Thursday, 4 February 2010

Limited Liability Partnership

The order of paper on LLP
• Introduction
• Limitations of Traditional Partnership and emergence of concept of LLP
 • Comparison • Introduction of LLP in India
 • Suitability of concept in Indian frame work
 • Advantages and Limitations
 • Conclusion with present situations and future in India


 Partnership is one of the oldest and is very popular form of business in India. Small businesses and professionals prefer it to any other form of business. However it requires some modifications to suit with changing requirements. Hence, there emerged a new concept called Limited Liability Partnership or LLP. The object of this article is to provide basic understanding about LLP. Limitations of Traditional Partnership Firms and Emergence of LLP Partnership is very popular form of business even today. However, this form has become outdated and needs some revisions. Partnership Act is also quite old as long as of 1932. 

There are many limitations of traditional partnership firms which lead to emergence of LLP 
1. The main limitations of traditional partnership which lead to introduction of LLP is its unlimited liability. Today partners are compelled to compensate from their personal estate the debt of their partnership firm. This is the reason why many persons especially professionals afraid to join partnership. Limited Liability Partnership has become necessary to allow Indian professional to compete with international business community without apprehensive of being subject to excessive liability. 

2. There is upper limit of partners (20 or 10) in Traditional partnership. LLP does not contain such kind of ceilings. This will allow professionals to compete on the larger scale. They can have larger capital base and also expand their operations without much restrictions. 

3. In partnership, partnership does not have separate identity different from their partners. Hence, death, retirement or insolvency of any partner almost amount to dissolutions of partnership firm practically. But LLP has separate legal entity different from their partner just as share holder in company has. Therefore, change in partners does not have any effect on LLP. Moreover partner can enter into agreement with LLP and vice versa which is not possible now. 

 These three are main limitations which raised demand for LLP. This concept is getting popularity worldwide. The USA has adopted it as early as in 90s. UK, Japan, China, Canada, etc have started following it after 2000s. However in most of nations LLP is allowed only for professionals like accountant, lawyers or architects. Responding to global changes and demands from within, Government of India has enacted Limited Liability Partnership Act 2008. 

LLP can be simply defined as combination of Partnership and private company or 
Partnership + Private Limited Company = Limited Liability Partnership 

