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Limited Liability Partnership (LLP)

A Limited Liability Partnership is an improvement on the traditional Partnership, and is in a sense, the best of the flexibility offered by a Partnership and the stability offered by a private limited company.

Envisaged under the Limited Liability Partnership Act, 2008, an LLP is brought into existence by way of an LLP agreement. In the event there is no LLP Agreement, or if the Agreement does not address any particular matter, the Act provides for a schedule that governs the business and functions of the LLP.

An LLP Agreement should at a minimum, cover the following matters:

Name of the LLP.
The registered office of the LLP.
The business to be carried on the LLP.
The name and details of the Partners, including who shall be the ‘Designated Partners’.
The capital contribution of each Partner and the profit and loss sharing mechanism.
The manner in which a Partner may retire and a new Partner may be inducted.

A Designated Partner(s) is one who has been designated to administer the affairs of the LLP, i.e., manage the business and be responsible for such management. For instance, it would be the Designated Partner that would be signing the audited statements and the filings of the LLP, and be responsible for statutory compliances.

Pros of LLP:

A limited liability partnership, as the name suggests, limits the liability of the partners to the capital of the LLP. To elaborate, in law, the LLP and the Partners of the LLP are two separate entities. Therefore, if the LLP incurs any liability that is more than the capital invested by the Partners, the personal assets of the Partners cannot be attached by a Court to fulfill the liability, as the case would be in the case of a Partnership firm. Further, being an incorporated entity, an LLP is more stable than a partnership that may be dissolved very quickly.

The key pros of an LLP are listed below:

Ease – An LLP is easier to bring into existence, is a body corporate, and has limited liability of the Partners.

Flexibility and Taxation – Governed as it is by the LLP Agreement, an LLP can be run as per the desires of the Partners; new Partners can be inducted, Partners can retire, the income / salary can be as desired; further, the distribution of dividends or profits to Partners will not attract the same Tax as that in a Company.

Separate legal entity – An LLP, being a legal entity separate from its Partners, can sue and be sued in own name, without the Partners being sued in the process.

Audit and Compliance – An LLP needs to cross 40 Lakh in annual turnover for an Audit to be mandatory by law. Further, there are significantly fewer compliance’s to deal with.

Specifically, the annual filings of an LLP are two: Form 8 and Form 11.
Form 8 (Statement of Account and Solvency) is a document prepared and filed by the Designated Partners with the Registrar of Companies, stating the ability of the LLP to pay off its debts and dues. Form 8 needs to be filed within 30 days of the end of 6 months from closure of the financial year to which the statement of account relates, and should be accompanied by the requisite fee.

Form 11 (Annual Return) is a document specifying details of the Partners, their contributions, etc, that needs to be filed within 60 days of the closure of the financial year.

Cons of LLP:

Funding – An LLP, being comprised of Partners, is quite different from a private company comprised of shareholders. In an LLP, the participants / owners are the Partners themselves, which limits the ability of the LLP / Partners to raise funds in exchange for ownership of the firm, be it angel, or series.
No ESOP – Again, an LLP not being comprised of shareholders rules out the ability of the LLP to reward its employees with stake in the firm.
Restrictions on transfer – In a Pvt Ltd. a shareholder may, subject to any agreement to the contrary, transfer his shares to any other person / entity without seeking the approval of the other shareholders. However, in an LLP, a Partner may transfer his/her assets or stake to a third party only after seeking approval from the other Partners.
New Partners – In order to admit a new Partner, the LLP agreement must be modified by way of a supplementary agreement every time such need arises. Such changes would need to be intimated to the relevant Registrar of Companies as well.

Procedure for LLP Incorporation:

Name Reservation – In order to incorporate as an LLP, an application must be made by way of eForm 1 to ascertain the availability of the name chosen for the LLP and reserve such name. Such name reservation is valid for a period of 60 days, within which the applicant must file eForm 2 to incorporate the LLP.
Incorporation: eForm 2 – The application for incorporation of the LLP is done by way of filing eForm 2, which contains relevant details of the proposed LLP such as its business, the Partners, the Designated Partners, their contributions, and their consent to act as Partners / Designated Partners.

LLP Agreement: eForm 3 – Within 30 days of the incorporation of the

LLP achieved by way of filing eForm 2, the Partners must execute and file the LLP Agreement by way of eForm 3.

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