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Formation of LLPs

January 10, 2010

Brief Overview of Limited Liability Partnership

Limited Liability Partnership (LLP) is a new form of organization introduced in India through the enactment of Limited Liability Partnership Act, 2008. Partnerships can now be incorporated as a limited liability partnership (LLP) and by doing so they can remove the unlimited liability of individual partners.

LLP is in vogue in many of the foreign countries like United Kingdom, United States of America, Australia, and Singapore etc. It is popular there, because of its dual characteristics, i.e., it is the blend of both the Company form and the Partnership form of organisations.

Limited Liability Partnership Vs Unlimited Liability Partnership /Company

Let us have a look in what way the LLP form is more favourable to conventional Partnership or a closely held limited Company.

1. A Limited Liability Partnership (LLP) shares many of the features of the normal
partnership – but it also offers reduced personal liability for business debts. Unlike
members of ordinary partnerships, the LLP itself is responsible for any debts that it runs up, not the individual partners. LLP and its partners are distinct from each other. Thus the name ―Limited Liability Partnership".

2. Unlike normal Partnership firm, an LLP is a body corporate having a distinct legal entity from its partners. LLP can sue, be sued, acquire, own, hold, develop or dispose of property, possess a common seal and do such acts as bodies corporate may lawfully do.

3. In an LLP one partner is not responsible or liable for another partner's misconduct or negligence. This is an important difference from that of a normal partnership. LLP
partners are not liable for the acts of other partners.

4. It has a perpetual succession. Any change in the partners of a LLP shall not affect the existence, rights or liabilities of the LLP.

5. Partnership Agreement is a must in case of an Unlimited Liability Partnership. Where as, such agreement is optional for an LLP. In absence of it, the mutual rights and obligations are determined as per schedule I of the LLP Act, 2008.

6. Unlike a partnership firm which restricts the maximum number of members to 10/20 and a private limited company which restricts the maximum number of members to fifty (50), there is no restriction on the maximum number of members in case of an LLP.

7. Unlike corporate shareholders, the LLP partners have the right to manage the business directly. In case of Company form, shareholders have to elect Board of Directors who in turn manage the Company in the best interests of the shareholders.

8. LLP will be taxed on the same lines as partnership firms — this would mean taxation of profit in the hands of the entity; the partners will be exempted. Further, LLP would not be liable to Dividend Distribution Tax and Minimum Alternate Tax. The surcharge on tax has also been revoked for Firms, which include LLP too. These tax incentives would make an LLP an attractive mode of business.

9. Audit is required, if the contribution is above Rs.25 lakhs or if annual turnover is above Rs. 40 lakhs.

In short it is a Partnership form with the following main advantages of a Company form:

• Separate Legal Entity
• Limited Liability
• Perpetual Succession

Other aspects which make it more acceptable

1. Low cost of Formation.
2. Easy to establish, manage & run.
3. No requirement of any minimum capital contribution.
4. Less Government Intervention.
5. Lesser compliance requirements
6. Easy to dissolve or wind up
7. Moreover the Limited Liability Partnership Act, 2008 has the provisions for the following:

• Corporate actions like mergers, amalgamations, etc.
• Winding up and Dissolutions
• Conversion of existing Partnership firm, Private Limited Company and Unlisted Public Company into an LLP

Major demerits of LLP

• LLP can not be formed for non profit objectives / purposes.
• Cannot raise money from Public.
• One of the designated partners must be resident in India.
• Though the LLP provides for two partners, if it has to be converted into a company under Part IX of the Companies Act 1956, there has to be seven partners.

Who can form an LLP

Any two or more persons associating for carrying on a lawful business with a view to profit may set up an LLP subject to the provisions of the Limited Liability Partnership Act, 2008.

The LLP Act does not restrict the benefit of LLP structure to certain classes of professionals only. LLP framework could be used for many enterprises, such as:

• Persons providing services of any kind
• Enterprises in new knowledge and technology based fields where the corporate form is not suited.
• For professionals such as Chartered Accountants (CAs), Cost and Works Accountants
(CWAs), Company Secretaries (CSs) and Advocates, etc.
• Venture capital funds where risk capital combines with knowledge and expertise
• Professionals and enterprises engaged in any scientific, technical or artistic discipline, for any activity relating to research production, design and provision of services.
• Small Sector Enterprises (including Micro, Small and Medium Enterprises)
• Producer Companies in Handloom, Handicrafts sector.

Which is a better structure – an LLP or a Ltd. Company

Selection of the best framework for a business venture entirely depends on the kind and scale of the activity being undertaken. Initially an LLP form may be more suitable, but as the business grows, it may have to be converted to a Company.

However, LLP may be opted, if the business can utilize the benefits of an LLP structure as mentioned above.

Procedure for Forming an LLP

1. Confirm the proposed business activity and the location of the LLP
2. Identify Partners (Minimum two. No restriction on maximum numbers)
3. Identify Designated Partners (Minimum two). One of them should be resident in India.
4. Obtain Designated Partner Identification Number (DPIN) [Form No.7] and Digital
Signature Certificate
5. Identify a suitable name to the venture being undertaken and apply for the availability of
such name in Form No.1
6. Draft an LLP Agreement (optional). In absence of it, Schedule I of the LLP Act, 2008 is
7. File the following incorporation documents:

S. No. Form Particulars of Form
1. Form 2 Details of partners, registered office etc
Subscription Sheet
2. Form 4 Consent of Partners - Consent of each
partner to become a partner of Liability
3. Form 3 LLP agreement (optional) - this can be filed
within 30 days from the date of registration.

Above said documents are required to be filed after signing digitally. On scrutiny, if found satisfied, the Registrar will register all documents and issue Certificate of Incorporation.

Want more information on LLP? Want help on selection of suitable structure – LLP or Ltd.
Company? Want to incorporate an LLP? Want to convert a Firm or Ltd. Company to an LLP?




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