MODULE 2

TOPIC 1

LIMITED LIABILITY PARTNERSHIP

IS IT A QUASI-PARTNERSHIP, QUASI-CORPORATION OR SUI GENERIS?

In order to reflect on the objective of the paper, we can fundamentally derive the balance
between a company and a limited liability partnership as in terms of various legislation
advantages as provided in the statute itself and also that has been derived from the various
market applications in the practical sense today in the very Indian context.

AGREEMENTAL OPERATION

The mutual rights and duties of partners inter se and those of the LLP and its partners are
exclusively governed by the agreement between partners or between the LLP and the partners i.e.
to the advantage of SME’s a perfect balance between the unlimited and mutual consent of the
partnership and the limited liability of the company. 1 This Agreement is known as “LLP
Agreement”2. As per provisions of the LLP Act, in the absence of agreement as to any matter,
the mutual rights and liabilities shall be as provided for under Schedule I3 to the Act but also
there is an option to evade this by expressly providing it in the legislation.

INCORPORATIONAL AND TERMINATION’S LEGAL AND PROCEDURAL EASE

When it comes to incorporation of company, we require legal professionals to deal with this
which is slightly lower in the case of partnerships but when it comes to, they turn to be middle
way out and click of mouse away. Having no educational qualifications and just DPIN 4 one can
move ahead. LLPs are required to have a registered office; an Incorporation Document and
ROC Certificate which can be hassle freely done online 5. Also LLP can have Foreign Nationals
including Foreign Companies & LLPs to incorporate a LLP in India. There are also provisions in
respect of ‘rectification of name’ in case two LLPs have been registered with the same name,
inadvertently online making it easier and beneficial.6

Also the changes in the partnership structure can be made very pester freely as compared to
resolutions of BOD or partnership agreements. A person may cease to be a partner in accordance
with the agreement or in the absence of agreement, by giving 30 days notice to the other
partners. Just a Notice is required to be given to ROC when a person becomes or ceases to be
partner or for any change in partners.7 

1
Chapter II of the LLP Act
2
http://www.mca.gov.in/LLP/llp_agreement_faq.html therein FAQ’s on LLP Agreement
3
Refers to Schedule 1 of the Act r/w Section 23(4)
4
Abbreviation for Designated Partner’s Identification Number
5
Section 68 of the LLP act
6
Chapter III of the LLP Act
7
Rules by MCA available at www.mca.gov.in/LLP/pdf/LLPRulesasnotified.pdf
COST OF CAPITAL REQUIRED TO SETUP

Having a minimum two and maximum none, the cost of capital required and the amounts
security is in the very benefit of the SME’s that the LLP’s could be formed without any
minimum capital contribution as opposed to the huge and major chunk floating in the Private
Limited companies’ requirement of one lack bucks or so initially. Even the contributions could
be made in installments which make the small entrepreneurs/startups avail these benefits and
forge ahead much easily.8

Additionally there is no minimum capital contribution at the time of incorporation as compared

to Statutory filing fees as well as the cost of formation is less compared to forming a Private
limited company. Apart from stamp duty for executing LLP agreement, the registration fees are
less than required for incorporation for a private Limited company posing a favorable balance
towards the same.

LIABILITY IS LIMITED

Opposed to partnership and similar to that of company and a bar on minor 9 being a partner in
LLP, the liability of each partner is limited 10 to the extent of his/her contribution/share as
opposed to the sole proprietorship or the traditional partnership firm where the personal assets of
the proprietor or partners could be at risk even for no reason or in the case of a failure of the
business. Thus this manner aids the partners to be free from personal liabilities or becoming
bankrupt (except in cases of fraud by any partner).

SEPARATE LEGAL ENTITY

Today’s SME entrepreneur feels like that in a company, LLP has its separate existence from its
partners holding the property, assets and liability in its own name. LLP can sue and be sued in its
own existence. Due to its status, the entry and exit of the partners don’t affect the LLP making it
easier anytime to enter or leave 11. As it incorporates various stakeholders and watchdogs, it
offers the flexibility while dealing & signing legal contracts and in many other things.

