Limited Liability Act 2008

 INTRODUCTION

 A need has been felt for a long time for a new corporate form that would provide an alternative to the traditional partnership with unlimited personal liability on the one hand, and, the compliance-based structure of the private or unlisted public company on the other hand. With this objective in view, the Limited Liability Partnership Act, 2008 was enacted by the Parliament on 12th December 2008, which received the assent of the President on 7th January 2009 and was notified with effect from 31st March 2009. Most of the sections of the Limited Liability Act, 2008 came into force on 31st March 2009.

LLP is a hybrid form of business organization structure that combines the advantages of the Partnership firm and the Company Structure. LLP offers the flexibility of a partnership firm and reduces the compliances of a company structure.

Though the enactment regarding Limited Liability Partnership (“LLP”) finally came into operation in 2009 in India, the concept of limited liability partnership is not new; in fact, is more than a 100-year-old concept. It is one of the most renowned forms of business organizations worldwide.

The Ministry of Corporate Affairs (MCA) and the Registrar of Companies (ROC) is entrusted with the task of administrating the LLP Act, 2008. The Central Government has the authority to frame the Rules with regard to the LLP Act, 2008, and can amend them by notifications in the Official Gazette, from time to time.

This Act deals with the formation and regulation of Limited Liability Partnerships and for matters incidental thereto.

It contains 81 sections and is divided into 4 schedules.

The First Schedule deals with mutual rights and duties of partners, as well as the rights and duties of limited liability partnership and its partners in case of the absence of a formal agreement with respect to them.

The Second Schedule deals with the conversion of a firm into LLP.

The Third Schedule deals with the conversion of a private company into LLP.

The Fourth Schedule deals with the conversion of unlisted public companies into LLP.

Note: The Indian Partnership Act, of 1932 is not applicable to LLPs.

 

WHY LIMITED LIABILITY PARTNERSHIP?

 A need has been felt to make new legislation related to a new corporate form of business organization in India to meet the contemporary growth of the Indian economy. It provides an alternative to the traditional partnership with unlimited liability on the one hand and the statute-based governance structure of the limited liability company on the other hand, in order to enable professional expertise and entrepreneurial initiative to combine, organize and operate in a flexible, innovative and efficient manner.

Limited Liability Partnership (LLP) is a corporate business organization that provides the benefits of limited liability but also allows its members the flexibility of organizing their internal structure just like in the case of a partnership, based on a mutually arrived agreement. The LLP form enables 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 is a suitable vehicle for small enterprises and for investment by venture capital.

 

LIMITED LIABILITY PARTNERSHIP – MEANING AND CONCEPT

Meaning: A LLP is a new form of legal business entity with limited liability. It is a separate legal entity where LLP itself is liable to the third parties upto the assets it owns but the liability of the partners is limited. It is an alternative corporate business vehicle that not only gives the benefits of limited liability at low compliance cost but allows its partners the flexibility of organising their internal structure as a traditional partnership. It gives the benefits of limited liability of a company and the flexibility of a partnership.

LLP is also called as a hybrid between a company and a partnership as it contains elements of both, a corporate entity as well as a partnership.

Since LLP contains elements of both ‘a corporate structure’ as well as ‘a partnership firm structure’ LLP is called a hybrid between a company and a partnership.

 

CHARACTERISTIC/SALIENT FEATURES OF LLP

 1. A body corporate

A LLP is a body corporate formed and incorporated under LLP Act and is a legal entity separate from the partners constituting it. [Sec. 3]

2. Separate Legal Entity

The LLP is a separate legal entity. It is liable to the full extent of its assets but liability of the partners is limited to their agreed contribution in the LLP. In other words, creditors of LLP shall be the creditors of LLP alone and not of the partners.

3. Perpetual Succession

Death, insanity, retirement or insolvency of partners has no impact on the existence of LLP. The LLP can continue its existence irrespective of changes in partners. It is can enter into contracts in its own name. It can also hold properties in its own name. It is created by law and law alone can dissolve it.

4. Absence of Mutual Agency

The cardinal principal of mutual agency of partners in a partnership is missing in LLP. In case of LLP, the partners of LLP are agents of LLP alone and not of the other partners. Hence, no partner can be held liable on account of the independent or un-authorized actions of other partners. Thus individual partners cannot be held liable for liability incurred by another partner’s wrongful business decisions or misconduct.

