Limited liability partnerships, or LLPs, are based on a fairly new but quite an innovative concept. While they haven’t been around for long and came into existence to close some major loopholes in the laws throughout the world that left many who work as partners in a business exposed to major financial risks.
However, an LLP comes with a wide range of benefits over the other traditional types of businesses. Apparently, it’s also much more convenient to manage, and these are probably some major reasons for the exponentially growing popularity of LLPs throughout the world, with India being no exception.
With that being said, let us try to learn pretty much everything there is about LLPs, how they function in India, as well as how to go about registering one in the country.
An LLP or a limited liability partnership is basically a partnership which doesn’t burden all its members with “unlimited” liability, as is the case with the traditional partnerships and corporations. In fact, depending on the jurisdiction, none of the members may be subjected to unlimited liability, meaning that all the members of the LLP would enjoy a limited liability and hence a significantly higher level of protection against the financial risks associated with traditional partnerships.
However, that doesn’t mean that an LLP functions very differently from a traditional partnership firm, which may mean that it would be more challenging to run the former. In fact, there are a surprisingly large number of elements that are common between an LLP and a partnership firm or corporation. One major difference (and benefit) of an LLP is that the partners aren’t responsible for the misconduct, negligence, wrongdoings or irresponsible business decisions taken on the part of another partner.
This is actually a huge relief for those looking to start a partnership business, as according to the Partnership Act 1890, which governs the traditional partnership businesses, ALL members of the partnership business would be jointly liable for another member’s mistakes.
Hence, this makes an LLP the clear winner between the two, with the former even allowing some partners to have a form of limited liability that’s very similar to the ones shareholders have in a company. However, unlike shareholders, the partners obviously have controlling rights in the business.
This makes LLPs more attractive to investors who would usually not bother considering an investment in a traditional partnership (thanks to the unlimited liability). This is because while an investment in an LLP may offer all the benefits that come with investing in any particular type of business, it would also come with the added advantage of being able to play a active role in the business’ 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.
Finally, another important difference between LLPs and traditional partnerships are the different tax laws.
Emergence of LLPs
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 slowdown with real estate and energy prices tumbling 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.
LLPs in India
Well, now that you know what an LLP basically is and how it came into existence, let’s get into the things you need to know about starting one in India, including LLP registration.
LLPs came into existence in India when the official Gazette of India published 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 a few months later, 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, followed by many more over a short period of time.
Unlike some other countries, however, LLPs in India don’t need to have at least one mandatory 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 salient features of an LLP in India include:
- An LLP has a separate legal status from its partners, and has perpetual succession
- It’s governed only by the separate legislation (LLP Act, 2008), and none of the provisions of the Indian Partnership Act, 1932 are applicable to it
- Every LLP should use “Limited Liability Partnership” or “LLP” as the last word of its name
- LLP is basically a mix of both a ‘corporate entity’ and a ‘partnership business’
- It’s mandatory 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, but not of other partners
- While an LLP agreement isn’t mandatory, the rights and liabilities of the partners will be determined according to the Schedule I of the LLP Act in the absence of one
- As the LLP is considered a separate legal entity, 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. This means that the members don’t need to bring in any amount of capital, unless of course if required by the LLP agreement
- Similarly, unlike the traditional partnerships, an LLP doesn’t even have any limit on the maximum number of members that can join it. It, however, does require a minimum of two partners for obvious reasons
- Unlike private and public companies, an LLP doesn’t require 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, it would be mandatory to get the audit done
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.
Anyway, so that brings us back to arguably the greatest feature of LLPs, limited liability. It simply means that your personal property is never going to be attached to the business’ property, regardless of the losses it incurs.
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.
Helps Build Trust
Although LLPs have been introduced in India only recently, they have been a very popular type of business throughout the world from quite a long time. This is especially 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 function more smoothly and effectively as compared to traditional partnerships.
Furthermore, they are also registered as a corporate body, which shows that the partners are serious about what they are doing, which perhaps isn’t the case when it comes to traditional partnerships (the registration being optional).
LLP Registration is a Breeze
LLP registration is indeed quite easy compared to the registration process that needs to be followed while starting a private or public company. While even starting a traditional partnership is easy enough, unlike LLPs, it doesn’t get a separate legal identity.
An LLP, being a separate legal entity, has perpetual succession. This means that irrespective of the changes in the partners, it will continue to exist 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.
An LLP, despite being a body corporate, doesn’t compromise on the flexibility front. It allows the partners to run the LLP the way they want to, given their actions are in accordance with the LLP agreement.
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.
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.
Easy to Attract Investors
As mentioned earlier, an LLP attracts investors way more easily than a small business or traditional partnership. After all, as it’s a regulated entity and tend to function more effectively, PE investors and financial institutions don’t hesitate before making an investment.
New LLP Registration
As mentioned earlier, LLP registration can actually be a breeze, especially when compared to registering other types of businesses.
That being said, here are steps involved while doing your LLP registration.
Obtaining the DIN or DPIN
For starting a new Indian LLP, you first need to obtain the DIN or DPIN (Designated Partner Identification Number). This is supposed to be done by all the designated partners of the LLP.
You can apply for it by filing an eForm DIN-1. However, if you have already got a DIN, you can use that as well.
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 name by filling out the Form 1. Depending on the type of LLP you want to register, you may even have to fill out the Form 2.
After the ministry approves your LLP’s name, you will get a confirmation email.
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.
Similarly, you would need to use the Form 18 if you want to covert a private or unlisted public company into an LLP.
Starting a FLLP
If you want to start a Foreign Limited Liability Partnership (FLLP), you need to fill out the Form 27. While it isn’t mandatory for you to obtain a DIN or DPIN, you would still need to obtain the DSC.
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 applicable for LLP registration including conversion of a partnership firm, private or unlisted public company into an LLP.
For an 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.
A Final Word
The above given information is pretty much everything you need to know about the concept of LLPs, LLPs in India, as well as LLP registration.
LLPs seem to be the best type of business to go for currently. Apparently, the only downsides seem to be that an LLP isn’t allowed to raise funds from the public and the winding up process of an LLP is quite complicated.
However, these really aren’t downsides given you don’t plan to make your business go public or wind up anytime soon.