Understanding a Limited Liability Partnership
- Flexibility
LLPs offer flexibility in management and decision-making, allowing partners to actively participate in the business's day-to-day operations.
- Limited liability
One of the key features is limited personal liability, protecting individual partners from being personally responsible for the LLP's debts.
What is the structure of an LLP?
A Limited Liability Partnership (LLP) is a distinct legal entity with partners who have limited liability, liable only up to their investment and any personal guarantees made. Registered at Companies House, LLPs are solely for profit-making entities. Partners must provide a business address and maintain a member register. There is no limit on the maximum number of partners, though a minimum of two members—individuals or limited companies—is required for incorporation. It's also permissible to form an LLP with one individual and a dormant company, offering flexibility in partnership structures within legal boundaries.
Features of Limited Liability Partnership (LLP)
A Limited Liability Partnership (LLP) has several distinct features:
- Separate legal entity: An LLP is recognised as a separate legal entity, much like a company, meaning it can own assets and enter into contracts in its own name.
- Minimum two partners: To form an LLP, at least two individuals must come together as partners. There is no upper limit on the number of partners an LLP can have.
- Designated partners: An LLP must have at least two designated partners responsible for regulatory compliance. One of these designated partners must be a resident of India.
- Limited liability: The liability of each partner is limited to the amount they have contributed to the LLP, protecting their personal assets from business debts.
- Low formation cost: Establishing an LLP involves lower costs compared to forming a private limited company.
- Less compliance: LLPs have fewer regulatory requirements and compliance obligations, making them easier to manage.
- No minimum capital requirement: There is no mandatory minimum capital contribution needed to start an LLP, allowing flexibility in setting up the business based on individual circumstances.
These features make LLPs a flexible and cost-effective option for entrepreneurs.
How does a limited liability partnership work?
An LLP combines the benefits of a partnership with the protection of limited liability. Let’s take a closer look at how this business model works.
A Minimum of Two Partners Is Needed to Form an LLP
To start an LLP, there must be at least two partners. These partners can be individuals or companies. Having two partners helps ensure the business is properly set up and run by people working together. However, more than two partners can be part of the LLP if needed.
Partners Have Limited Liability, Which Protects Their Personal Assets
One of the biggest advantages of an LLP is that partners have limited liability. This means their personal property is protected if the LLP faces debts or legal claims. Only the money invested in the LLP can be used to pay these liabilities, so partners don’t risk losing their own assets.
An LLP Works According to an Agreement That Defines Everyone’s Roles
An LLP operates under a legal agreement called the LLP agreement. This document explains the rights, duties, and responsibilities of each partner. It also covers important things like how profits are shared, how decisions are made, and other roles needed to run the business smoothly.
LLPs Must Follow the Limited Liability Partnership Act, 2008
The LLP Act, 2008 provides the legal framework for LLPs in India. It sets out rules for registration, compliance, and the rights and duties of partners. LLPs must follow these rules, including keeping proper records, filing annual returns, and meeting financial standards.
Benefits of an LLP
LLP offers a balance of liability protection, operational flexibility, and corporate advantages, providing the following benefits to all involved parties:
Distinct Legal Entity: An LLP functions as a distinct legal entity, similar to a company. It can enter into contracts and legal proceedings in its name.
Limited Liability of Partners: Partners enjoy limited liability, restricting their financial exposure to their contributed capital. In insolvency cases, only LLP assets are used to settle debts, shielding partners from personal financial obligations.
Cost-Effective and Low Compliance: Forming an LLP is cost-effective compared to public or private limited companies. You only need to file two statements annually: the Annual Return and the Statement of Accounts and Solvency for the compliance requirements.
No Minimum Capital Requirement: LLP formation doesn't demand a minimum capital contribution, offering flexibility to partners.
Disadvantages of LLP
While Limited Liability Partnerships (LLPs) offer several advantages, it is important to be aware of certain potential disadvantages:
- Compliance costs and penalties: LLPs must adhere to various compliance requirements, such as annual filings and maintaining records. Even minor non-compliance can result in significant penalties from the Ministry of Corporate Affairs. This adds to the overall cost of operating an LLP, particularly if professional assistance is required to meet these legal obligations.
