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Ministry of Corporate Affairs defines LLP as “LLP: 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.” The Bill concerning Limited Liability Partnership (LLP) was tabled in the Rajya Sabha on 12.12.2006 by the Ministry of Company Affairs. The statement of objects and reasons of the bill shows that that LLP has been conceived of “as an alternative corporate business vehicle that provides the benefits of limited liability to its members but allows them the flexibility of organizing their internal structure as a partnership based on mutually arrived agreement”. It has been said that “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 suitable vehicle for small enterprises and for investment by venture capital.”
What is a Limited Liability Partnership?
An LLP is an alternative corporate business vehicle that gives the benefits of limited liability but allows its members the flexibility of organizing their internal structure as a traditional partnership. It is a separate legal entity and, while the LLP itself will be liable for the full extent of its assets, the liability of the members will be limited. A glance at the provisions reveals the following propositions: LLP is a body corporate, i.e. a separate legal entity distinct from its members. The LLP can own and hold property, employ people and
enter into contractual obligations. Debts incurred are the debts of the LLP. An LLP has unlimited capacity which means that third parties need not be concerned about any restrictions on its activities. An LLP has members but no directors or shareholders. And LLP has no share capital and is not subject to the company rules governing the maintenance of capital. The members of the LLP have limited liability. The LLP is liable for all its debts to the full extent of its assets. An LLP has complete flexibility as to the internal structure which it wishes to adopt; there are no requirements for board or general meetings or decision making by resolution. An LLP does not have Memorandum of Association. As the members have limited liability, the protection of those dealing with an LLP requires that the LLP maintains accounting records, prepares and delivers audited annual accounts to the Registrar of Companies, and submits an annual return in a similar manner as applicable.
The arrival of the much desired and long awaited LLP on the Indian business and professional scene marks yet another significant step in our decade old journey towards globalization of the Indian Economy. It also marks the culmination of the efforts of several expert committees which recommended its introduction starting with the Bhatt Committee of 1927 through Naik Committee of 1992, Abid Hussain Committee of 1997, Gupta Committee of 2001, Naresh Chandra Committee of 2003 and the JJ Irani Committee of 2005. On the basis of the recommendations of the Naresh Chandra and JJ Irani Committees a Bill for LLP was introduced in the Rajya Sabha which was then referred to the Parliamentary Standing Committee on Finance. The Standing Committee submitted its report on 27.11.2007 taking into consideration the suggestions of the august committee, the revised Bill, namely the Limited Liability Partnership Bill, 2008 was introduced in the Rajya Sabha on
21.10.2008. The various expert committees felt that the Companies Act need not enforce limitations on the other forms of the organization. Section 11 of the Companies Act bars the formation of any partnership consisting of more than 20 persons for carrying on any other business that has for its object the acquisition of gain by the partnership. If the number exceeds 20, the association will have to be registered as a company. Now all that has changed with the enactment of the Limited Liability Partnership Act 2009. The President of India gave assent on 7.01.2009. While the Naresh Chandra Committee of 2003 looked at LLP mainly for professionals to prepare them for global competition, the JJ Irani Committee of 2005 suggested that the concept may also be considered for small enterprises not seeking access to capital markets through listing on then stock exchange. The idea is to enable them access technology and face increasing global competition, and bring in business synergies. The preamble to the Act states that it is “an act to make provisions for the formation and regulation of limited liability partnerships and for matters connected therewith or incidental thereto”. It applies to the whole of India and its provisions have been brought into force w.e.f 31.03.2009.The government has notified the Limited Liability Partnership Rules, 2009 w.e.f 01.04.2009.
About the Act
The Act is administered by the Ministry of Corporate Affairs 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 annexure (A to D)
Features of the Act
The salient features of the LLP form of business may be listed as follows: The LLP shall be a body corporate and separate legal entity separate from its partners.[Sec 3(1)]. The LLP will have perpetual succession. [Section 3(2)].
