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LLP is a corporate business vehicle combining the vital aspects of a partnership firm and the advantages of a limited liability company. LLP is a hybrid of a company and a partnership. The LLP is a separate legal entity which can continue its existence irrespective of changes in its partners. LLP enables professional expertise and entrepreneurial initiative to combine and operate in flexible, innovative and efficient manner, providing benefits of limited liability while allowing its members the flexibility for organizing their internal structure as a partnership.
Like a traditional partnership firm, minimum two partners are required to incorporate an LLP. However, there is no upper limit on the maximum number of partners of an LLP.
- An Individual (Indian/ Foreign National) or
- A Body Corporate (i.e., a Company or an LLP whether incorporated in India or outside India)
However, if the individual is found to be of unsound mind by a Court/ is an undischarged insolvent/ has applied to be adjudicated as an insolvent and his application is pending; then such an individual shall not be capable of becoming a partner
The document which specifies mutual rights and duties of partners among themselves and in relation to the LLP is called the LLP Agreement. An LLP Agreement will contain clauses like the objectives of the LLP, its functioning, place of business, profit share between partners, salary and remuneration to be paid to partners, interest on loans given or taken from partners and conflict resolution among other things.
The LLP Act specifies that among all the partners, there should be a minimum of two Designated Partners who shall be individuals, and at least one of them should be resident in India.
Designated Partners (DPs) are those partners who are responsible for compliance of the LLP with provisions of the LLP Act. In case of any non-compliance, DPs are liable for penalties.
There are three important aspects to be considered:
- All DPs should be INDIVIDUALS(a natural person). If a Body Corporate (which is a partner in an LLP) wants to be a DP of the LLP, it must nominate an individual as its Nominee and that individual shall fulfill the responsibilities of DP.
- There should be MINIMUM 2 DPs. If due to circumstances such as death/retirement of a DP or change in designation of DPs, if the number of DPs reduces below 2, ensure that the DP is appointed within 6 months otherwise the LLP shall not be allowed to file any form on the LLP portal, and it would be a violation of provisions of the LLP Act.
- Minimum 1 DP should be RESIDENT OF INDIA. An Individual is called Resident of India if he has stayed in India for not less than 182 days during immediately preceding 1 year.
- Separate Legal Entity: It means that in the eyes of law, LLP is separate from its partners just like a company is separate from its shareholders. The LLP is distinct from its partners. An LLP can sue and be sued in its own name. This allows the business to contract with other entities, own assets and borrow funds in the name of an LLP itself which is not possible in the case of a traditional partnership firm.
Also, the LLP need not be wound up, if the number of partners falls below 2 temporarily. The LLP can continue to exist, and the surviving partner has a period of 6 months to introduce a new partner.
- Limited Liability: The liability of the partners is limited to the contributions made by them and they are not personally liable for any loss in the business. This means that if an LLP becomes insolvent, at the time of winding up, only the LLP assets are liable for clearing its debts and the personal assets of the partners cannot be attached.
This is entirely different from proprietorship and traditional partnership where the personal assets of proprietor/ partners are not protected if the business becomes bankrupt. This is one of the main reasons why people prefer LLP as their preferred form of business organization compared to sole proprietorship and traditional partnership.
- Low cost of incorporation and compliance: The cost of forming an LLP and the cost of compliances is low compared to the cost for a public or private limited company. The LLP needs to file only 2 statements annually, i.e., Annual Return (Form 11; the due date is 30th May) and a Statement of Accounts and Solvency (Form 8; the due date is 30th October).
Statutory audit is required for Limited Liability Partnership only if the contribution has exceeded INR 25 lakhs or turnover is more than INR 40 lakhs. If contribution/ turnover is below the specified limits, audit is optional. Unlike companies, compliances related to board meetings, annual general meetings, preparation and maintenance of minutes, board resolutions etc. do not apply to LLPs. This makes it cost-effective to maintain an LLP.
- Simple structure for withdrawing profits: The share of profits of LLP is not taxed again in the hands of partners.