 5. LLP Agreement

The partners are free to make rules related to the mutual rights and duties of the partners as per their choice. This is done through an agreement. In the absence of any such agreement, the mutual rights and duties shall be governed by the provisions of the LLP Act, 2008.

6. Artificial Person

An LLP is an Artificial legal person created by law capable of enjoying all the rights of an individual. It can do everything which a natural person can do, except the contracts of very personal nature like, it cannot marry, it cannot go to jail, cannot take an oath, cannot marry or get divorce. Further, it cannot practice a learned profession like CA, Law or Medicine. A LLP is invisible, intangible, immortal but not fictitious because it really exists.

7. Common Seal

Being an artificial person, an LLP work on its own but it has to act through its partners. Hence, it may have a common seal that can be considered as its official signature. [Section 14(c)], It should be noted that it is not mandatory for  LLP to have a common seal. If it decides to have one, then it shall remain under the custody of some responsible official and it shall be a fixed in the presence of at least 2 designated partners of the LLP.

8. Limited Liability

Every partner of an LLP is, for the purpose of the business of LLP, the agent of the LLP, but not of other partners (Section 26). The liability of the partners will be limited to their agreed contribution in the LLP.

9. Management of Business

The partners in the LLP are entitled to manage the business of LLP. However, only the designated partners are responsible for legal compliances.

10. Minimum and Maximum number of Partners

Every LLP shall have least two partners and shall also have at least 2 individuals as designated partners. It is mandatory that at least one of the designated partners shall be resident in India. Further, there is no maximum limit of partners in LLP.

11. Business for profit Only

LLP can be formed only for carrying on any lawful business with a view to earn profit. Thus LLP cannot be formed for charitable or non-for-profit purpose.

12. Investigation

The Central Government shall have powers to investigate the affairs of an LLP by appointment of competent authority.

 13. Compromise or Arrangement

Any compromise or arrangement including merger and amalgamation of LLPs shall be in accordance with the provisions of the LLP Act, 2008.

14. Conversion into LLP

A firm, private company or an unlisted public company would be allowed to be converted into LLP in accordance with the provisions of LLP Act, 2008.

15. E-Filling of Documents

Every form or application of document required to be led or delivered under the act and rules made thereunder, shall be led in computer readable electronic form on its website www.mca. gov.in and authenticated by a partner or designated partner of LLP by the use of electronic or digital signature.

16. Foreign LLPs

Section 2(l)(m) defines foreign limited liability partnership “as a limited liability partnership formed, incorporated, or registered outside India which established a place of business within India”. Foreign LLP can become a partner in an Indian LLP.

 

ADVANTAGES OF LLP

The following are the advantages of LLP form of business organization:

It is easier to form a LLP as compared to a company.

The partners of a LLP enjoy limited liability.

It operates on the basis of an agreement.

It is not rigid as far as capital structure is concerned.

It provides flexibility without imposing detailed legal and procedural requirements.

It is easy to dissolve an LLP as compared to a Company.

 

INCORPORATION OF LLP

Essential elements to incorporate LLP

Limited Liability Partnerships are body corporates that must be registered with the Registrar of LLP after following the provisions specified in the LLP Act. The process is quite similar to the setting up of a company. Under the LLP Act, 2008, the following elements are very essential to form a LLP in India:

 

Persons intending to incorporate an LLP shall decide a name for the LLP.

A LLP shall execute a limited liability partnership agreement between the partners inter se or between the LLP and its partners. In the absence of any agreement the provisions as set out in First Schedule of LLP Act, 2008 will be applied.

Then they shall complete and submit the incorporation document in the form prescribed with the Registrar electronically, along with the prescribed fees.

There must be at least two partners for incorporation of LLP [Individual or body corporate],

A LLP shall have a registered office in India so as to send and receive communications;

It should appoint atleast two individuals as designated partners who will be responsible for number of duties including doing of all acts, matters and things as are required to be done by the LLP. At least one of them should be resident in India. Each designated partner shall hold a Designated Partner Identification Number (DPIN) which is allotted by MCA.

As soon as the process is completed, a certificate of registration shall be issued which shall contain a Limited Liability Partnership Identification Number (LLPIN)

 

STEPS OR PROCESS FOR INCORPORATING AN LLP

 Step I: Reservation of name

The first step while incorporating a LLP is the reservation of name of LLP.

The name of a LLP shall not be similar to that of an existing LLP, Company or a Partnership Firm.

The applicant has to file e-form 1, for ascertaining the availability and reservation of name.

6 names in order of preference can be indicated.

