In 2009, the Limited Liability Partnership (LLP) was introduced in India. Legally, limited liability partnerships (LLPs) have only been existing for a few decades. Each country has its own set of rules regarding LLPs. In this blog, we will look at its advantages and disadvantages.
What is a Limited Liability Partnership (LLP)?
An LLP is a type of partnership that combines the features of a corporation with those of a partnership. As the name implies, the liability of partners in an LLP is ‘limited.’ An LLP’s operation and structure are adaptable, making it suited for small and midsize enterprises.
As An Example, Consider The Following:
Suppose Mr. A & Mr. B are partners in an LLP and have invested 1 lakh rupees as capital. Unfortunately, the company incurs a big commercial loss of Rs. 25 lakhs. However, the responsibility is limited to the amount invested in the firm and the business assets, i.e. Rs. 1 lakh. Creditors are not permitted to seize their personal or real estate assets to recover the remaining Rs. 24 lakhs.
However, if Mr. A and Mr. B are partners in a firm and the company suffers a loss of Rs. 25 lakhs, the partners are personally accountable. This means that the partners are personally accountable, and their personal and company assets may be liquidated to recover the Rs. 25 lakhs.
LLP is best suited for the following:
1. Small and medium-sized businesses
2. Professional Corporations
3. Start-up Companies
4. Family-owned and operated enterprises
5. Information Technology Companies
Features of an LLP
The following are the key features of an LLP in India:
A Body Corporate
Section 3 of the Act defines an LLP as a legal entity that can be formed under the Act.
Separate Legal Entity
An LLP is entirely responsible for its assets and liabilities. The partners’ liability, however, is limited to their contribution to the partnership. As a result, an LLP’s creditor is NOT the partners’ creditor.
An LLP continues to exist even if one or more of its partners retire, become bankrupt, insane, or die. It can also enter into contracts and hold assets in its name.
Artificial Legal Person
For all legal purposes, an LLP can be seen as an artificial legal entity. Because an LLP is formed through a legal process, it has all of the rights of a legal person. It is, however, intangible, invisible, immortal, and hence artificial.
Section 26 of the Act designates all partners as business representatives of the LLP. A partner, on the other hand, is not an agent of the other partners. The actions of one partner have no bearing on the other partners of the LLP. Every partner’s responsibility is limited to his or her contribution to the LLP.
The LLP agreement outlines the duties and rights of all partners who can choose to form one. If such an agreement does not exist, the Act imposes joint duties and rights on all partners.
Number Of Partners
A minimum of 2 partners are required for an LLP. There must be at least two designated partners among the LLP’s partners. Furthermore, at least one authorized partner shall always be a resident of India.
An LLP is run and managed by its partners. However, the designated partners are responsible for legal compliance.
Not For Non-Profit Businesses
An LLP cannot be formed for non-profit or charity purposes. An LLP is only permitted for businesses with for-profit enterprises.
Conversion To A Limited Liability Partnership
An LLP can be formed from an unlisted public corporation or a private firm.
Foreign Limited Liability Partnerships
A foreign LLP is incorporated or registered outside of India and has a registered place of business in India, according to the Act. It enables a foreign LLP to join forces with an Indian LLP.
Advantages and Disadvantages of LLP
A limited liability partnership, like any other business structure, has pros and cons, which are outlined below:
1. Simple registration.
2. Uncomplicated monitoring.
3. Fewer compliances and requirements.
4. There are no audit requirements (till the turnover exceeds Rupees Forty lakhs or contribution to Rs. 25 Lakhs).
5. Legal entity distinct from others.
6. It is cost-effective.
7. Partners’ fiduciary relationship.
1. Partners and LLP are taxed separately.
2. Because LLPs are a new concept in India, banks and other authorities are hesitant to use them.
3. Any change in the Partners necessitates the modification of the entire LLP Agreement.
4. Hefty penalty for late filings
A limited liability partnership combines the benefits of a firm with the flexibility of a partnership. It allows individual partners to avoid shared liability in a partnership firm. Businesses are realizing the benefits of joining an LLP, which has been a windfall to the Indian startup ecosystem. We hope this post has helped you understand the benefits and drawbacks of forming a limited liability partnership and determining whether it is right for your company.