Hence it is very important to compare LLP with these two. LLP and others Points Traditional Partnership Firm Limited Liability Partnership Private Limited Company Number of Members Minimum 2 maximum 10 (for banking) or 20 (for others) Minimum 2 and no limit on maximum numbers Minimum 2 and Maximum 50 Liability Unlimited. Personal estate of partner is also liable to make good the debt of firm Partner’s liability is limited to the extent of its capital contribution. Liability of member is limited to the extent of share capital held and unpaid Legality Status Does not have separate identity from their partners. Has separate status in eyes of law different from its partners. Has separate identity different from its members Governing statue Partnership Act 1932 Limited Liability Partnership Act 2008 Companies Act 1956 Registration Not compulsory. Firm can voluntarily get itself registered with registrar of Firms Compulsory with Registrar of Companies Compulsory registration with Registrar of Companies Name No specific provision in this regard. Should contain word Limited Liability Partnership or LLP after its name Should contain word Private Limited after its name. Documents for formation Partnership deed is required which can be oral or written Incorporation Document and partnership agreement is compulsory Memorandum of Associations and Article of Association is compulsory Annual returns and statements Not required to file any documents about accounts Required to file annual return and statement with ROC Required to file annual return and statement with ROC Audit No specific provision in Partnership Act 1932 Compulsory if contribution exceeds Rs 25 lakhs or turn over exceeds Rs 40 lakhs Compulsory irrespective of turnover or capital Introduction of LLP in India There has been continuous demand for LLP in India. After globalization, Indian professionals are able to serve worldwide. They cannot serve in form of company because of professional restrictions. They hesitate to form partnership due to number of aforesaid reasons. Abid Hussain Committee has recommended legislation on LLP as old as in 1997. Later on Naresh Chandra Committee in 2003 and JJ Irani Expert Committee on Company Law in 2005 also supported this view. The Limited Liability Partnership is expected to provide platform to small and medium professional firms of chartered accountant, company secretaries, etc to conduct their profession efficiently which in turn will increase their global competitiveness Hence government presented Limited Liability Partnership Bill 2006 in parliament which letter on become Limited Liability Partnership Act 2008. The LLP Act is broadly based on LLP laws of United Kingdom and Singapore. However a care is also taken to fit in Indian environment. One important thing to be noted about Indian LLP law which is different from LLP laws of American or European nations. In most of nations LLP is allowed to create for professional firms only. In India initially Naresh Chandra Committee recommended LLP only for professionals. However there is demand from institutions like FICCI to allow LLP for business purpose also. Accordingly LLP can be set up for all profit earning objectives. LLP is expected to fill the room between partnership and private company in India. After having brief idea about LLP, we shall proceed to overview provisions of LLP Act 2008. We do not intend to cover detailed provisions. We have discussed only such provisions which we fill is necessary for understanding the legal framework of LLP, about its incorporation, registrations, operations and administration. How to incorporate LLP? The incorporation procedure of LLP is very much same to incorporation of company. Before to form LLP, person has to decide about designated partners. • Designated Partners:- Every LLP must have at least 2 designated partners which must be individuals. One of designated partner must be resident of India. Designated partner should not be confused with working partner. Designated partner is one who is liable for regulatory and legal compliances in addition to his liability as partner. Designated partner shall apply for Designated Partner Identification Number (DPIN) form Ministry of Corporate Affairs. He should also obtain digital signature certificate because he will be required to sign digitally all e-forms to be filled with ROC. The designated partner shall electronically apply for reservation of name of LLP. Every LLP must contain word LLP after its name. Moreover, where LLP contains name like Chartered Accountants, Advocate, etc., approval must be obtained from concerned institution. In order to get registration, LLP must file incorporation document with ROC. Such incorporation document must be signed by at least two partners. The internal management of LLP is governed by LLP agreement. The LLP agreement contains provision as to management, right, liability, contribution, remuneration of working partners, admission, retirement, accounts, etc. it is not compulsory to have LLP agreement. An LLP may adopt format given in Schedule 1 of LLP Act. However one may not agree with all provisions of schedule I and hence it is advisable to draft LLP agreement. LLP is also required to file details such as name, occupation, addresses of its partner. It is also required to have its registered office. LLP must convey any changes in above details to ROC with in prescribed time limit. Administration of LLP After discussing about incorporation of LLP, let us have a brief idea about administration of LLP. LLP carries on its day to day business in accordance of LLP agreement. Each partner shall be liable to contribute amount as per LLP agreement. Such contribution may consist of both tangible or intangible property and any other benefit to LLP. LLP agreement will provide regulations for day to day business of LLP. Working partners have to observe such regulations. They are responsible for taking daily business decisions and may be paid remuneration for the same. Every partner of LLP is agent of LLP but not of other partner. Each partner is personally liable for any wrongful act or omission or fraud done by him. Other innocent partners are not be personally liable for the same. Any obligations of LLP have to be met with properties of LLP and not of its partners. However, where number of partners reduces below 2 and LLP carries on business with such reduced number, the existing partner shall be personally liable for the deeds. Accounting and compliance provisions Every LLP must keep such accounts which reflect true and fair view of affairs of LLP. However, different from traditional partnership, LLP Act contains mandatory provisions for audit of accounts where turnover of LLP exceeds Rs 40 lakhs or contribution exceeds Rs 25 lakhs. As the partners have limited liability, creditors have greater risk in dealing with LLP compared to proprietorship or traditional partnership. Hence, it is necessary to provide for various compliance procedures for the same. LLP is required to file its Statement of Accounts and Solvency annually in e-form 8 with ROC. In addition to this it is also required to file Annual Return with ROC in e-form-10. Statement of Accounts and Solvency contain a brief abstract of Balance sheet and Profit and Loss account of LLP. While annual information contains details of Partners, their contribution and any changes therein. So far as taxation is concerned LLP is treated at par with traditional partnership firm. Like company LLP has to give notice about change in its partners, business, registered office, etc. it has to file details of charges if any created by it. Moreover such documents will be available for public inspection on payment of prescribed fees. Hence, act seeks to ensure transparency and credibility about functions of LLP to partners, creditors, public, government and other stake holders. List of documents available for public inspection are as follows. • Incorporation document, • Names of partners and changes, if any, made therein, • Statement of Account and Solvency • Annual Return LLP Act also contains other advance provisions as to conversion of other business form into LLP and vice versa, merger, winding up of LLP, penalties and offences. However we are not going into detail of that. Such provisions are broadly based on the existing provisions of Companies Act, 1956 which are adopted with slighter modifications. Here we conclude discussion about LLP. Now, we may interest to know what are the advantages and limitations of such concept. 1. The major advantage of LLP is obliviously its limited liability which will induce business persons to adopt. At present partnership is considered an outdated business model in age of globalization. But LLP can remove such wrong belief. 2. LLP involves lesser compliance and regulatory provisions compared to company. Hence, small businesses which are not required to be overburdened with larger compliance provisions may find LLP as a suitable option. Lesser compliance will ease operations and also reduce unnecessary wastage of cost and time which are involved in such compliances. 3. LLP contains provisions for audit of accounts. No statue provide for audit of partnership. But providing for audit of accounts will ensure that operations of LLP are in accordance with law. Government official may also rely on audited statement of LLP and go for sample scrutiny rather than each assessment. 4. Bank and other financial institution do not prefer to finance partnership because there are no much statutory restrictions on their operations. Hence they are not assured of reliability of their finance. But LLP is required to make proper disclosure of its operation. It has to register charge with ROC. So it is expected that financial institutions will consider LLP as better option to finance. 5. LLP is required to maintain minutes of its all meetings of partners. So it formalizes all proceedings and operations. Having written all the decisions, it is expected that it will create a better atmosphere of confidence amongst partners. 6. LLP is a form suitable to operate on global level. So in future, LLP may represent Indian Business Community which is presently monopolized by company form of organization. However, this concept is criticized widely on following grounds. 1. LLP is suitable only for professionals like CA or CS because their professional does not allow adopting corporate form. This concept has not got popularity amongst trading community. This is why major LLP formed are of professional firms and not of business firms. 2. LLP is said to have lesser compliance requirement compared to companies. It is true to some extent. But on and average it cast significant burden of compliance on LLP. Filling of various documents and compulsory maintenance of records may lead to difficulties in operations of LLP. 3. There is not much awareness amongst general business community about LLP. They are totally ignorant of such development. So LLP has not got that much popularity which was expected for it. Conclusion LLP is new development in India. It is only year of its introduction. So it will be to early to conclude about relevance of LLP in our country. The entire provisions are based on foreign law with some modifications. Hence, it will be necessary to redraft some provisions to give them Indian touch. It is getting popularity gradually. We may expect that Indians especially professionals will combine together in LLP and compete with glob to render their qualified services. When India is on way towards becoming economic super power, LLP is milestone in its journey.

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