LIMITED LIABILITY PARTNERSHIP

What is a Limited Liability Partnership?

A Limited Liability Partnership (LLP) was introduced in India through the “Limited Liability Partnership Act of 2008.” This legal structure offers a distinctive advantage where one partner is not held liable for the misconduct or negligence of another partner. Particularly favoured by professionals, micro-enterprises, and small businesses with familial or closely-held ownership, LLPs provide limited liability to their owners with minimal maintenance requirements.

The primary benefit of a Limited Liability Partnership is the concept of “limited liability.” In a Private Limited Company, owners have limited liability to creditors, safeguarding personal assets in case of default. Similarly, an LLP extends limited liability protection to its owners, shielding them from the debts incurred by the LLP. This means that in the event of default, creditors can only seize the assets of the LLP and not the personal assets of the partners.

Noteworthy is the simplicity in maintaining an LLP, making it an attractive choice for businesses. The registration process for an LLP can be facilitated through services like “LegalRaasta,” which maintains offices in key cities such as Delhi NCR, Mumbai, Bengaluru, Chennai, and various other locations across India. The widespread accessibility of LLPs and their limited liability feature make them a preferred legal structure for diverse entities, providing a balance between liability protection and operational ease.

What are the advantages of being a Limited Liability Partnership?

Advantages of Limited Liability Partnership (LLP) :

1. Flexibility in Capital Structure :

Unlike Partnership Firms or Public Limited Companies, LLPs do not enforce a minimum paid-up capital requirement on partners. This flexibility enables partners to contribute capital based on their agreement, avoiding the obligation of a mandatory minimum capital investment.

2. Audit Exemption and Streamlined Compliance:

LLPs operate under agreed rules outlined in the partnership agreement, eliminating the mandatory audit requirement. This exemption not only streamlines compliance processes but also reduces the administrative burden on the LLP.

3. Continuity Beyond Individual Partners:

In contrast to Partnership Firms, LLPs enjoy uninterrupted existence even after the passing of individual partners. The legal separation of the firm and partners ensures the continuity of the LLP beyond the lifetimes of individual partners.

4. Unrestricted Capital Raising:

LLPs face no limitations on the maximum number of partners, providing significant flexibility in capital raising. Partners can easily introduce new members or secure additional contributions from existing partners, facilitating capital infusion without constraints.

5. Empowered Legal Standing for Litigation:

LLP partners hold the authority to initiate legal proceedings against suppliers or fellow partners in the name of the firm. Furthermore, they can sue third parties for delayed payments, establishing a robust legal standing for the LLP in dispute resolution scenarios.

What are the ground requirements to form a Limited Liability Partnership?

Minimum Partners:

At Least Two Partners: LLP formation necessitates a minimum of two partners, allowing for shared responsibilities and decision-making.
Collaborative Structure: The presence of multiple partners encourages a collaborative approach to business operations.

Designated Partners:

Minimum Two Designated Partners: LLPs must have a minimum of two designated partners among the partners.
Distinct Roles: Designated partners hold specific responsibilities, including legal compliance and representation, ensuring effective management.

Registered Office Location:

Territorial Presence: The registered office of the LLP should be within the territorial boundaries of India.
Legal Requirement: Having an established office in India ensures a physical presence for official communication and legal obligations.

Comprehensive LLP Agreement:

Well-Defined Agreement: A detailed LLP agreement outlining the rights, responsibilities, and profit-sharing among partners.
Legal Framework: The agreement serves as the legal foundation, addressing key aspects of the LLP’s operation and governance.

DIN and DSC for Partners:

Director Identification Number (DIN): Partners require a DIN, which is obtained by filing Form DIR-3.
Digital Signature Certificate (DSC): Partners need a DSC to digitally sign documents, enhancing the authenticity and security of filings.

Address Proof and Identity Proof:

Valid Documents: Partners must provide address proof and identity proof, such as Aadhar card, passport, or voter ID.
Verification Compliance: These documents are essential for identity verification during the registration process.

