LIMITED LIABILITY PARTNERSHIP ACT, 2008 AN OVERVIEW

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1 LIMITED LIABILITY PARTNERSHIP ACT, 2008 AN OVERVIEW Mamta Mitra Assistant Professor, Department of Commerce Kirori Mal College Limited Liability Partnership (LLP) is a corporate business vehicle that enables professional expertise and entrepreneurial initiative to combine and operate in flexible, innovative and efficient manner, providing benefits of limited liability while allowing its members the flexibility for organizing their internal structure as a partnership. LLP is an incorporated partnership formed and registered under the Limited Liability Partnership Act 2008 with limited liability and perpetual succession. The Act came into force, for most part, on 31st March 2009 followed by its Rules on 1st April 2009 and the registration of the first LLP on 2nd April 2009.This new entity combines the benefits of managerial and financial flexibility of the partnership firm registered under the Indian Partnership Act, 1932 with the limited liability and perpetual succession of a company incorporated under the Companies Act. LLP is a new corporate form of doing any lawful business for profit. Business includes trade, commerce, manufacture, service, profession etc. This new entity should prove highly beneficial especially for small entrepreneurs in business and industry including knowledge or technology-based units, venture capitalists, professional service providers like Company Secretaries, Chartered Accountants, Cost Accountants, Advocates, Consultants and the like. A limited liability partnership (LLP) is a body corporate, with a distinct legal entity separate from that of its partners. It has perpetual succession and a common seal. A limited liability partnership, which is a separate legal person, will be liable to the third parties independent of the other partners. Any change in its partners, will not affect the existence, rights or liabilities of the limited liability partnership. Like a company, a limited liability partnership can do all the things an individual

2 or company can do. It can make contracts, sue or be sued, hold property or become insolvent. A limited liability partnership can at best be described as a hybrid between a company and a partnership, that provides the benefits of limited liability but allows its members the flexibility of organizing their internal structure as a partnership based on a mutually arrived agreement.336 LLPs are registered as on 12 November, Need for the New Corporate Form - LLP With the growth of the Indian economy, the role played by its entrepreneurs as well as its technical and professional manpower has been acknowledged internationally. It is felt opportune that entrepreneurship, knowledge and risk capital combine to provide a further impetus to India s economic growth. In this background, a need has been felt for a new corporate form that would provide an alternative to the traditional partnership, with unlimited personal liability on the one hand, and, the statute-based governance structure of the limited liability company on the other, in order to enable professional expertise and entrepreneurial initiative to combine, organize and operate in flexible, innovative and efficient manner. The Limited Liability Partnership (LLP) is viewed as an alternative corporate business vehicle that provides the benefits of limited liability but allows its members the flexibility of organizing their internal structure as a partnership based on a mutually arrived agreement. The LLP form would enable entrepreneurs, professionals and enterprises providing services of any kind or engaged in scientific and technical disciplines, to form commercially efficient vehicles suited to their requirements. Owing to flexibility in its structure and operation, the LLP would also be a suitable vehicle for small enterprises and for investment by venture capital. Keeping in mind the need of the day, the Parliament

3 enacted the Limited Liability Partnership Act, 2008 which received the assent of the President on 7th January Features of Limited Liability Partnership The salient features of the LLP Act 2008 inter alia are as follows: - (i) The LLP shall be a body corporate and a legal entity separate from its partners. Any two or more persons, associated for carrying on a lawful business with a view to profit, may by subscribing their names to an incorporation document and filing the same with the Registrar, form a Limited Liability Partnership. The LLP will have perpetual succession. (ii) The mutual rights and duties of partners of an LLP inter se and those of the LLP and its partners shall be governed by an agreement between partners or between the LLP and the partners subject to the provisions of the LLP Act The act provides flexibility to devise the agreement as per their choice. In the absence of any such agreement, the provisions of shall govern the mutual rights and duties proposed the LLP Act. (iii) The LLP will be a separate legal entity, liable to the full extent of its assets, with the liability of the partners being limited to their agreed contribution in the LLP which may be of tangible or intangible nature or both tangible and intangible in nature. No partner would be liable on account of the independent or unauthorized actions of other partners or their misconduct. The liabilities of the LLP and partners who are found to have acted with intent to defraud creditors or for any fraudulent purpose shall be unlimited for all or any of the debts or other liabilities of the LLP. (iv) Every LLP shall have at least two partners and shall also have at least two individuals as Designated Partners, of whom at least one shall be resident in India. The duties and obligations of Designated Partners shall be as provided in the law.