- Dissolution risks: Unlike companies, LLPs do not enjoy perpetual succession. If the number of partners drops below two for a period of six months, or if the LLP encounters severe financial difficulties, it may face dissolution. This can disrupt business operations and create complications for stakeholders, especially if the dissolution process is lengthy.
- Limited access to capital: LLPs face limitations when it comes to raising capital. Their structure lacks a formal equity system, which makes it less attractive to investors and venture capitalists. Without the ability to issue shares, LLPs may find it harder to secure large-scale funding, which can restrict growth opportunities.
Understanding these drawbacks is essential for making informed decisions about the suitability of an LLP.
Difference between LLP and partnership
Aspect
|
LLP (Limited Liability Partnership)
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General Partnership
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Legal status
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Separate legal entity
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No separate legal entity
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Liability
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Limited to the extent of the partner's contribution
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Unlimited; partners are personally liable
|
Number of partners
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Minimum 2, no maximum limit
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Minimum 2, maximum 20 (10 for banking partnerships)
|
Management
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Managed by designated partners
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Managed by all partners jointly
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Registration
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Mandatory under the LLP Act, 2008
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Not mandatory, but advised for legal recognition
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Compliance requirements
|
Higher compliance, annual filing mandatory
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Lower compliance requirements
|
Ownership of assets
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Owned by the LLP as a legal entity
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Owned collectively by the partners
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Transfer of ownership
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Easier; governed by the LLP agreement
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More restrictive, requiring partner consensus
|
Continuity of existence
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Continues regardless of changes in partners
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Dissolves upon a partner’s death or withdrawal
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Taxation
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Taxed as a partnership; no dividend distribution tax
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Taxed as a partnership
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Suitable for
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Professionals, businesses requiring limited liability
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Small businesses, professional services, family-run firms
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Difference between LLP and LLC
A Limited Liability Partnership (LLP) and a Limited Liability Company (LLC) both provide owner protections but differ in structure and management. An LLP requires a formal partnership agreement and often entails annual reporting. Management in an LLP must be equally shared among partners, unlike an LLC, which offers more flexibility in management structure. LLCs shield members from personal liability for business debts, while LLP partners are generally not liable for each other's actions. Both entities are flow-through for tax purposes, with partners taxed individually on profits. The choice between LLP and LLC often depends on management preferences and liability considerations for professionals.
Difference between Limited Liability Partnership and company
Aspect
|
LLP (Limited Liability Partnership)
|
Company (Private/Public)
|
Legal status
|
Separate legal entity
|
Separate legal entity
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Governing law
|
Governed by the LLP Act, 2008
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Governed by the Companies Act, 2013
|
Liability
|
Limited to the extent of the partner’s contribution
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Limited to the extent of shares held (for shareholders)
|
Ownership
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Owned by partners (designated partners)
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Owned by shareholders
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Management
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Managed by designated partners
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Managed by Board of Directors
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Number of members
|
Minimum 2 partners, no maximum limit
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Minimum 2 (private company) or 7 (public company), maximum 200 (private)
|
Compliance requirements
|
Moderate compliance requirements (annual filing mandatory)
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Higher compliance requirements (mandatory audits, annual filings)
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Registration
|
Mandatory registration under LLP Act, 2008
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Mandatory registration under Companies Act, 2013
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Transfer of ownership
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Requires consent of all partners as per the LLP agreement
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Shares can be freely transferred (subject to restrictions in private companies)
|
Perpetual succession
|
Yes, LLP continues regardless of changes in partners
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Yes, company continues regardless of changes in shareholders
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Taxation
|
Taxed as a partnership; no dividend distribution tax
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Subject to corporate tax rates; dividend distribution tax may apply
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Profit distribution
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Distributed according to the LLP agreement
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Distributed as dividends according to shareholding
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Audit requirement
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Mandatory only if turnover exceeds a specified limit
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Mandatory, regardless of turnover
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Suitable for
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Professional services, small businesses needing flexibility
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Larger businesses, companies looking for growth and investment
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What is an example of an LLP?
An example of an LLP is a law firm where partners share profits and liabilities. Each lawyer's personal assets are protected from the firm's debts, providing a level of security while maintaining a collaborative business structure.
What is the difference between a Limited Partnership and an LLP?
Liability
In a limited partnership, at least one partner has unlimited personal liability, while all LLP partners enjoy limited liability protection.