The name should contain the suffix “Limited Liability Partnership” or “LLP”.

 

Step 2: Incorporation

 In the second step, the applicant has to file e-form 2 for incorporating a new LLP.

This form contains the details of the proposed LLP and the Partners and Designated Partners along with their consent to act as such.

 

Step 3: Execute an LLP Agreement

 It is mandatory to execute LLP Agreement. [Sec. 23]

LLP agreement shall be filed with the registrar in e-form 3 within 30 days of incorporation of LLP.

 

The contents of the LLP Agreement are enumerated below:

Name of LLP

Name and address of partners and designated partners

Form of contribution & interest on contribution

Profit sharing ratio

Remuneration of Partners

Rights & Duties of Partners

Proposed Business

Rules for governing LLP.



Financial Disclosure

Every LLP is required to prepare a statement of account and solvency within a period of 6 months from the end of the financial year and shall file it in Form 8 with the Registrar of companies along with the specified fees of Rs. 1000 within 60 days from the end of six months of the financial year.

The financial disclosures in LLP have been discussed under the below-mentioned four heads:

1. Maintenance of books of account

2. Statement of account and solvency

3. Auditing of accounts of LLP

4. Annual return

 

1.      1. Maintenance of books of account

To reflect the true and fair view of state of affairs, every LLP is required to maintain books of account. Every LLP is required to maintain the books of accounts on cash basis or accrual basis (recording revenues when they are earned and not when they are received in cash, and recording expenses when they are incurred and not when they are paid) and also according to Double Entry System of Accounting. The books of accounts shall also be preserved in the registered office of the LLP for the specified period.

Every LLP has to maintain uniform financial year ending on 31st March of a year. The LLP rules provide that the books of account shall contain:

a) Particulars of all sums of money received and expended (spend) by the LLP and the matters with respect to which the receipts and expenditures take place

b) A record of all the assets and liabilities of the LLP

c) Statements of cost of goods purchased, inventories, work-inprogress, finished goods and cost of goods sold

d) Any other particular as the partner/s may decide

 

2. Statement of account and solvency 

Statement of account 

This is detailed summary of financial position of LLP.

It consists:

- Statement of assets and liabilities

- Statement of income and expenditure

Statement of solvency

Declaration by the designated partners as to state of solvency of LLP i.e ability of the LLP to pay its debts.

Time Period for Preparation and Filing

Every LLP is required to prepare a statement of account and solvency within a period of 6 months from the end of financial year and shall file it in Form 8 with the Registrar of companies along with the specified fees of Rs. 1000 within 60 days from the end of six months of the financial year.

Example: In case financial year ends on 31st March, 2012 the LLP must prepare its annual statement by 30th September, 2012. The same statements must be filed with registrar of companies in form 8 till 30th November, 2012.


The statements should also be signed by the Designated Partners.

 

3. Auditing of accounts of LLP

Auditing means checking of accounts by auditor. 

Audit under LLP Act:

Audit Not Required 

Every LLP whose turnover does not exceed Rs.40 lakhs or whose contribution (contribution of a partner may consists of tangible, movable or immovable or intangible property or other benefit to the LLP, including money etc.) does not exceed Rs.25 lakhs in any financial year is exempted from audit.

Audit Required 

Every LLP whose turnover exceed Rs.40 lakhs or whose contribution exceed Rs.25 lakhs in any financial year has to mandatorily get its accounts audited by a Chartered Accountant.

Qualification and Appointment of Auditors:

A person needs to be chartered accountant in order to qualify for appointment as an auditor of a LLP.

The LLP whose turnover/contribution exceeds the prescribed limit shall appoint a Chartered Accountant as its auditor for auditing its accounts.

Designated partner should appoint the auditor. In case, designated partners fails then the partners may appoint the auditors.

Auditors should be appointed preferably before the end of financial year.

Remuneration of Auditors: 

Remuneration of an auditor is fixed by designated partners or by following the procedure as laid down in the LLP agreement.

Change of LLP Auditors:

There is no specific guidelines for appointment / reappointment of Auditors.

The partners of LLP are free to change the auditors from time to time.

Resignation of Auditors: 

An auditor of the LLP can resign at any time by sending a notice to the registered office of the LLP with the reason for resigning.

The partner of LLP can fill the vacancy by appointing another auditor.