Any change in the partners of a LLP shall not affect the existence, rights or liabilities of LLP.[ Sec 3(3)] Save and otherwise provided in the Act, the provisions of the Indian Partnership Act shall not be applicable to a LLP. [Sec 3(4)] 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. Every registered LLP shall be assigned a LLP identification number (LLPIN) in one consecutive series. Any individual or body corporate may be a partner in a LLP. An individual shall not be capable of becoming a partner of a LLP if(a) He has been found to be of unsound mind by a court of competent jurisdiction and finding is in force; (b)He is an un discharged insolvent; or (c) He has applied to be adjudicated as an insolvent and his application is pending. [Sec 5] Prior consent of an individual is required for his appointment as Designated Partner.[ Sec 7(3)] Every LLP shall have at least two partners. If at any time, the number of partners of a limited liability partnership is reduced below two and the limited liability partners carries on business for more than six months while the number is so reduced, the person, who is the only partner of the limited liability partnership during the time that it so carries on business after those six months business with him along, shall be liable personally for the obligations of the limited liability partnership incurred during that period. [Sec 6]. 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, provided, in case of a limited liability partnership in which all the partners are bodies corporate or in which one or more partners are individuals and bodies corporate, at least two individuals who are partners of such LLP or nominees of such bodies corporate shall act as designated partners [Section 7(1)]
Every designated partner of a LLP will obtain a Designated Partner Identification Number (DPIN) from the Central Government. [Section 7(6)]. LLP will be required to appoint a designated partner within thirty days of a vacancy, if any. However, if no designated partner is appointed, or if at any time there is only one designated partner, each partner shall be deemed to be a designated partner [Section 8(9)]. A designated partner shall be responsible for the doing of all acts, matters and things as are required to be done by the limited liability partnership in respect of compliance of the provisions of this Act including filing of any document, return, statement and shall be liable to all penalties imposed on the limited liability partnership for any contravention of those provisions. [ sec 7(8)] The mutual rights and duties of partners of an LLP inter se and those of the LLP and its partner shall be governed by an agreement between the LLP and the partners subject to the provisions of the LLP Act 2008. The Act provides the flexibility to devise the agreement as per their choice. However in the absence of any such agreement, the mutual rights and duties shall be governed by the provisions of the LLP Act 2008. The LLP will be a separate legal entity, liable to the full extent of its assets, with the liability of the partner being limited to their agreed contribution in LLP, which maybe 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. The duties and obligations of designated partners shall be as provided in the law. No restriction as to the maximum number of partners in a LLP. 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 LLP’s shall also be audited, subject to any class of LLP’s being exempted from this requirement by the Central Government. The Central Government shall have powers to investigate the affairs of an LLP, if required by appointment of competent Inspector for the purpose. The compromise or arrangement including merger and amalgamation of LLP’s shall be in accordance with provisions o LLP Act 2008. 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 certification of registration issued by the Registrar in this regard, the effects of 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 property( movable or immovable) 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 LLP without further assurance, act or deed and the firm or the company, shall be dissolved and removed from the records of the Registrar of Firms or Registrar of Companies, as the case may be. The winding up of the LLP may be either voluntary or by the tribunal to be established under the Companies Act, 1956. Till the Tribunal is established, the power in this regard has been given to the High Court. The LLP Act confers powers on the Central Government to apply provisions of the Companies Act, 1956 as appropriate, by notification with such 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. Tax issues of LLP shall be addressed under Income Tax Act 1961 separately. The Budget 2009-10 has laid tax provisions for LLP.
Comparative Analysis- Partnership vs New LLP
Point of Comparison 1. Governance 2. Registration 3. Composition Limited Liability Partnership Partnership
The Limited Liability The Indian Partnership Act, Partnership Act, 2008. 1932. Registration with Registrar Registration is optional. of Companies mandatory. Minimum: Partners at least 2 Minimum: at least 2 Partners
Maximum: Number of Maximum: No limit as to partners should not exceed maximum no. of partners. 10 in case of banking business and 20 in case of other business. 4. Body Corporate It is a Body Corporate having a Separate Legal Entity capable of sueing and being sued in its own name. A partnership firm does not have a Separate Legal Entity and it is not a Body Corporate.
5. Formalities of Incorporation
Name; Incorporation Application to the Registrar Document; LLP Agreement; of Firms for Registration of Declaration by CA/CS/ Partnership Firm. Advocate/ Plus 1 subscriber to the Incorporation Document. Name to end with LLP or The firm, which is registered, Limited Liability shall use the brackets and Partnership word (Registered) immediately after its name. Yes None
7. Common Seal
8. Minimum number Designated Partners: At Designated Partners: There is of Directors/ least 2 no concept of DP’s/ Directors. Designated Partner One must be Indian. DP’s must have DPIN. 9. Limitation on Liability Liability of Partner is limited to the extent of his capital contribution or as agreed as per the LLP Agreement. But no partner is liable on account of an independent action on part of any other partner. Yes Every partner is liable jointly with all the other partners and severally, for all acts of the Firm done while he is a Partner.
