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What is Limited Liability Partnership

What is Limited Liability Partnership?

According to Ministry of Corporate Affairs, 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. As the name suggests, partners in LLP have limited liability. This means that personal assets of the partners cannot be used for paying off the debts of the company. Partners are liable only to the extent of their agreed contribution in the LLP. However, the LLP is liable completely to the extent of its assets. Since many entrepreneurs are opting for this, it has become a very popular form of business in the recent past.  

There is a number of partners in the firm. Each partner is liable for their own acts and not liable for other's misconduct. In this way, individual partners are shielded from the joint liability that is created by another partner's wrongful business decisions or any misconduct. In case of change of partners, the LLP will continue its existence; entering into contracts and holding property in its own name. An agreement between the partners or the partners and the LLP governs the mutual rights, duties, and responsibilities of the partners.

The concept of LLP is legally sanctioned by the Limited Liability Partnership Act, 2008. The Act is a corporate business vehicle that drives professional expertise and entrepreneurial initiatives to combine and operate in a flexible, innovative, and efficient manner. The benefits of limited liability will allow its members the flexibility for organizing their internal structures. The structure of LLP is a combination of both partnership and corporation. It consists of elements of both a ‘corporate structure’ and a ‘partnership structure’. Therefore, it is a hybrid between a company and a partnership which has features of both these forms.

A few characteristics of the LLP Formation:

  • Separate legal entity: Similar to a company structure, the partners, and the LLP are distinct from each other. The LLP enjoys the status of a separate legal entity like a company where partners are different from the company.

  • The inclusion of foreigners: According to the Act, foreign nationals including foreign companies can be incorporated to form an LLP in India. For this purpose, at least one designated person must be resident of India.

  • No minimum capital required: A minimum amount of capital is required to start a company, but not an LLP.

  • A minimum number of members: To begin an LLP, minimum of two members are required. However, there is no upper limit set for the maximum number of partners.

  • No compulsory audit required: the audit in case of LLP is not mandatory, unless:

  • If the contribution of the LLP exceeds 25 lakh rupees.

  • If the turnover of the LLP exceeds 40 lakh rupees annually.

Advantages of Limited Liability Partnership (LLP)

  1. Easy to form: One of the main benefits of LLP is that the process of forming an LLP is easy and not time-consuming like that of a company.

  1. Liability: As mentioned above, the partners have limited liability which means they are not liable to pay the debts of the company from their personal assets. No partner can be held responsible for the conduct of other partners.

  1. Perpetual succession: According to the provisions of the Act, the LLP will not be winded up in case of death, retirement or insolvency of a partner. The life of the LLP is not affected by the same.

  1. Easy transfer-ability of ownership: The transfer of ownership is easy, as it is easy to admit or leave a partner. There are no restrictions upon joining and leaving of partners in LLP.

  1. Taxation: The rate of taxation is less than that of a company. Moreover, the tax is levied on the LLP and the partners would be exempted from the tax. The Income tax returns must be signed and verified by the partner or partners as the case may be.

  1. No compulsory audit required: Every business has to appoint an auditor in order to keep a check of internal management and accounts. The audits are not mandatory except for the exceptions mentioned above.

  1. An LLP is organized and operates on the basis of the agreement.

  1. Flexibility is provided in this form of the business model without imposing detailed legal and procedural requirements.

  1. The LLP enables professional or technical expertise such that financial risk-taking capacity of the firm is handled in an efficient manner.

  1. Raising of funds and utilizing them depends upon the will of the partners.

Process of LLP Registration

LLP formation process as defined by Ministry of Corporate Affairs is:

  1. Apply for Designated Partner Identification Number (DPIN)

  2. Acquire digital signature certificate and register them on the portal.

  3. The name of the LLP has to e approved by the Ministry. Name selection and approval are considered to be one of the hardest jobs due to the rules defined for the same. You can conduct a company name check here.

  4. Once the LLP name is approved, one can proceed for LLP registration.

Once the number of partners and the capital poured by them is decided, it is essential to get the LLP registered with the Registrar of Companies (ROC) as appointed under the Companies Act, 1956. For this purpose, every LLP must have a registered office. The incorporation document has to be filed with the Registrar and subscribed by at least two partners. Thereby, the ROC will issue the Certificate of Incorporation which is also considered as the proof of registration. The next important task required to complete the formation process is to file for Permanent Account Number (PAN) card. Further, one will file the LLP agreements and a current bank account. The contents of the agreement shall also be filed with the Registrar.

Apply for LLP Registration

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