INTRODUCTION
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?
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
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
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 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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