Although it was introduced in India in 2009, a Limited Liability Partnership or LLP is not a new concept. Legally, LLPs have only been around for a couple of decades but conceptually, limited liability vehicles have been around since the time of Romans. The idea was to limit liability in any contract. The prevalence of limited liability vehicles can also be seen during the early Islamic era and eleventh-century Italy. In the modern version, LLPs arose in the US in the 80s. Soon countries like the UK, Japan, Canada, China, India, etc. joined the list of allowing LLPs as legal entities. Every country has different regulations surrounding an LLP. In this article, we will explore the LLP structure in India and talk about its advantages and disadvantages.
What is a Limited Liability Partnership or LLP?
To begin with, an LLP is a partnership. Now, partnerships are of different types. An LLP is a kind of partnership that combines the features of a corporate business form with those of a partnership. A typical partnership generally offers the partners limited liability from errors, negligence, and incompetence but no limited liability from debts and lawsuits. In an LLP, as the name suggests, the liability of partners is ‘limited’. It merges the benefits of limited liability of a company into the structure of a partnership. This allows it to offer a new corporate business option to enterprises. It is particularly beneficial for small and medium enterprises since the operation and structure of an LLP are flexible.
Features of an LLP
In India, the Limited liability Partnership Act, 2008 (herein called the ‘Act’), governs LLPs. Here are the features of an LLP in India:
A Body Corporate
Section 3 of the Act defines an LLP as a body corporate that you can incorporate under the Act.
Separate Legal Entity
An LLP is completely liable for its assets and liabilities. However, the liability of the partners is limited to their contribution to the partnership. Hence, a creditor of an LLP is NOT a creditor of the partners.
An LLP continues its existence even if one or more partners retire, become insolvent, insane, or die. It also has the power to enter into contracts and hold assets in its name.
Artificial Legal Person
You can treat an LLP as an artificial legal person for all legal purposes. Since you create an LLP via a legal process, it has all the rights of a legal person. However, it is intangible, invisible, and immortal, hence artificial.
Section 26 of the Act defines all partners as agents of the LLP for the purpose of business. A partner, however, is not an agent of other partners. Actions of one partner do not affect the other partners or the LLP. The liability of every partner is limited to his/her contribution to the LLP.
The LLP agreement governs the duties and rights of all partners who can create one as per their choice. If no such agreement exists, then the Act bestows mutual duties and rights to all partners.
Number of Partners
It is mandatory for an LLP to have at least 2 partners. Amongst all the partners of the LLP, there shall be at least two designated partners. Further, one designated partner should always be a resident in India at all times. An LLP has no maximum limit on the number of partners.
The partners run and manage the business in an LLP. However, the designated partners are liable for legal compliances.
NOT for non-profit businesses
You cannot form an LLP for non-profit or charitable purposes. An LLP is allowed for businesses for profit only.
Conversion to an LLP
An unlisted public company or a private company can convert into an LLP.
The Act defines a foreign LLP as one that is incorporated or registered outside India with a registered place of business in India. It allows a foreign LLP to become a partner in an Indian LLP.
Advantages and Disadvantages of a Limited Liability Partnership (LLP)
Like any other business form, a limited liability partnership offers some advantages as well as disadvantages as listed below:
- Easy registration
- Hassle-free monitoring
- Fewer compliances and formalities
- No Audit requirements (till the turnover exceeds Rupees Forty lakhs or contribution to Rupees Twenty Five Lakhs)
- Separate legal entity
- Fiduciary relationship of Partners
- Separate taxation of the Partners and LLP
- LLP being a new concept in India, banks and other authorities are less confident about the structure
- Any change in the Partners requires modifying the complete LLP Agreement
- Hefty fee in case of late filings
A limited liability partnership combines the flexibility of a partnership with the benefits of a company. It allows the individual partners to steer clear of the joint liability in a partnership firm. It has been a boon to the Indian startup landscape as businesses are reaping the benefits of forming an LLP. We hope that this article helps you understand the pros and cons of a limited liability partnership and determine if it is good for your business.