Powers and Duties of Auditors:

• Right to inspect books of accounts

• Right to ask for information and clarifications

• Right to visit the branches

• Right to take legal and technical advice

• Right to ask for remuneration

• Right to correction of wrong statements

• Right to sign the audit report


4. Annual return

LLP annual return basically includes:

Name and address of registered office of LLP

A summary of details of Partners and Designated Partners and changes among them annually Principal business activities of the LLP

Date of closure of financial year etc.

Every LLP must file an annual return duly authenticated with the registrar within 60 days of closure of its financial year i.e by 30th May in form 11 alongwith the prescribed fees. A penalty of Rs. 100 per day is applicable for late filing of returns.




Process of Conversion of a Pvt Ltd Co. to an LLP

Obtain DIN

Conduct a Board Meeting

Application for Name availability

Draft Limited liability partnership agreement (LLP Agreement)

File E- form FiLLiP (Filing of Incorporation Documents)

File E-form 18 (Application for conversion)

Obtain Certificate of Registration (Form 19)

File E Form 3 ( Information of LLP Agreement)

Certificate of Incorporation as LLP

Filing of E Form 14 (Intimation to ROC)


Obtain DIN:

The first step towards conversion of a Private Limited Company to an LLP is to obtain DIN for the designated partners who don’t have one.

The minimum number of partners for the incorporation of an LLP is two and also one of them must be Indian. But it is very important to file for a DSC before applying for the DIN.


Conduct a Board meeting:

The next step will be to call for a board meeting of all the board members with following purposes:

To Pass Resolution for Conversion of a Private Limited Company into LLP.

To Pass Resolution to authorize any director to Apply for Name of LLP.

Application for Name availability

An application is to be made to reserve the name of an LLP. An application can be made for reserving the name of a new LLP or for changing the name of an existing LLP. The name of the company can be changed into the name of the LLP.

 

Draft Limited liability partnership agreement (LLP Agreement):

An LLP agreement is a written document defining the agreement between the partners of a Limited Liability Partnership. It defines the rights and duties of all the partners towards each other and towards the firm.

 

Contents of Agreement are

Name of LLP

Name of Partners & Designated Partners

Form of contribution

Profit Sharing ratio

Rights & Duties of Partners

Proposed Business

Rules for governing the LLP

 

File E- form FiLLiP (Filing of Form of Incorporation)

Incorporation Document along with the proof of address of registered office of LLP (Signed by each Designated Partner and witnessed by Profession to be filled in E Form FiLLiP.

 

File E Form FiLLiP with ROC along with following Attachments:

 

Address proof of the registered office of LLP.

The subscription sheets.

Consent to act as a designated partners and partners

Identity and Resident proofs of designated partners and partners

Detail of LLP(s) and/ or company(s) in which partner/ designated partner is a director/ designated partner.


File E-form 18 (Application for conversion):

With Form 2, one other form is to be filed. This form is E Form 18 which is a sole form to be filed for the conversion of a Pvt Ltd Co. to an LLP. This Form is to be filed with the following attachments:

 Statement of the consent of shareholders (Mandatory)

Statement of accounts of the company certified as true and correct by the independent auditor

List of all the secured creditors along with their consent

Copy of acknowledgement of latest income tax return (Mandatory)

 

Obtain Certificate of Registration (Form 19):

After all formalities and filings have been complied with by the applicants and approved by the Ministry, the Registrar of LLP will issue a Certificate of Registration in form no. 19 as to conversion of the LLP. The Certificate of Registration issued shall be the conclusive evidence of conversion of the LLP.


File E Form 3 ( Information of LLP Agreement):

This form provides information about the LLP Agreement entered into between the partners. This form is to be filed in 30 days from the date of conversion of the company into an LLP.

 

Attachment Required: LLP Agreement

 

Certificate of Incorporation as LLP:

The next step would be to obtain the Certificate of Incorporation as an LLP.

 

Filing of E Form 14 (Intimation to ROC):

After receiving incorporation certificate of LLP it has to be filed within 15 days of the date of conversion. 

 

Attachments to be filed along with E-Form 14:

 

Copy of Certificate of Incorporation (COI) of LLP.

Copy of incorporation document submitted in E-Form FiLLiP  to ROC.

Effect of Conversion of Private Limited Company to LLP

 

The following are some of the implications due to the conversion of a company into a LLP:

 

The private company is dissolved after conversion.

The name of the private limited company will be removed from the register of the ROC.

The conversion will not affect existing liabilities, obligations, agreements, contracts and continued employment.

Company has to intimate all the authorities concerned about the conversion and make necessary changes in all the registrations and licenses.


Note: Check Laws Notes

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