10.Annual Return to be filed with Registrar 11.Conversion
The LLP Act and LLP Rules has provisions for conversions of any other form of business into LLP. By Partners/ Designated Partners
The Indian Partnership Act does not have any specific provisions for conversion of Partnership into any other form of business. By Partners
Would be Regulated by Registrar of Companies.
Regulated by Registrar appointed by the respective State Government under the Partnership Act.
Comparative Analysis- Limited Liability Company vs New LLP
Point of Comparison 1. Governance 2. Incorporation Procedure Limited Liability Partnership The LLP Bill, 2006 Similar to LLC, MOA equivalent Incorporation Document, AOA equivalent LLP Agreement` To end with Limited Liability Partnership or LLP. Letters, invoices and correspondences to carry name of LLP, registered office address registration no. and a statement that is registered as an LLP. Minimum: 2 Partners Maximum: No limit Limited Liability Company The Companies Act 1956 Name availability, MOA, AOA, declaration by an Advocate/CA/CS or the person named as the First Director To end with Limited/Private Limited. Letters, invoices and correspondences to carry name of LLC and the registered office address.
3. Name 4. Letter Head/ Invoice
5. Minimum members/ Partners
Minimum: 2 Members Maximum: 50 as per Sec 3 of the Companies Act, 1956.
6. Minimum No. of Designated Partners: At Two. Citizenship need not Directors/ least 2 necessarily be Indian. Designated Partners Directors must have DIN. One must be Indian. DP’s must have DPIN.
7. Separate Legal Identity i.e. can sue and be sued in its own name 8. Limitation of Liability
Liability of a partner limited to the extent of his capital contributed or agreed to be contributes as per LLP Agreement. Yes
Liability of shareholders is limited to the extent of his capital contributed or agreed to be contributes as per LLP Agreement. Yes Yes
9. Common Seal 10.Transferability share/ Interest 11.Conversion of
Yes with limitations
The Bill does not have any To an LLP is possible. specific provisions for converting an LLP to any other form of business. Permissible By Board of Directors Of Partners/ Designated Partners to be notified to the Registrar. Yes Permissible By Partners/ Designated Partners. Of Directors, Secretaries to be notified to the Registrar. Yes
12.Change of registered office/ Name 13.Management 14.Change
15.Annual Account/ Return to be filed with the Registrar 16.E-filing Registrar with
Forming a Limited Liability Partnership
There are precise provisions for registration of a limited liability partnership. However, one cannot buy an “off the shelf” limited liability partnership as you can a limited liability company. The original documents have to be prepared with the names of the first set of “real” partners. Process to Start LLP
A Limited Liability Partnership may be incorporated as per the procedure explained below: a) User Registration • Register yourself on the website of Ministry of Corporate Affairs, developed for LLP services, i.e. www.llp.gov.in. This website may also be accessed through the website of the Ministry www.mca.gov.in. On the home page of the URL www.llp.gov.in click. On the home page of the URL www.llp.gov.in click “Register” tab on top right hand corner of the page. • Fill in the registration form. Fields marked * in the form are to be mandatorily filled. Select your user name and password.