4 (v) The LLP shall be under an obligation to maintain annual accounts reflecting true and fair view of its state of affairs. A statement of accounts and solvency shall be filed by every LLP with the Registrar every year. The accounts of LLPs shall also be audited, subject to any class of LLPs being exempted from this requirement by the Central Government. (vi) The Central Government have powers to investigate the affairs of an LLP, if required, by appointment of competent Inspector for the purpose. (vii) The compromise or arrangement including merger and amalgamation of LLPs shall be in accordance with the provisions of the LLP Act (viii) A firm, private company or an unlisted public company is allowed to be converted into LLP in accordance with the provisions of the Act. Upon such conversion, on and from the date of certificate of registration issued by the Registrar in this regard, the effects of the conversion shall be such as are specified in the LLP Act. On and from the date of registration specified in the certificate of registration, all tangible (moveable or immoveable) and intangible property vested in the firm or the company, all assets, interests, rights, privileges, liabilities, obligations relating to the firm or the company, and the whole of the undertaking of the firm or the company, shall be transferred to and shall vest in the LLP without further assurance, act or deed and the firm or the company, shall be deemed to be dissolved and removed from the records of the Registrar of Firms or Registrar of Companies, as the case may be. (ix) The winding up of the LLP may be either voluntary or by the Tribunal to be established under the Companies Act, Till the Tribunal is established, the power in this regard has been given to the High Court. (x) The LLP Act 2008 confers powers on the Central Government to apply provisions of the Companies Act, 1956 as appropriate, by notification with such

5 changes or modifications as deemed necessary. However, such notifications shall be laid in draft before each House of Parliament for a total period of 30 days and shall be subject to any modification as may be approved by both Houses. (xi) The Indian Partnership Act, 1932 shall not be applicable to LLPs. Who can be a Partner in LLP (i) An individual (other than one who has been found to be of unsound mind by Court, an undischarged insolvent; has applied to be adjudged insolvent and application is pending) (ii) Indian private and/or public company (iii) Foreign company (iv) Any other LLP (v) LLP registered outside India. Who cannot be a Partner in LLP (i) a corporation sole (ii) a co-operative society (iii) any other body corporate ( not being a company as defined in section 3 of Companies Act,1956 or limited liability partnership as defined in this Act),which the Central Government may, by notification in the Official Gazette specify in this behalf. Merits of LLP Easy and less expensive formation. Flexibility in management. No requirement of any minimum capital contribution by partners. No restriction as to maximum number of partners. LLP is a separate legal entity. Partners are not liable for acts of other partners. Low Compliance cost.

6 No exposure to personal assets of the partners except in case of fraud. Fewer requirements as to maintenance of statutory records. Less Government Intervention. Easy to dissolve or wind-up. Professionals can form Multi-disciplinary Professional LLP, which was not allowed earlier. LLP for the Professionals LLPs are eminently suited to the professionals like Company Secretaries, Chartered Accountants and others. They will get the benefit of limited liability and insulate them from third party claims against professional negligence or deficiency. Accountants, solicitors and recognized professionals are organized as partnership firms. Partnership firms are founded on the principle of unlimited liability, which is joint and several, and agent-principal relationship. LLP will not protect the partners against their personal liability, but will grant the most-needed protection of liabilities filtering in due to actions of other partners. The LLP legislations provide that partners will be agents of the LLP, but not of other partners. Hence, vicarious liability for acts of other partners will be shielded against. A cross section of the professionals may come together under the banner of LLP to carry on the professional work in their respective field of specialization, with the respective statutes according sanction for such a dispensation. It will give the professions the much-needed impetus of global presence and level playing field against their foreign counterparts. Governance of LLP The Act comprises of 81 sections in 14 Chapters and 4 Schedules. The Rules comprise of 41 rules in 18 chapters, with 31 forms and 4 annexures (A to D). The Registrar of Companies and the Ministry of Corporate Affairs (MCA) are the administrative authorities to regulate the LLP Act The Ministry is primarily

