LLP Explained

Article for Blog Post Writing Competition 2011 | by Vineet Kothari


May 28th, 201110:13 am


In India there is a splurge of unemployment for the last few decades and for self employment an individual has many options such as sole proprietorship, partnership, company etc. But each form suffers a lot of disadvantages and advantages. Thus after a lot of efforts  a new style of corporate entity has been allowed in India which is Limited Liablity partnership ( LLP ). It is an amalgamation of the features of a company and a partnership. Most of the drawbacks of both these forms have been removed in this form of  corporate entity.

LLP Is Limited Liability partnership which is a very recent development in the Indian Corporate Scenario. LLP is governed by the LLP Act 2008. With the growth of the Indian economy, the role played by its entrepreneurs as well as its technical and professional manpower has been acknowledged internationally.  It is felt opportune that entrepreneurship, knowledge and risk capital combine to provide a further impetus to India’s economic growth.

The Limited Liability Partnership (LLP) is viewed as an alternative corporate business vehicle that provides the benefits of limited liability but allows its members the flexibility of organizing their internal structure as a partnership based on a mutually arrived agreement. 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 a suitable vehicle for small enterprises and for investment by venture capital. It operates much like a limited partnership, but gives each member of the LLP an equal voice in managing the business. It also protects members from personal liability, except to the extent of their investment in the LLP.

Concept of “limited liability partnership”

  • LLP is an alternative corporate business form that gives the benefits of limited liability of a company and the flexibility of a partnership.
  • The LLP can continue its existence irrespective of changes in partners. It is capable of entering into contracts and holding property in its own name.
  • The LLP is a separate legal entity, is liable to the full extent of its assets but liability of the partners is limited to their agreed contribution in the LLP.
  • Further, no partner is liable on account of the independent or un-authorized actions of other partners, thus individual partners are shielded from joint liability created by another partner’s wrongful business decisions or misconduct.
  • Mutual rights and duties of the partners within a LLP are governed by an agreement between the partners or between the partners and the LLP as the case may be. The LLP, however, is not relieved of the liability for its other obligations as a separate entity.
  • Day to day operations of Limited Liability Partnership will be managed by Designated Partners, who are responsible for ensuring the compliances of all applicable laws.

Since LLP contains elements of both ‘a corporate structure’ as well as ‘a partnership firm structure’ LLP is called a hybrid between a company and a partnership. LLP shall be a body corporate and a legal entity separate from its partners. It will have perpetual succession.

Advantages of an LLP

  • Separate legal entity
  • Easy to establish
  • Flexibility without imposing detailed legal and procedural requirements
  • Perpetual existence irrespective of changes in partners
  • Internationally renowned form of business in comparison to Company
  • No requirement of minimum capital contribution
  • No restrictions as to maximum number of partners
  • LLP & its partners are distinct from each other
  • Partners are not liable for Act of other partners.
  • Personal assets of the partners are not exposed except in case of fraud.
  • Easy to dissolve or wind-up
  • Professionals like CS / CA / CWA / Lawyers can form Multi-disciplinary Professional LLP
  • No requirement to maintain statutory records except Books of Accounts
  • Less Cost of formation (Compared to a company)

Disadvantages of an LLP

  • LLP cannot raise funds from Public
  • Any act of the partner without the other may bind the LLP.
  • Under some cases, liability may extend to personal assets of partners.
  • No separation of Management from owners

Difference between LLP & “traditional partnership firm”

  • Under “traditional partnership firm”, every partner is liable, jointly with all the other partners and also severally for all acts of the firm done while he is a partner.
  • Under LLP structure, liability of the partner is limited to his agreed contribution.  Further, no partner is liable on account of the independent or un-authorized acts of other partners, thus allowing individual partners to be shielded from joint liability created by another partner’s wrongful acts or misconduct.

Difference between LLP & a Company

  • A basic difference between an LLP and a joint stock company lies in that the internal governance structure of a company is regulated by statute (i.e. Companies Act, 1956) whereas for an LLP it would be by a contractual agreement between partners.
  • The management-ownership divide inherent in a company is not there in a limited liability partnership.
  • LLP will have more flexibility as compared to a company.
  • LLP will have lesser compliance requirements as compared to a company.
  • Unlike in the case of a company, there is no requirement for minimum capital contribution for a LLP.

Since an LLP is a very new form of entity the Tax implications also need to be understood clearly to ascertain the tax and financial burden on it. Since the taxation related matters in India are provided under Tax Laws, the taxation of LLPs has not been provided in the LLP Act. The Finance Bill, 2009 has made provisions in this regard, pursuant to which the taxation scheme of LLPs has been proposed to be introduced in the Income Tax Act. The Finance Bill, 2009 has proposed following regarding taxation of LLPs:-

(a)       LLPs to be taxed on the lines similar to general partnerships under Indian Partnership Act, 1932, i.e. taxation in the hands of the entity and exemption from tax in the hands of its partners.

(b)        Consequent changes to be made in the Income-tax Act, 1961 like (i) the word ‘partner’ to include within its meaning a partner of a limited liability partnership, (ii) the word ‘firm’ to include within its meaning a limited liability partnership and (iii) the word ‘partnership’ to include within its meaning a limited liability partnership

(c)        The designated partner shall sign the income tax return of an LLP, or, where, for any unavoidable reason such designated partner is not able to sign the return or where there is no designated partner as such, any partner shall sign the return.

(d)       In case of liquidation of an LLP, every partner will be jointly and severally liable for payment of tax unless he proves that non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part.

(e)       As an LLP and a general partnership is being treated as equivalent (except for recovery purposes) in the Income-tax Act, the conversion from a general partnership firm to an LLP will have no tax implications if the rights and obligations of the partners remain the same after conversion and if there is no transfer of any asset or liability after conversion.

(f)        If there is a violation of these conditions, the provisions of section 45 of Income-tax Act shall apply.

(g)        These amendments are proposed to be made effective from the 1st day of April 2010 i.e. assessment year 2010-11.

Process to Start LLP

LLP

It is very easy to form an LLP, the process of which has been explained above with the help of a flow chart. It removes the very complicated formalities of the Companies Act,1956 As well as removing the certain loopholes in Indian Partnership Act,1932.

Conclusion

The Researcher thus suggests that this form of Corporate Entity is a very good option for entrepreneurs looking for self employment without taking extra risk. The best part is that even professionals can make LLPs and eliminate the risk earlier suffered due to Partnership. And since it allows multi-disciplinary LLPs professionals from 2 or more fields may come together and form an LLP to reap the advantages of providing a complete package to the corporate houses as well as other clients and reap the benefits of outsourcing in the present business framework.

Article by-

-Vineet Kothari

Fourth year student, Department Of Law,

University Of Calcutta, Kolkata.

[Submitted as an entry for the MightyLaws.in Blog Post Writing Competition, 2011]

 

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