Limited Liability Partnership (LLP)- Legal Aspects

One key aspect of incorporating a LLP is that it requires a profit motive. Thus it is not available to charitable organisations.

Basics of LLP

Hybrid Structure

A combination of a partnership and a company. Removes defects of unlimited liability and rigidity of provisions in Company Law.
 

Limited Liability, Perpetual Structure

Ensures separation of ownership, thus liability limited to firm, doesn’t extend to partners.
 

Flexibility in operations

Maximum flexibility in respect to internal management, remuneration to partners, specific powers like management power and veto power to some partners. Can also hold property in its name
 

 

Partners in LLP

  1. A partner cannot bind other partners.
  2. Who can be a partner? A company, LLP, foreign LLP and foreign company can be partner of LLP [However, there would be difficulties in repatriation of profits or capital, unless FEMA provisions are amended].
  3. A minimum of two partners, no upper limit.
  4. No restriction on partnerships- a person can become a partner in any number of LLPs.
  5. Designated partners- Minimum two partners should be nominated as ‘designated partners’ to fulfill statutory obligations under LLP Act. Other partners will not be normally held liable, except in case of fraud.

LLP Agreement

  1. Requirements of Agreement – the LLP Act, 2008 provides great operational flexibility. Technically, a LLP Agreement is NOT mandatory. If there is no LLP agreement, provisions as contained in First Schedule of LLP automatically apply. Practically, the conditions in First Schedule are not acceptable in majority of situations. Hence, each LLP will be required to have LLP Agreement. It is not possible or advisable to have a standard draft for LLP. The requirements and composition of proposed LLP should be considered and then LLP agreement should be drafted.
     
  2. Executing the Agreement- the agreement can be executed either before or after the incorporation of the LLP. Since it is an agreement between partners, there is some flexibility as to when the agreement is executed. The agreement can also be amended any number of times.
     
  3. ePayment of Stamp Duty- Provision for ePayment of Stamp Duty has been made under the Companies Act. Till a parallel provision is made under the LLP Act, till then physical stamps and physical submission of documents will continue.

General Comments on LLP Agreement

  • Careful drafting of agreement- there cannot be a standard LLP agreement which fits all types of LLPs. Thus it has to be unique. For example, some LLPs may be in the form of family partnerships, while some may be in the form of joint ventures (JVs).
     
  • The agreement should be as flexible as possible. Higher the rigidity of the agreement, higher the degree of operational problems. Requirements of all parties should be kept in mind.
     
  • Types of Partners- As per the Indian Partnership Act, partners are mutual agents in a firm. However under the LLP Act, the authority of partners can be limited by way of a LLP agreement.
     
  • Veto Power- the agreement may make provisions for veto power for one or more partners. Can be useful if you as a partner of a LLP intend to take control of decision making.
     
  • Executive/Managing Committee- in the case of large number of partners, it would be advisable to form a committee of senior partners to handle management.
     
  • Number of partners- The legal minimum is 2 partners to execute a LLP agreement. However, if a large number of partners exist, it would be advisable to incorporate the company with 2 partners and add more partners post incorporation.
     
  • Draft LLP agreement to suit form 3- Columns 7 to 20 of Form 3 are in respect of information with regard to LLP agreement. It is highly advisable to draft LLP Agreement in same sequence as far as possible, so that filling form 3 and its checking by ROC will be easy.

Steps to Incorporating a LLP

  1. Acquire a DPIN (Designated Partner Identification Number). Use FORM 7 to apply electronically and subsequently send physical forms.
     
  2. Digital Signature- the designated partners should obtain a Digital Signature Certificate (DSC) Class II or above, from a Certification Agency (CA).
     
  3. Register DPIN and DSC with the LLP website.
     
  4. Filing Information about Partners- Form 3 (information regarding LLP Agreement) and Form 4 (notice of appointment of partner/designated partner). These forms can be filed together with Form 2 itself or within 30 days of incorporation.
     
  5. Send an original copy of the LLP agreement duly stamped.

Running a LLP

  • Formation- procedures for incorporating a LLP are similar to incorporating a company. Incorporation document (parallel to memorandum) and LLP agreement (parallel to Articles of Association) is required to be filed electronically
     
  • Formalities- very few formalities exist in running a LLP. Examples are- No formalities of board meetings, general meetings, registration of charges, restrictions on managerial remuneration,  issue and transfer of shares, election of directors,  restrictions on powers of Board etc.
     
  • Accounts and eFiling of Returns- accounts are to be maintained, but a LLP is exempt from audit provisions. A statement of accounts and solvency is required when returns are filed electronically. This is subject to qualification, based on turnover and contribution.
     
  • Change in Partners/Holding Out- law requires notification within 30 days if partners are changed. The concept of ‘holding out’ is also upheld (if a non-partner gives the impression that he is a partner in the firm to outsider, then the non-partner will also be held liable as a partner).
     
  • Reconstruction/Amalgamation- Provisions of reconstruction, amalgamation and compromise, winding up, inspection and investigation are similar to those under Companies Act.
     
  • Conversion of existing company/firms- existing partnerships, private and unlisted companies can convert to LLPs subject to:
    • There will be no capital gains on such conversion to company or its shareholders if conditions as specified in section 47(xiib) of Income Tax Act are satisfied
    • Only small companies with turnover less than Rs. 60 lakh are can convert.
       
  • Taxation of LLP- taxation of a LLP will be similar to that of a partnership. The exception is that a partner of partnership firm is liable personally for income tax liability of firm. In case of LLP, all partners are jointly and severally liable for income tax liability, but a partner can escape the liability if he proves that non-recovery cannot be attributed to any gross neglect, misfeasance or breach of any duty on his part.

Returns and Records Required by LLP

  • Books of Accounts
     
  • Minute book- to record minutes of meetings with partners and managing/executive committee of partners.
     
  • Change in partners – any change in partner/designated partner should be filed electronically using eForm 3 within 30 days for change with fee.
     
  • Supplementary LLP Agreement - Such admission and cessation will alter mutual rights and duties of partner shall change. Hence, supplementary LLP agreement will be required which is also required to be filed in e-form 3 within 30 days of change with fees (LLP Agreement can be drafted suitably to avoid this).
     
  • Statement of Account and Solvency (SAS)SAS is to be filed annually with eForm 8 (along with fee). It is to be filed within 30 days from expiry of 6 months from end of each financial year i.e. by 30th October.
     
  • Annual Return – to be filed with ROC (Registrar of Companies) in eForm 11 within 60 days of completion of financial year. A Rs. 100 per day penalty applies for late filing of returns.
     
  • Inspection of Documents – Incorporation document (form 2), Annual Return (form 11), SAS (form 8) and Name of Partners or any changes (form 3) are available for public inspection for a fee. The LLP Agreement however, is not available for public inspection.

 

Information gathered from: http://www.dateyvs.com