7 concerned with the administration of the Limited Liability Partnership Act 2008 and the rules framed there under. Every year, LLP shall file with ROC, (i) statement of account and solvency of LLP, signed by designated partners and (ii) Annual Return. The existing partnership law is specifically excluded from application to LLPs and should not be looked upon as applying in any form of default basis. The LLP Act 2008 empowers the Central Government to apply the provisions of the Companies Act 1956 or any other Act with appropriate exception, modifications and adaptation to LLP. Comparative Analysis of LLP In India, businesses mainly operate as companies, sole proprietorships and general partnerships. Each of these business structures has its own advantages and shortcomings and is subject to different regulatory and tax regimes. The partnership form of business fails to recognize the difference between partnership and partners. It also restricts the maximum number of partners to ten, in case of banking business and twenty in case of other business and it imposes unlimited liability on each partner for acts committed by another and by partnership as a whole. The private company form of business, by its articles of association, limits the number of its members to fifty (excluding the past and present employees of the company), restricts the right of its members to transfer its shares and prohibits an invitation to the public to subscribe to any shares in or the debentures of the company. As an alternative, Limited Liability Partnership (LLP) addresses some of these concerns. The primary intention of LLP is that its external structure should mirror that of the limited company but in terms of conduct of internal affairs it would be similar to traditional partnership. Some of the differences of LLP with the traditional partnership and private limited company are given below.

8 POINT OF COMPARISON LIMITED LIABILITY PRIVATE LIMITED PARTNERSHIP PARTNERSHIP COMPANY Governance The Limited Liability The Indian Partnership Act, Partnership Act, The Companies Act, 1956 Registration Mandatory Optional Mandatory Minimum: At least 2 partners Minimum: At least 2 members Number of Members Minimum: At least 2 partners Maximum: 10 in case of Maximum: 50, excluding Maximum: No Restriction banking business and 20 in members who are or were case of other business in the employment of the company. It is a body corporate It is a body corporate having a It is not a body corporate and having a separate legal Body Corporate & Separate separate legal entity capable does not have a separate entity capable of sueing Legal Entity of sueing and being sued in its legal entity. and being sued in its own own name name Name Name to end with LLP The firm, registered, shall Name to end with private use word (Registered) limited immediately after its name Liability of a Partner is limited Liability of Partners to the extent of his capital as Every Partner is liable jointly per the LLP Agreement, Liability of the shareholder (with all the other partners) except in case of unauthorized is limited to the extent of and severally for all acts of acts, fraud and negligence of total amount due on the firm done while he is a partner(s) when the delinquent shares subscribed partner partner will be personally liable. Minimum number of Designated Partners: At least There is no concept of Directors: At least 2 and directors/ Designated 2 and have DPIN Designated Partners have DIN Partners Management By Partners/Designated Partners By Partners By Board of Directors Incorporation Document is Memorandum & Articles of Incorporation Document executed. LLP agreement Association to be filed with Partnership deed governs the mutual rights and RoC. Table A applies in duties of partners of LLP. the absence of Articles.

9 Conclusion LLP Act is going to serve a long felt need of small players in the market. They can organize themselves in a better manner under the umbrella of limited liability. LLP is not legally a partnership. It is, however - like a company - a corporate body with a continuing legal existence independent of its members. Also, as with a limited liability company, partner cannot lose more than what is invested in an LLP. The introduction of LLP concept in India would provide a further impetus to the growth of the entrepreneurs and professionals by providing them an effective alternative to the traditional partnerships while also allowing them to enjoy benefits of a limited liability company. LLP would also be a suitable vehicle for small enterprises and for investment by venture capital. LLP will play a major role in the manufacturing sector of India. The manufacturing sector in our country is dominated by the Small and Medium Enterprises (SMEs). But most of these SMEs are in non-corporate form, the reason being the high compliance cost of the companies. The Proprietorship form of business is preferred by these SMEs due to complete flexibility and less compliance cost. But for this gain the sector faces problems in availing the credit facility from the bankers. Now the Limited Liability Partnership form has opened the door for manufacturing sector to enjoy the twin advantages of less compliance with higher access to credits in the market. Limited liability partnership form of business structure is prevalent in various countries in the world, and in India as well it would definitely be a boon for professionals, service providers, traders and manufacturers. This enables professional expertise and entrepreneurial initiative to combine, organize and operate in an innovative and efficient manner.