No Minimum Capital Requirement:

Flexibility in Capital Contribution: LLPs do not impose a mandatory minimum capital requirement, allowing partners to contribute as per their agreement.
Financial Adaptability: The absence of stringent capital norms provides financial flexibility.

Legal Consultation:

Professional Guidance: Seeking legal consultation for understanding and fulfilling all legal requirements.
Compliance Assurance: Ensures adherence to regulatory guidelines and reduces the risk of legal complications.

How to register a Limited Liability Partnership?

STEP 1: OBTAIN DIGITAL SIGNATURE CERTIFICATE (DSC)

A Digital Signature Certificate (DSC) is a secure electronic signature issued by the Government of India, equivalent to physical signatures.
Purpose: Prevents forgery of signatures and ensures the authenticity of documents.
Issuing Authority: Ministry of Corporate Affairs.

STEP 2: OBTAIN DESIGNATED PARTNER IDENTIFICATION NUMBER (DPIN) :

Designated Partner Identification Number (DPIN) is required for individuals intending to become designated partners in the LLP.
Purpose: Serves as the identity of designated partners and aids in tracking.
Issuing Authority: Ministry of Corporate Affairs.

STEP 3: NAME APPROVAL :

Registrar of Companies (ROC) approval for a unique name for the LLP.
Purpose: Ensures the LLP has a distinct and acceptable name.
Procedure: Apply for name approval through the official Ministry of Corporate Affairs portal.

STEP 4: APPLY FOR LLP REGISTRATION :

Submission of LLP registration application on the official Ministry of Corporate Affairs website.
Required Information: Names, addresses, and capital contributions of partners, names and DPINs of designated partners, LLP name, registered address, and other relevant details.
Submission: Complete the application and submit the necessary documents with the prescribed fee.

STEP 5: INCORPORATION OF LLP :

Log in to the official portal, fill Form 2, submit required documents, and pay the fee.
Timeline: Obtain the registration certificate within 14 working days (2 weeks).

STEP 6: ISSUANCE OF CERTIFICATE OF INCORPORATION :

Once all steps are completed, the Certificate of Incorporation is issued.
Significance: Official recognition of the LLP’s legal existence.

STEP 7: SUBMISSION OF THE LLP AGREEMENT :

Submit the LLP agreement to the Registrar of Companies (ROC) within 30 days of registration.
Content: Details the roles, responsibilities, and profit-sharing among partners.

Following these step-by-step procedures ensures the systematic and compliant registration of a Limited Liability Partnership in India. Professional assistance can enhance the efficiency of the registration process.Top of Form

What are the general features of a Limited Liability Partnership?

PERPETUAL SUCCESSION:

Continuity Beyond Partner Changes:

Sustainable Existence: The LLP persists even amid partner departures or changes.

Consistent Operations: Ensures ongoing operations and business activities.

Asset Ownership:

Independent Entity: Holds the capacity to own, acquire, and manage assets under the firm’s name.

Transactional Autonomy: Facilitates independent financial and contractual transactions.

LIMITED LIABILITY:

Protection from Liability:

Financial Safeguard: Partners benefit from limited liability, safeguarding personal assets from business liabilities.

Risk Mitigation: Shields individual partners from the full extent of financial risks.

MEMBERSHIP STRUCTURE:

Two Partners, Two Designated Partners:

Minimum Requirement: Consists of a minimum of two partners and designates at least two partners as key executives.

National Representation: Enforces the necessity of at least one designated partner being an Indian resident.

Responsibilities and Roles:

Defined in LLP Agreement: Clearly articulates roles, duties, and obligations through the LLP Agreement.

Liability Limitation: Confirms that partners are not personally liable for the LLP’s losses or obligations.

PROFIT SHARING:

As Per LLP Agreement:

Contractual Foundation: The distribution of profits is governed by mutually agreed terms specified in the LLP Agreement.

Customizable Arrangements: Provides flexibility for partners to formalise and adjust profit-sharing structures.