Management
LLPs typically allow all partners to actively participate in management, unlike limited partnerships where some partners may have limited involvement.
Who is eligible to become a partner in an LLP?
LLPs welcome different kinds of professionals and offer protection by limiting personal liability, with clear rules about income:
Indian Citizens and Residents: An LLP must have at least two designated partners, who can be any Indian citizen or resident.
Foreign Nationals and Companies: Foreign partners need permission from the Reserve Bank of India (RBI) and the Foreign Investment Promotion Board (FIPB). They must also have a digital signature and a Director Identification Number (DIN).
Non-Resident Indians (NRIs): NRIs can also be partners, following similar rules as Indian citizens.
LLPs and Companies: Almost any type of entity can join an LLP, except other LLP partnerships.
Designated Partners: There must be two designated partners, and at least one must be an Indian citizen with a DIN and Digital Signature Certificate (DSC) for official filings.
Required documents for LLP incorporation
To easily register an LLP, you need to have these documents ready:
Identity Proof: PAN cards and address proof of all members.
Address Proof: Utility bills or rental agreement for the LLP’s registered office.
Designated Partners’ Details: PAN card, address proof, and photographs of the designated partners.
Subscription Sheet: Signed by all partners to confirm their contribution to the LLP.
Consent to Act: A document where partners agree to be appointed as designated partners.
LLP registration process
Step 1: Get Digital Signature Certificate (DSC)
Before you start registering your LLP, the designated partners need to get a Digital Signature Certificate (DSC). This is because all LLP documents are filed online and must be digitally signed. DSCs can be obtained from government-approved agencies. The cost varies depending on the agency. Make sure to get a Class 3 DSC.
Step 2: Apply for Designated Partner Identification Number (DPIN)
All designated partners, or those who want to become designated partners, must apply for a DPIN. This is done by filling out Form DIR-3 and attaching scanned copies of documents like Aadhaar and PAN. The form must be signed by a Company Secretary, Chartered Accountant, or Cost Accountant who is practising full-time.
Only natural persons (individuals) can be designated partners. Companies or other legal entities cannot get a DPIN.
Step 3: Name Approval
You need to reserve a unique name for your LLP by filing RUN-LLP (Reserve Unique Name-Limited Liability Partnership) with the Central Registration Centre. Before applying, use the free name search on the MCA portal to check if your desired name is available.
The registrar will approve the name only if it is not similar to existing company or LLP names, trademarks, or partnership firms and is not undesirable.
If there are any issues, you can correct and resubmit the application within 15 days. You can suggest up to two names. After the name is approved, you must register your LLP within 3 months.
Step 4: Incorporate the LLP
To register the LLP, file Form FiLLiP (Form for Incorporation of Limited Liability Partnership) with the Registrar who covers the area where your LLP’s registered office will be.
You will need to pay the fees as mentioned in Annexure ‘A’.
This form can also be used to apply for DPIN if any designated partner doesn’t have one yet. Only two individuals can apply for DPIN through this form.
You can also reserve your LLP name through this form. If the name is approved, it will be used for your LLP.
Step 5: File the LLP Agreement
The LLP agreement explains the rights and duties between the partners and between the LLP and its partners.
You must file the LLP agreement online in Form 3 on the MCA portal.
Form 3 must be filed within 30 days of the LLP’s incorporation.
The LLP agreement should be printed on stamp paper, and the value of the stamp paper varies from state to state.
LLP forms
Form Name
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Purpose of the Form
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FiLLiP
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Use for LLP incorporation
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RUN LLP
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Reserve a name for the LLP
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Form 3
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Provide information about the LLP agreement
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Form 8
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Submit the Statement of Account and Solvency
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Form 11
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File the Annual Return of Limited Liability Partnership (LLP)
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Form 24
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Apply to the Registrar of Companies for striking off name of LLP
|
Conclusion
In conclusion, a Limited Liability Partnership (LLP) offers a unique blend of flexibility and limited liability protection, making it an attractive business structure for various industries. Understanding the benefits and differences between an LLP and other business entities is crucial for entrepreneurs seeking a balance between personal liability protection and operational flexibility.
Explore the impact of LLPs on taxation, including aspects related to GST, by visiting this page on GST.
