You are on page 1of 17

Limited Liability Partnership Act, (LLP) 2008

Introduction
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

1
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.

Evolution
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

2
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)].

3
 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)]

4
 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 un-
authorized 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

5
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.

6
Comparative Analysis- Partnership vs New LLP
Point of Comparison Limited Liability Partnership
Partnership

1. Governance The Limited Liability The Indian Partnership Act,


Partnership Act, 2008. 1932.

2. Registration Registration with Registrar Registration is optional.


of Companies mandatory.

3. Composition Minimum: at least 2 Minimum: at least 2 Partners


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 A partnership firm does not


having a Separate Legal have a Separate Legal Entity
Entity capable of sueing and it is not a Body
and being sued in its own Corporate.
name.

7
5. Formalities of Name; Incorporation Application to the Registrar
Incorporation Document; LLP Agreement; of Firms for Registration of
Declaration by CA/CS/ Partnership Firm.
Advocate/ Plus 1 subscriber
to the Incorporation
Document.

6. Name 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.

7. Common Seal Yes None

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 of Partner is Every partner is liable jointly


Liability limited to the extent of his with all the other partners
capital contribution or as and severally, for all acts of
agreed as per the LLP the Firm done while he is a
Agreement. But no partner Partner.
is liable on account of an
independent action on part
of any other partner.

10.Annual Return to Yes No


be filed with
Registrar

11.Conversion The LLP Act and LLP Rules The Indian Partnership Act
has provisions for does not have any specific
conversions of any other provisions for conversion of
form of business into LLP. Partnership into any other
form of business.

12.Management By Partners/ Designated By Partners


Partners

8
13.Regulation Would be Regulated by Regulated by Registrar
Registrar of Companies. appointed by the respective
State Government under the
Partnership Act.

Comparative Analysis- Limited Liability Company vs New


LLP
Point of Comparison Limited Liability Limited Liability Company
Partnership

1. Governance The LLP Bill, 2006 The Companies Act 1956

2. Incorporation Similar to LLC, MOA Name availability, MOA,


Procedure equivalent Incorporation AOA, declaration by an
Document, AOA equivalent Advocate/CA/CS or the
LLP Agreement` person named as the First
Director

3. Name To end with Limited To end with Limited/Private


Liability Partnership or LLP. Limited.

4. Letter Head/ Invoice Letters, invoices and Letters, invoices and


correspondences to carry correspondences to carry
name of LLP, registered name of LLC and the
office address registration registered office address.
no. and a statement that is
registered as an LLP.

5. Minimum members/ Minimum: 2 Partners Minimum: 2 Members


Partners
Maximum: No limit 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.

9
7. Separate Legal Yes Yes
Identity i.e. can sue
and be sued in its
own name

8. Limitation of Liability Liability of a partner limited Liability of shareholders is


to the extent of his capital limited to the extent of his
contributed or agreed to be capital contributed or
contributes as per LLP agreed to be contributes as
Agreement. per LLP Agreement.

9. Common Seal Yes Yes

10.Transferability of Yes with limitations Yes


share/ Interest

11.Conversion The Bill does not have any To an LLP is possible.


specific provisions for
converting an LLP to any
other form of business.

12.Change of registered Permissible Permissible


office/ Name

13.Management By Board of Directors By Partners/ Designated


Partners.

14.Change Of Partners/ Designated Of Directors, Secretaries to


Partners to be notified to be notified to the Registrar.
the Registrar.

15.Annual Account/ Yes Yes


Return to be filed
with the Registrar

16.E-filing with Yes Yes


Registrar

10
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.

11
• 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 Delhi-
110003.

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

12
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”

13
 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.

Advantages
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,

14
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.

Suggestions
 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

15
for capital intensive companies when it comes to shifting to LLP
model.

Bibliography

1. Chartered Secretary- Pages 1382-1486


2. www.mca.gov.in

16
3.

17