, with India being no exception.

Overview of Limited liability Partnership

An LLP or a limited liability partnership is fundamentally a partnership, as is the case with the traditional partnerships and corporations. In fact, with respect to the jurisdiction, none of the members may be applicable to unlimited liability, meaning that all the members of the LLP would enjoy a limited liability and hence a remarkably higher level of protection against the financial risks combined with traditional partnerships. However, that doesn’t mean that LLP operations very differently from a traditional partnership firm, which may provide that it would be more challenging to operate the former. One major difference of an LLP is that the partners aren’t responsible for the misconduct, negligence, mistakes or irresponsible business decisions taken on the part of another partner. This is eventually a wide relief for those looking to start a partnership business, as with respect to the Partnership Act 1890, which maintains the traditional partnership businesses, ALL members of the partnership businesswould be liable for another member’s wrongdoings. Hence, this organizes an limited liability partnership (LLP) the clear winner between the two, with the former even allowing some partners to have a form of limited liability that’s very familiar to the ones shareholders have in a company. However, unlike shareholders, the partners obviously have controlling rights in the business. These kinds of activities of LLPs more attractive to investors who would actually not bother than considering an investment in a traditional partnership. Because, an investment in an LLP may provide all the advantages that come with investing in any specific type of business, it would also come with the added advantage of being able to plays as a vital role in the company’s management.

However, it’s also worth noting that in some countries, it’s mandatory for at least one partner to have “unlimited” liability in the partnership. At lastly, important difference between LLPs and traditional partnerships are the variant tax laws.

Emergence of Limited Liability Partnership (LLP)

The U.S. became the country to introduce the concept of LLPs to the world in the early 1990s. Back then, the U.S., and particularly Texas, was hit by a major a decline in economic activity with real estate and energy prices fall suddenly to surprisingly low levels. This resulted in the failure of many banks, savings and loans. However, as it wasn’t possible to recover most of the losses, the banks turned to the lawyers and accounts who advised them in the early 1980s to recover their losses. This is because the laws in existence back then allowed the recovery of such losses from those partners in the law and accounting firms, even if this meant that they would personally go bankrupt in paying off the losses which apparently weren’t caused due to their direct involvement. Hence, it was only fair to shield such partners from such potential huge financial risks, and this led to laws being passed to introduce a new concept that would protect such members of partnership businesses, introducing the concept of LLPs to the world. Many other countries followed suit, as they too realized the importance of LLPs and the major drawbacks associated with traditional partnerships, including India, Canada, Japan, Germany, China, Poland, Romania, Singapore, Greece and Kazakhstan.

Introduction of LLP in India

LLPs came into existence in India when the official Gazette of India newly established the Limited Liability Partnership Act 2008 on January 9, 2009. It came into effect from 31 March, 2009. However, it covered just a few sections.

It was updated currently, by adding sections that mentioned how traditional partnerships and other companies can convert into an LLP. The first LLP was registered in the first week of April, 2009, which followed by many more over a short period of time.

Unlike some other countries, however, LLPs in India don’t want to have at least one compulsory member with unlimited responsibility. All the members are entitled for limited liability. So this basically means that their liability may be just limited to the amount of capital they have invested into the business.

Some of the important and essential advantages of an LLP in India which follows:

• An LLP has a separate and identical legal status from its liable partners, and it has perpetual succession
• It’s governed only by the separate legal agreement or legislation (LLP Act, 2008), and none of the provisions of the Indian Partnership Act, 1932 are applicable to it
• Every LLP have the rights to use “Limited Liability Partnership” or “LLP” as the last word of its own unique name and it is mandatory.
• LLP is fundamentally a combination of both a ‘corporate entity’ and a ‘partnership business’
• It is compulsory for every LLP to have at least two partners, with one of them being a resident of India. The other partners shall be agents of the LLP. While an LLP agreement isn’t mandatory, the rights and liabilities of the partners will be found with respect to the Schedule I of the LLP Act in the absence of one
• As the limited liability partnership is maintained as a separate legal entity, and its partners and the LLP aren’t the same.
• Unlike a company, there aren’t any minimum capital requirements when it comes to an LLP.
• Similarly, unlike the traditional partnerships, an LLP doesn’t eventually have any limitation on the maximum number of members that can join it. It, however, does need a minimum of two partners for obvious reasons
• Unlike private and public companies, an LLP doesn’t need compulsory audits. However, there are exceptions to this rule, as if the total capital of the LLP exceeds Rs. 25 Lakhs, or if the annual turnover turns out to be over 40 Lakhs.

What are the Advantages of an LLP?

While we have already touched upon some of the major advantages of LLPs, there’s actually a lot more to it. So without further ado, let’s take a look at some of the most important advantages of an LLP.

Limited Liability — And Why It Matters So Much?

Well, we know it’s kind of obvious and we have already mentioned quite a bit about it. However, we still think it’s worth elaborating on this one even more as it’s such an important feature of an LLP. Apparently, most partnership businesses in India end up failing. Hardly a few of all the ones that are started manage to last more than just 5 years. This is saying something, as many private and public companies tend to run quite effectively (while maintaining an impressive growth rate) for decades. While there may be many reasons to blame for the lackluster performance of such traditional partnerships in India, one of the major ones would probably turn out to be the unlimited liability the partners are burdened with. Although it may not seem a big deal unless the business ends up making huge losses, there are actually many other things that get affected due to it that are often overlooked. For instance, when the partners are aware of the fact that they may end up going bankrupt if things go terribly wrong, they will probably have a very careful and cautious approach, which isn’t exactly the way to go about managing a new business. There are many other similar things as well that get affected due to unlimited liability, but hope you get the point. Similarly, you also won’t be responsible for any losses arising out of another partner’s wrongdoings. The same goes in the event of a fraud or something — your personal property will surely not be included to pay off the liabilities of your business. This is indeed a very relieving feature, as it also means less disagreements and arguments between the partners, as they would be aware that even if someone gets involved in some kind of misconduct, the other partners won’t be responsible for their actions.