Upload digital signature certificate. On successful registration, system will give a message that you have been registration successfully. a) Obtain Designated Partners Identification Number (DPIN) All designated partners of the proposed LLP shall obtain “Designated Partners Identification Number (DPIN)” by filing an application individually online in Form-7 For obtaining DPIN log in by clicking on the “Login” tab on top right corner of the home page, enter your user name and password. After login, click on the E-forms link. List of e-forms link. List of e-forms will open. Click and open Form 7. Fill up “Form 7” for allotment of DPIN Pay filing fee of Rs. 100 online through credit card (master/visa) Submit the application form online. The system will generate a provisional DPIN. Take the print out of the application form, affix a latest passport size photograph and get it attested/certified for submission physically along with documentary evidences for proof of identity and proof of residence with the Registrar LLP. Deliver the printed and signed application form, along with the prescribed documents by hand/courier/registered post to the office of Registrar, Ministry of Corporate Affairs, 3rd floor, ‘Paryavaran Bhawan’ CGO Complex , Lodhi Road, New Delhi110003. a) Digital Signature Certificate Digital Signature Certificates (DSC) are the digital equivalent (that is electronic format) of physical or paper certificates. Like physical documents are signed manually, electronic documents, for ex e-forms are required to be signed digitally using a Digital Signature Certificate. Partner/ Designated partner of LLP/ proposed LLP, whose signatures are to be affixed on the e-forms has to obtain class 2 or class 3 Digital Signature Certificate
from any authorized certifying agency. There are a total of seven Certification Agencies authorized by the CCA to issue the DSC viz: 1. Tata Consultancy Services 2. National Informatics Center 3. IDRBT Certifying Authority 4. SafeScrypt CA Services, Sify Communications Ltd. 5. Code Solutions CA 6. MTNL Trust Line 7. Customs & Central Excise 8. E-MUDHRA a) Reservation of Name Log on to the LLP portal by clicking the “log in” tab on the top right corner of the home page and enter your user name and password. After login, click “ E- Forms” link. Open Form-1 for reservation of name and fill in the details. Select name of the proposed LLP [ up to 6 choices can be indicated] Any partner or designated partner in the proposed LLP may submit Form-1. Append digital signatures and submit the e-form. Pay the necessary fee by credit card. Free name search facility is available on MCA portal. The system will provide the list of similar/closely resembling names of existing companies/LLP’s based on the search criteria filled up. Details of minimum two designated partners of the proposed LLP is required to be filled in the application for reservation of name. Only individuals or nominees on behalf of the bodies corporate as partners can act as designated partners. Check status of your application by logging on the portal. a) Incorporation of LLP Once the name is reserved by the Registrar, log on to the portal and fill up Form-2 “Incorporation Document and Statement”
Pay the prescribed registration fee as per the slab given in Annexure A of the LLP Rules 2009, based on the total monetary value of contribution of partners in the proposed LLP. Statement in the e-form is to be digitally signed by a person named in the incorporation document as a designated partner having permanent DPIN and also to be digitally signed by an advocate/ CS/ CA/ Cost Accountant in practice and engaged in the formation of LLP. On submission of complete documents the Registrar after satisfying himself about compliance with relevant provisions of the LLP Act will register the LLP, maximum within 14 days of filing of Form-2 and will issue a certificate of incorporation in Form-16. Check status of your application by logging on to the portal.
a) Filing of LLP Agreement (Form-3) and Partners’ details “(Form-4) Form 3 (Information with regard to LLP agreement and changes, if any made therein) and Form-4 (notice of appointment of Partner/ Designated Partner, his consent etc) may be filed with the prescribed fee simultaneously at the time of filing Form-2 or within 30 days of the date of incorporation or within 30 days of such subsequent changes.
LLPs have been successfully used for rendering professional services in countries like US, UK, Germany, Australia and Singapore for following advantages: • As a hybrid structure for running business, LLP offers the twin benefits of internal governance flexibility of partnership firms and limited liability of companies. As a separate legal entity LLP has the liability to the full extent of its assets, but the liability of its partners is limited to their agreed contributions in the LLP. LLP will give a boost to professionals by bridging the gap between partnership and company. For example in a rapidly globalizing world,
multidisciplinary professional firms cannot restrict themselves to the 20 members. LLP enables Indian professionals to meet the challenges of global market and seize emerging opportunities. LLP’s will facilitate pooling of resources for multidisciplinary professionals. Partners can trust each another and start business without being accountable for the other partner’s conduct. LLP will enable existing un incorporated business entities to convert themselves to LLP’s or become partners in LLP’s. Moreover, persons with innovative and creative ideas, but who are capital-scarce, can form LLP by typing up with companies or venture capitalists. The intellectual contribution of partners can be quantified at the stage of signing of the LLP agreement. Legal compliance requirements in respect of LLP are much simpler and easier than that of companies.
Aligning LLP legislation with other economic legislations like the Foreign Exchange Management Act and Foreign Direct Investments Guidelines by appropriate amendments/clarifications. Making the role of government that of a facilitator rather than controller. For ex, the requirement that the Central Government can direct that any provisions of the Companies Act, 1956, shall apply to any LLP with such exception, modification and adaptation, should not render LLP akin to a private limited company under the Companies Act. At present, the Income Tax Act does not recognize LLP firms. Proposals to amend the laws have been made by both the ministry and Parliament’s Standing Committee on Finance. However, there has been no action on this. Yet another demand, for a “one-person” company, will not be possible under the LLP route as the minimum requirement is two persons. Clarity is required on carry-forward of losses of existing entity on such conversions to avoid disputes. This will be a huge incentive
for capital intensive companies when it comes to shifting to LLP model.
1. Chartered Secretary- Pages 1382-1486 2. www.mca.gov.in 16
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