ADVANTAGES IN TAXATION

When it comes to matter of taxation, it’s only the saving that matters. There are certain favorable
provisions such as the no surcharge is payable by LLP. cess, various deductions while computing
the taxable income of LLP12, avoidance of double taxation in case of income. Also not only to
the LLP but also to the subsidiary and associate company various provisions exists such as any
company which is a partner in a LLP is not liable to pay MAT on the share of profit receivable

8
Dr. Madhusudan Saharay, Textbook on Indian Partnership Act with Limited Liability Partnership Act, New Delhi,
Universal Law Publishing House, p. 246
9
Sections 24, 29, and 33 of Advocates Act, 1961: For instance, the requirements of ―citizens[hip] of India‖ and
―twenty-one years of age‖ are conditions that a non-natural person is not capable of meeting.
10
Chapter IV of the Act r/w sections 23, 25,26,28,30
11
Supra 48
12
Taxation of LLP available at http://www.llponline.in/tax_llp.php
from LLP and thus attracting not only a greater saving but also promotion to associate with
various other successfully running business. Also same goes in case of retirement or dissolution
of LLP13. Accordingly if the partner14 of LLP is able to prove that non recovery cannot be
attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs
of the LLP, then he will not be personally liable.

Another advantage of taxation in India is that there is no surcharge and only 30 percent is taxable
but the effective tax rate becomes comparatively lesser 15also there is no MAT16 as compared to
company who has to obligatory pay MAT 17 However LLP has to pay AMT18. Additional
advantage is that there is no Dividend Distribution tax though amount distributed by the
company as is liable for additional income tax.19 With respect to Profits distributed by LLP
exempt in the hands of the partners.20

FORIGEN ASPECT TO LLP’s

Today it is right to ponder that no frog can survive today without looking out of the well and so
goes for the business. This is for the utmost benefit of the SME’s entering LLP that Foreign
nationals including foreign companies and LLPs can incorporate LLPs in India 21, subject to
compliance with foreign exchange laws. When there is a scene that government of India is ready
with the Foreign Investments, subject to specified conditions.22 23

This provision is a laudable initiative to attract foreign direct investment and provide
opportunities to global business concerns to conduct flourishing business activities in India,
consequently enabling India’s economy and GDP to reap its benefits. 24Also Government of India
from time to time is issuing guidelines for Foreign LLP and Foreign LLC to become partner in
LLP. They will be governed by FEMA regulations.

However, despite the restrictions on FDI in LLPs, it is believe that this move by the Government
to introduce FDI in LLPs25 will not only boost up the number of joint ventures in the realm but
will be attracting a major investments in infrastructure sector, where most of projects till date are

13
Provisions of S.45 (4) of the Income Tax Act, 1961 is applicable here
14
Section 167C of Income-tax Act,1961
15
Net Effective rate come around 30.9%.
16
Minimum Alternate Tax
17
Paid @18.5% (eff.rate 20.007%) of Book Profit
18
Alternative Minimum Tax payable @ 18.5% eff.rate 19.055%
19
Payable @15% of the Dividend.
20
Difference in AMT AND MAT available at http://www.llponline.in/tax_llp.php
21
Section 59 of the LLP act
22
FDI CIRCULAR at http://dipp.nic.in/English/policies/FDI_Circular_02_2011.pdf
23
PIB, Government Permits FDI in LLP Firms, available at http://pib.nic.in/newsite/erelease.aspx?relid=72273
Foreign Direct Investment in Limited Liability Partnerships, available at
http://www.llponline.in/foreign_investment_in_llp.php
24
Ashwin Shah, Incorporation and Registration of LLP, 6 Income Tax Rev. Vol.XXXV
25
India Needs to Evaluate Domestic Scenario Before Opening-Up available at http://www.luthra.com/articles.asp,
for a contrary view, . Jha, ―Indian Legal Profession and Trade in Legal Services available at
www.indlaw.com/publicdata/articles/article170.pdf
executed in form of unincorporated joint venture where most leaving aside the few successful
ones around the nation.26

26
Foreign Direct Investment in Limited Liability Partnerships, available at
http://www.llponline.in/foreign_investment_in_llp.php