Another Type Firm: Limited Liability Partnership-I
After talking over the partnership firm, in previous two articles Partnership Firm I and Partnership Firm – II . There is also another way of firm incorporation and that is through Limited Liability Partnership.
Lets have a look at wiki definition :
“A limited liability partnership (LLP) is a partnership in which some or all partners (depending on the jurisdiction) have limited liabilities. It therefore exhibits elements of partnerships and corporations. In an LLP, one partner is not responsible or liable for another partner’s misconduct or negligence”
We will break LLP talking into two articles the first will be an discussion and brief on a quick glance of LLP and the LLP Agreement.
The need to start: The concept of joint and several liabilities which is a part of a partnership firm implies that the personal property of the partners is also liable for attachment for the satisfaction of the company’s debts in addition to the capital contributed by the partners in the firm. The unlimited liability attached a to a partnership makes it a risky affair. The Lok Sabha passed the Limited Liability Partnership Bill on 13 December 2008 thereafter it received the assent of the President on 7 January 2009 and thereby it has received legal status as Limited Liability Partnership Act, 2008 (“the act”). The rules have been put into effect from 01/04/2009
Objective: The 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.
Though there are its own benefits however many investors and lenders are still wary about this business structure and prefer to deal with private or public limited companies–making difficult for them for huge fund raising. This thing can be considered as a secondary task as the business grows and partners feel to take it to next level, there is a provision for converting the firm type to another, a LLP to Limited company or partnership and vice-verse.
- the LLP shall be a body corporate and a legal entity separate from its partners
- the LLP will be a separate legal entity, liable to the full extent of its assets, with the liability of the partners being limited to their agreed contribution in the LLP. No partner would be liable on account of the independent or unauthorized actions of other partners or their misconduct. The liabilities of the LLP and its partners who are found to have acted with intent to defraud creditors or for any fraudulent purpose shall be unlimited for all or any of the debts or other liabilities of the LLP;
PQR LLP (which has 2 partners Mark and Steve) takes a loan of INR 40 lakhs and is unable to repay the loan when it is due. Its capital is INR 20 lakhs (Mark is supposed to contributed INR 12 lakhs and Steve is to contribute INR 8 lakhs), but its partners have only contributed 10 lakhs (Mark – INR 6 lakhs and Steve – INR 4 lakhs). In such a case, the LLP will be liable only up to the amount of its capital, i.e. INR 20 lakhs. Mark and Steve will be liable for an aggregate amount of 10 lakhs only, as they have agreed to contribute such amount towards the capital of the LLP, in the ratio in which they had agreed to contribute the amount towards capital. Therefore, out of the INR 10 lakhs that A and B are liable to pay, Mark will only be required to contribute his share of INR 6 lakhs that is unpaid, and Steve will have to contribute his unpaid balance of INR 4 lakhs. If this is not sufficient to meet unpaid debts of the LLP, creditors cannot recover any further amounts from partners of X LLP. )
- every LLP shall have at least two partners and shall also have at least two individuals as Designated Partners, of whom at least one shall be resident in India. (If a an entrepreneur wants one of its partner from another country ) However, body corporate or organization, a foreign company, a foreign LLP can also be partners of a LLP as long as the above requirement of two designated partners is fulfilled
- the compromise or arrangement including merger and amalgamation of LLPs shall be in accordance with the provisions of the act;
(for small entrepreneurs who may think to merge their ideas with other)
- It can continue its existence irrespective of changes in partners, that is, it has perpetual succession just like a company. If shareholders change in a company, it makes no difference to its existence and legal status. Similarly, change of partners does not result in any change in the legal status of the LLP.
- The act provides that every partner of the LLP is, for the purpose of business of the LLP, an agent of the LLP but not of other partners. The LLP shall not be bound by anything done by a partner in dealing with a person if that partner has no authority to act for the LLP in doing a particular act and the person with whom he is dealing also knows that the partner has no authority for such act. It, further, provides that an obligation of the LLP, whether arising out of contract or otherwise shall be solely the obligation of the LLP.
Time Bound LLP
Since LLPs are governed by the LLP Agreement it is possible for LLPs to provide suitable clauses in such agreement to fix time limits for the duration of the LLP in the LLP Agreement. In such cases, after realization of the objectives of the venture, the LLP could either be wound up, or the provisions for striking-off of the name of the LLPs can be used, instead of the winding up provisions
- disclose with reasonable accuracy, at any time, the financial position of the limited liability partner ship at that time; and
- enable the designated partners to ensure that any Statement of Account and Solvency prepared under this rule complies with the requirements of the Act
NOTE: (Many a stratup usually stop in mid journey, but still a the records are mandatory to be kept for a designated period)
Statement of Account and Solvency in Form 8
LLP Rules for Audit:
- An audit can only be taken by practicing Chartered Accountant under Indian Law
- An auditor must be appointed for each financial year. Auditor
- The Auditor must be appointed by one of the designated partner
- at any time before the end of first financial year and for other financial years at any time 30 days before end of financial year
To know about dis-closer, auditing and filling requirement : Click Here