Understanding Limited Liability Partnerships (LLP)

• A Limited Liability Partnership (LLP) is an alternative corporate business form that combines the benefits of limited liability of a company with the flexibility of a partnership.
• LLPs have been introduced in India through the Limited Liability Partnership Act, 2008, which was notified on March 31, 2009.
• LLPs combine the advantages of both companies and partnerships into a single organizational form.
• LLPs allow members to avail the benefit of limited liability and the flexibility of organizing their internal management through a mutually-arrived agreement, similar to a partnership firm.

Features of LLP

• LLPs are considered a legal entity separate from its partners, making it an artificial legal person.
• Unlike traditional partnership firms, an LLP can continue its existence even after the retirement, insanity, insolvency, or death of one or more partners.
• LLPs can enter into contracts and hold property in its name.
• LLPs are separate legal entities, fully liable for their assets, with partner liability limited to their contribution.
• Creditors of the LLP are not considered creditors of the individual partners.
• Independent or unauthorized actions of one partner do not make the other partners liable in an LLP.
• All partners are agents of the LLP, but their actions do not bind the other partners.
• Each partner's liability is limited to their agreed contribution to the LLP.
• LLPs must have a minimum of two partners, with at least two individuals as designated partners.
• At least one designated partner must be a resident of India.
• There is no maximum limit on the number of partners in an LLP.
• LLPs must be formed to carry on a lawful business with the intent to earn a profit and cannot be formed for charitable or non-profit purposes.

Capital Contribution, Designated Partners and LLP Agreements

• LLPs do not have the concept of share capital.
• Every partner is required to contribute to the LLP in a manner specified in the LLP agreement.
• Contributions can be tangible, movable, immovable, intangible property, or other benefits, including money, promissory notes, agreements to contribute cash or property, or contracts for services performed.
• A 'Designated Partner' is a partner designated in the incorporation documents or appointed according to the LLP Agreement.
• Every LLP must have at least two designated partners, who must be individuals, with at least one being a resident of India.
• Forming an LLP requires an agreement between the partners, which includes the LLP's name, names of partners and designated partners, form of contribution, profit-sharing ratio, and rights and duties of partners.
• If no agreement is in place, the rights and duties prescribed under Schedule I to the LLP Act apply.
• The LLP Agreement can be amended, but all changes must be reported to the Registrar of Companies.

Benefits of LLP

• There is no minimum capital requirement to form an LLP.
• An LLP can be formed with the least possible capital.
• An LLP requires a minimum of two partners, but there is no limit on the maximum number of partners.
• The cost of registering an LLP is lower compared to incorporating a private limited or a public limited company.
• LLPs do not have a mandatory requirement for compulsory audits.
• The operation of the partnership and distribution of profits is determined by written agreement between the members, allowing for greater flexibility in business management.

Disadvantages of LLP

• LLPs have higher compliance requirements compared to proprietorships or partnership firms.
• Even with no activity, LLPs are still required to file income tax and MCA annual returns each year.
• LLPs lack the concept of equity or shareholding, which restricts investment from angel investors, HNIs, venture capital, and private equity funds.
• LLPs primarily rely on funding from promoters and debt funding.

Distinguish Between LLP and Partnership Firm

• An LLP is a business form that offers the combined benefits of a partnership and a company.
• A partnership firm uses revenue reserves to meet unforeseen events in a business organization.
• The Limited Liability Partnership Act, 2008 applies to LLP while the Indian Partnership Act, 1932, applies for Partnership Firms.
• In an LLP, partners have limited liability, whereas in a partnership firm, partners' liability is to the amount of capital invested.
• Registration is mandatory to set up a LLP, while the Registration is optional for setting up a partnership firm.
• An LLP has a separate legal status, however, there is no separate legal status when setting up a partnership firm.

Distinguish Between LLP and Company

• The Limited Liability Partnership Act, 2008 applies to LLPs.
• The Indian Companies Act 2013 applies to Private and Public Companies.
• LLP Agreement are used for LLPs.
• Memorandum of Association and Articles of Association are used for Private and Public Companies.
• An LLP has a minimum of 2 members and no Maximum limit.
• Private Companies have a minimum of 2 members, and maximum limit of 200.
• Public Companies have a minimum of 7 members, and no Maximum limit.
• The Liability of Owners is Limited for LLPs, Private and Public Companies.
• Owners Meeting is not applicable for LLPs, and is mandatory for Private and Public Companies.

Accounts, Audit, Records, and Legal Compliances

• Accounts must be maintained with all supporting documents.
• Accounts must be audited by a Chartered Accountant if the turnover exceeds Rs. 40 Lakhs or the contribution exceeds Rs. 25 Lakhs.
• LLPs are not required to maintain registers, records, and minutes unless mandated by the LLP agreement, with partners deciding the requirements.
• LLPs are required to file certain statutory returns annually and other filings based on certain events, irrespective of business activity.
• LLP has to prepare the following Financial Statements; Statements of Assets and Liabilities, Statement of Income & Expenditure, Statement of Account & Solvency and Certificate by the Designated partner or Auditor.

Explore the concept of Limited Liability Partnerships (LLPs) as a corporate business form. LLPs combine the benefits of limited liability with the flexibility of a partnership. Learn about their features, including legal entity status and perpetual succession.