Corporate Laws

Limited Liability Partnership (LLP) : Characteristics, Advantage and Disadvantages

LLP is a corporate business vehicle that enables professional expertise and entrepreneurial initiative to combine and operate in a 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 Limited Liability Partnership Act, 2008 (LLP Act) does not provide an exhaustive definition. Sub-section (n) of section 2 of the Act states that “limited liability partnership” means a partnership formed and registered under this Act.

Nature and Characteristics of LLP

  • The LLP is a body corporate having separate entity from its partners and perpetual succession.
  • An LLP in India is governed by the Limited Liability Partnership Act, 2008, and therefore, the provisions of the Indian Partnership Act, 1932 are not applicable to it.
  • Every Limited Liability Partnership shall use the words “Limited Liability Partnership” or its acronym “LLP” as the last words of its name.
  • An LLP is a result of an agreement between the partners, and the mutual rights and duties of partners of an LLP are determined by the said agreement subject to the provisions of the LLP Act, 2008.
  • The LLP being a separate legal entity is liable for all its assets, with the liability of the partners limited only to the amount contributed by them just like a company. No partner will be individually liable for any wrongful acts of other partners. However, if the LLP was formed for the purpose of defrauding creditors or for any fraudulent purpose, then the liability of the partners who had the knowledge will be unlimited.
  • There must be at least two designated partners in every LLP of whom one shall be resident in India.
  • Every LLP shall maintain annual accounts to show its true state of affairs. It must prepare a statement of accounts and solvency every year and file with the Registrar.
  • The Central Government may, whenever it thinks fit, investigate the affairs of an LLP by appointing a competent Inspector.
  • A firm, private company, or an unlisted public company has the option to convert itself into LLP as per the provisions of the Act. Upon such conversion, the Registrar will issue a certificate to that effect. After issuance of a certificate of registration, all the property of the firm or the company, all assets, rights, obligations relating to the company shall be vested in the LLP so formed, and the firm or the company stands dissolved. The name of the firm or the company is then removed from the Registrar of Firms or Registrar of Companies, as the case may be.
  • Like the company, an LLP can be wound up either voluntary or by the Tribunal established under The Companies Act, 2013
  • The LLP Act 2008 also enables the Central Government to apply the provisions of the Companies Act whenever it thinks appropriate.

Also Like: Audit Requirement for an LLP in India

Advantages of LLP

  • Easy to form: Forming an LLP is an easy process. It is less complicated and time-consuming unlike the process of formation of a company.
  • Liability: The partners of the LLP is having limited liability which means partners are not liable to pay the debts of the company from their personal assets. No partner is responsible for any other partner’s misconduct.
  • Perpetual succession: The life of the Limited Liability Partnership is not affected by the death, retirement, or insolvency of the partner. The LLP will get wound up only as per provisions of the LLP Act.
  • Management of the company: An LLP has partners, who own and manage the business. This is different from a private limited company, whose directors may be different from shareholders.
  • Easy transferability of ownership: There is no restriction upon joining and leaving the LLP. It is easy to admit as a partner and to leave the firm or to easily transfer the ownership to others.
  • Taxation: an LLP is not subject to Dividend Distribution Tax. (DDT). Distributed profits in the hands of the partners are not taxable. For Income Tax purposes, LLP is treated on par with partnership firms.
  • No compulsory audit required: Every business has to appoint an auditor for checking the internal management of the company and its accounts. However, in the case of LLP, there is no mandatory audit required. The audit is required only in those cases where the turnover of the company exceeds Rs 40 lakhs and where the contribution exceeds Rs 25 lakhs.
  • Fewer compliance requirements: An LLP is much easier and cheaper to run than a private limited company as there are just three compliances per year. On the other hand, a private limited company has a lot of compliances to fulfill and has to compulsorily conduct an audit of its books of accounts.
  • Flexible agreement: The partners are free to draft the agreement as they please, with regard to their rights and duties.
  • Easy to wind-up: Not only is it easy to start, but it is also easier to wind up an LLP, as compared to a private limited company.

Also Like: Process of Name approval of LLP through RUN-LLP (Reservation Unique Name-LLP)

Disadvantages of LLP

  • Restricted Access to Capital Markets: LLPs are a small form of business and cannot get their shares listed in any stock exchange through initial public offerings. With this restriction, limited liability partnerships may find it difficult to attract outside investors to buy the shares.
  • Rights of partners: An LLP can be structured in such a way that one partner has more rights than another. So it isn’t a one vote per share system. So, some lesser partners may feel compromised if higher shareholders choose to move the business in a direction that affects their interests.
  • Public Disclosure of LLP Information: A LLP must file its Annual Returns, Financial Statements, etc to the Registrar of LLPs annually. Which becomes a public document once filed with the Registrar of LLPs and may be inspected by the general public including competitors by paying some fees to the Registrar of LLPs. Information disclosure can make an entity competitively disadvantaged. Competitors – especially those not required to disclose any documents – can access that information and use it to improve their own business.
  • Limitations in Formation of LLP: LLP cannot be formed by a single person. A non – resident Indian and a Foreign National willing to form an LLP in India must have one person resident in India to act as Designated Partner. Further FDI in LLP is allowed only through government route only and that too in those sectors only where 100% FDI is allowed under automatic route under the FDI Policy. This limitation makes LLP an unattractive form of business.
  • Offenses and penalties: Limited Liability Partnership Act, 2008 provides that for non-compliance on procedural matters such as delay in filing of e-forms, one has to pay default fee for every day for which the default continues. Such default fee would be payable at the rate of rupee one hundred per day after the expiry of the date of filing up to a period of three hundred days. The offense can result in either (i) through payment of fine or (ii) through payment of fine as well as imprisonment of the offender.
  • Exit Options are Not Easy for LLPs in default of Filings: A LLP who has defaulted in filings its statement of accounts and annual return with the Registrar of LLPs, willing to shut down its operations and wind up, will have to make its default good first by filing necessary e-forms with the late filing fee. This provision is making LLP an unattractive form of business as in India there are many businesses that are ignorant about compliances.
  • Limitation in External Commercial Borrowings (ECB): Limited Liability Partnerships are not allowed to raise ECB. Therefore, an LLP cannot avail of commercial loans from its foreign partners, FIIs, Foreign Banks, and any financial institution located outside India.

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