Finally, you may also want to know that you would even be protected against any lawsuits that your business may come across. Even if the business fails to pay off the claims by the other party, you wouldn’t have to pay anything out of your pocket, including even the fees and charges for the lawsuit. Although LLPs have been established in India recently, but they have been a very popular type of business across the world within a short time. This is significantly true when it comes to businesses offering different services, as they mostly tend to be LLPs.

Similarly, though LLPs aren’t as well-known in India as elsewhere in the world, they are still considered trustworthy. This is because LLPs are known to operate more gently and efficiently as compared to traditional partnerships.

Furthermore, they are also recognized as a corporate body, which provides that the partners are serious about what they are doing, which perhaps isn’t the case when it comes to traditional partnerships. LLP registration is indeed quite simple compared to the other registration carried while starting a private or public company. While even starting a traditional partnership is simple enough, unlike LLPs, it doesn’t have a separate legal identity.

Perpetual Succession

An LLP, which is known as a separate legal entity, has the quality of perpetual succession. This means that regardless of the changes in the partners, it will continue to survive until its wound up legally. It will also continue to enjoy all the benefits for as long as it stays in existence, notwithstanding any changes that happen in its ownership or other any changes.

Easy Transfer of Ownership

It’s easy to leave or join the LLP as a partner. Similarly, it’s also just as easy to transfer the ownership to a new partner, as long as it’s allowed by the agreement.

Flexibility of Limited Liability Partnership (LLP)

An LLP, despite being a body corporate, doesn’t compromise on the flexibility front. This may permits the partners to operate the Limited Liability Partnership (LLP) by their own wish too, provided their actions are in accordance with the LLP agreement.

Easy to Attract Investors

An LLP attracts investors more easily and beneficially than a small business or any kind of partnership. After all, as it’s a regulated entity and tend to function more effectively and efficiently, PE investors and financial institutions don’t hesitate before making an investment.

Taxation Benefits

This is another great advantage of an LLP. It has lower tax rates than companies, and is also not subjected to the Dividend Distribution Tax, meaning that it won’t be liable to tax while distributing the profits among the partners.

Process of Registration of a New LLP

By the above description, LLP registration can usually be a breeze, specifically when compared to registering other types of business entities. That being said, here are steps involved while doing your LLP registration.

Obtaining the DIN or DPIN

For starting a new LLP in India, you first want to obtain the DIN (Director Identification Number) or DPIN (Designated Partner Identification Number). This is supposed to be done by each and every appointed or delegated partners or members of the LLP.

You can apply for it by filing an e-Form DIN-1. However, if you have already got a DIN, you can use that as well.

Acquiring DSC

The Information Technology Act, 2000 requires all electronic documents to use Digital Signature Certificate (DSC) for ensuring the required level of security.

Only a licensed Certifying Authority (CA) can issue the DSC. A Certifying Authority (CA) is a person that has been approved to provide DSC by the Information Technology Act, 2000.

Apply for a Name

You then need to apply for your LLP’s own identity like name by filling in the Form 1. According to the type of LLP you want to register, you may even have to fill in the Form 2.

After the ministry approves your LLP’s name, you will get a confirmation email to your registered email id.

LLP Agreement

After you’re done with the LLP registration process and got it approved, you need to file your LLP agreement within 30 days. You need to use the Form 3 for doing this.

Converting into an LLP

If you’re an existing partnership and want to convert into an LLP, you need to fill out the Form 17 for doing so.

Starting a FLLP

To start a Foreign Limited Liability Partnership (FLLP), and register it and the process of filling is carried on the Form 27. While it isn’t compulsory for you to get a DIN or DPIN, but you would still want to get the DSC.

Limited Liability Partnership (LLP) Registration Costs

The fee structure for LLP registration is actually pretty simple. So let’s just cut to the chase and take a look at the fee structure. This fee structure is also proceeding for LLP registration including conversion of a partnership firm, private or unlisted public company into an LLP.

For an Limited Liability Partnership (LLP) whose contribution isn’t more than Rs. 1 Lakh, the fee would be Rs. 500. Similarly, if the contribution is between Rs. 1 Lakh to Rs. 5 Lakhs, you will have to shell out Rs. 2,000. For LLPs whose contribution is in the range of Rs. 5 Lakhs to Rs. 10 Lakhs, you would be looking at paying Rs. 4,000 in fees. Finally, if the contribution exceeds Rs. 10 Lakhs, the fees to be paid would turn out to Rs. 5,000.

Conclusion

The above mentioned details about limited liability partnership are pretty much enough to know about the concept of LLPs, LLPs in India, as well as LLP registration process.

LLPs appear to be the best way of business to go for currently. Apparently, the only downsides appear to be that an LLP isn’t permitted to increase funds from the public and the winding up process of an LLP is quite difficult compared to other type of business. However, these really aren’t downsides given you don’t plan to make your business go public.

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