Limited Liability Partnership
A Limited Liability Partnership (LLP) is a business structure that combines the features of a partnership and a company. It provides a way for partners to limit their liability while maintaining the flexibility of a partnership. Under an LLP, each partner has limited liability, meaning they are only responsible for business debts up to the amount they have invested in the business.
Key Takeaways
Limited Liability:
Each partner’s liability is limited to their capital contribution, protecting personal assets from business debts or liabilities.
Risk Dispersal:
The LLP structure helps distribute risk among the partners while allowing each to leverage their individual skills and expertise.
Division of Labor:
LLPs often have a defined division of labor, where partners contribute based on their expertise, making it an ideal structure for professional services.
Common Among Professionals:
LLPs are commonly used by professional businesses, such as:
- Law firms
- Accounting consultancies
- Wealth management firms
Origin of the Concept
The Limited Liability Partnership (LLP) structure was introduced in India through the Limited Liability Partnership Act of 2008. The main aim was to offer a business entity that is:
- Less complex in terms of legalities and operations.
- Easier to maintain than traditional company structures.
- Provides limited liability for its partners, protecting personal assets from business-related risks.
The LLP structure blends the benefits of a partnership (flexibility and ease of operation) with the limited liability of a company, offering a more structured yet less burdensome business option.
Suitability and Popularity
- Ideal for professionals: LLPs are particularly popular among professional services firms like legal consultancies, accounting firms, and wealth management businesses.
- Family-owned businesses: It is also a common choice for closely held, family-owned businesses.
- Not suitable for raising equity funds: LLPs are not the best option for businesses that intend to raise funds from Venture Capitalists, Angel Investors, or Private Equity firms, as they do not offer equity-like shares that investors typically prefer.
This structure is seen as a balance between the flexibility of a partnership and the limited liability feature of a company.
Features of LLP (Limited Liability Partnership)
Separate Legal Entity:
An LLP is considered a separate legal entity, meaning it has its own legal identity distinct from its partners. This enables the LLP to enter into contracts, own assets, and incur liabilities independently of its members.
Limited Liability:
The liability of each partner is limited to the capital they contribute. This means that in case of business debts or legal issues, the personal assets of the partners are protected, unlike in traditional partnerships where partners have unlimited liability.
Low Cost of Formation and Maintenance:
The formation and running costs of an LLP are relatively lower compared to companies, making it an attractive choice for small and medium-sized enterprises (SMEs).
Reduced Compliance and Regulations:
LLPs are subject to fewer compliance requirements than companies. There are no complex governance structures, and less paperwork is involved in comparison to private or public companies.
No Minimum Capital Requirement:
Unlike companies, there is no minimum capital contribution required to form an LLP. Partners can contribute as per their agreed-upon terms
Audit Requirements:
Compulsory auditing is only required when:
The contribution of the LLP exceeds ₹25 lakhs.
The annual turnover exceeds ₹40 lakhs. For smaller businesses, this can save significant operational costs.
Basic Requirements to Incorporate an LLP
Minimum 2 Designated Partners:
An LLP must have at least two designated partners who will manage the LLP. One of them must be an Indian resident.
Digital Signature of One Designated Partner:
One designated partner must possess a digital signature for filing necessary documents and forms electronically.
DPIN (Designated Partner Identification Number):
Each partner must obtain a DPIN, which is a unique identification number assigned to partners in the LLP.
Contribution to the LLP:
Partners must contribute either tangible property, intangible property, or other benefits to the LLP, as part of their investment in the business.
At Least One Designated Partner Should Be an Indian Resident:
It is mandatory for at least one of the designated partners to be a resident of India.
Documents Required for LLP Registration
To incorporate an LLP (Limited Liability Partnership) under the LLP Act, 2008, the following documents are required:
1. PAN Card or Passport:
PAN card for Indian partners.
Passport for foreign partners.
2 .Identity Proof of Partners:
Driving License or Aadhar Card or Residence Card or Election Identity Card or any other government-issued identity document.
3. Address Proof of Partners:
A Telephone Bill or Bank Statement not older than 3 months.
4. Registered Office Proof:
- The landlord must provide proof that the premises can be used as the LLP’s registered office.
- This proof can include:
- Gas or Electricity Bill, Property Tax Receipt, Water Bill, or Sales Note (must not be older than two months).
- Alternatively, Documentary evidence of any utilities such as gas, electricity, or telephone bill in the name of the owner of the property.0
Registration Process of Limited Liability Partnership (LLP)
The process to register an LLP India is as follows:
Name Application Through RUN On MCA Portal:
The first step is to apply for the reservation of the LLP name using the web service RUN LLP on the MCA portal (www.mca.gov.in).You can propose two names along with their justification.Ensure the name is available and is not already trademarked. The name reservation is valid for 20 days.
Obtaining Digital Signature Certificate (DSC):
Apply for a Class 2 Digital Signature Certificate (DSC) for the designated partners. All documents related to LLP registration need to be digitally signed.
E-Filing for Registration of LLP:
The main application for incorporation is done through the FiLLiP form (Form for Limited Liability Partnership).
The FiLLiP form is an integrated application that serves several purposes, such as:
- Allotment of DIN (Director Identification Number),
- Reservation of Name,
- Incorporation of LLP.
Documents needed to accompany the FiLLiP form include:
- Subscriber’s sheet
- Director’s KYC
- Consent form
- Registered office address proof.
- The e-form needs to be digitally signed by one partner and certified by a professional (CA, CS, or CWA).
Certificate of Incorporation:
Once the FiLLiP form is approved, the Certificate of Incorporation is sent via email. This marks the official formation of your LLP.
Filing of LLP Agreement:
- The LLP Agreement governs the rights and duties between the partners and the LLP.
- It must be submitted within 30 days of the incorporation (through Form 3).
- The agreement must be printed on stamp paper, and it needs to be notarized. The stamp duty varies based on the state and the capital contribution of the LLP.