What are the common differences between a Limited Liability Partnership Firm and a Partnership Firm?

Separate Legal Entity:

Limited Liability Partnership (LLP): Legally recognized as a separate entity distinct from its partners.
Partnership Firm: Lacks a distinct legal status; considered an extension of its partners.

Liability Protection:

Limited Liability Partnership (LLP): Provides protection to partners against personal liability.
Partnership Firm: Partners do not enjoy protection against personal liability.

Entity Name:

Limited Liability Partnership (LLP): The name concludes with LLP, e.g., “Fortius Marketing LLP.”
Partnership Firm: No specific or unique ending for the entity name.

Non-Residents Participation:

Limited Liability Partnership (LLP): Allows NRIs to form an LLP with Indian nationals.
Partnership Firm: NRIs cannot establish a Partnership Firm in India.

Contractual Agreements:

Limited Liability Partnership (LLP): Has the authority to enter into contracts with third parties.
Partnership Firm: Lacks the capacity to engage in contracts under the firm’s name.

Continuity of Existence:

Limited Liability Partnership (LLP): Perpetual existence independent of partner changes.
Partnership Firm: Dissolution or changes in partners can affect continuity.

Understanding these distinctions is crucial for individuals choosing the appropriate business structure based on their preferences and objectives.

FAQ

FAQs:

Q. What are the types of Partnership Firms?

Partnership firms are diverse entities, each with its own set of characteristics. Here are the four primary types:

General Partnership:

A traditional form of partnership where all partners share equal responsibility, liability, and decision-making authority.
Key Features:
Equal sharing of profits and losses.
Each partner has unlimited liability.
Decisions made collectively by all partners.

Limited Partnership:

A partnership with a combination of general partners, who have unlimited liability, and limited partners, who enjoy liability protection to the extent of their investment.

Key Features:

Limited partners have restricted liability.
General partners bear unlimited liability.
Limited partners typically don't participate in daily operations

Limited Liability Partnership (LLP):

A partnership combining elements of traditional partnerships and corporations, providing limited liability to partners.

Key Features:

Partners have limited liability, protecting personal assets.
Flexible structure with internal management.
Profit distribution based on LLP agreement.

LLC Partnership (Limited Liability Company):

A hybrid business structure combining features of partnerships and corporations, offering liability protection and flexibility.

Key Features:

Members (owners) enjoy limited liability.
Flexible management structure.
Pass-through taxation.

Understanding the distinctions among these partnership types is crucial for entrepreneurs in choosing the most suitable structure for their business.

Q. What is the major advantage of LLP?

The major advantage inherent in an LLP (Limited Liability Partnership) lies in the safeguarding of individual partners' personal assets. This protective measure ensures that the personal wealth and belongings of each partner remain insulated from legal proceedings or actions initiated against the LLP. Importantly, this principle of limited liability means that each partner is exclusively accountable for their own actions and financial commitments, thereby alleviating them from bearing responsibility for the actions or liabilities incurred by other partners within the LLP structure.

Q. What are the disadvantages of Limited Liability Partnership (LLP)?

Complex Dissolution Process:
- Procedure Challenges: The dissolution process can be intricate and involve substantial legal formalities.
- Agreement Complexity: Complexities may arise when dissolving an LLP, particularly if agreements are not explicitly defined.
Limited Capital Investment Options:
- No Equity Shares: LLPs cannot issue equity shares, restricting the scope for diverse capital-raising methods.
- Investor Attraction: May face challenges in attracting investors looking for equity-based investment opportunities.
Regulatory Compliance Requirements:
- Compliance Responsibilities: Although less burdensome than some structures, LLPs still have compliance obligations.
- Reporting Requirements: Periodic filing and adherence to regulatory guidelines can be demanding.
Limited Recognition in Certain Sectors:
- Industry Restrictions: Some sectors may prefer or recognize other business structures over LLPs.
- Perception Challenges: LLPs may face perception challenges in industries where traditional corporate structures are more prevalent.
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LIMITED LIABILITY PARTNERSHIP