[FAQs] Formation of Limited Liability Partnership (LLP)

Advantages of LLP are as follows:

• • Easy to form : Forming LLP is an easy process. It is less complicated and time consuming unlike the process of formation of a company.
  • Liability : The partners of the LLP have limited liability which means partners are not liable to pay the debts of the LLP from their personal assets. No partner is responsible for any other partner’s misconduct.
  • Perpetual Succession : The life of the Limited Liability Partnership is not affected by death, retirement or insolvency of the partner. The LLP will get wound up only as per provisions of the LLP Act.
  • Management of the company : LLP has two or more partners, who own and manage the business. This is different from a private limited company, whose directors may be different from shareholders.
  • Easy transferability of ownership : There is no restriction upon joining and leaving the LLP. It is easy to admit as a partner and to leave the firm or to easily transfer the ownership to others.
  • Taxation : LLP is not subject to Dividend Distribution Tax (DDT). A distributed profit in the hands of the partners is not taxable. For Income Tax purposes, LLP is treated on par with partnership firms.
  • No compulsory audit required : Every business has to appoint an auditor for checking the internal management of the company and its accounts. However, in the case of LLP, there is no mandatory audit required. The audit is required only in those cases where the turnover of the LLP exceeds ` 40 lakhs and where the contribution exceeds ` 25 lakhs.
  • Fewer compliance requirements : LLP is much easier and cheaper to run than a private limited company as there are just three compliances per year. On the other hand, a private limited company has a lot of compliances to fulfil and has to compulsorily conduct an audit of its books of account.
  • Flexible agreement : The partners are free to draft the agreement as they please, with regard to their rights and duties.
  • Easy to wind-up : Not only is it easy to start, it is also easier to wind-up an LLP, as compared to a private limited company.

Following are the main points of distinction between LLP and Company:

The salient features of the Limited Liability Partnership (LLP) are as follows:

• • The LLP is a body corporate and a legal entity separate from its partners.
  • Any 2 or more persons, associated for carrying on a lawful business with a view to profit, may by subscribing their names to an incorporation document and filing the same with the ROC, form a LLP.
  • The LLP has a perpetual succession.
  • The mutual rights and duties of partners of an LLP inter se and those of the LLP and its partners shall be governed by an agreement between partners or between the LLP.
  • A LLP is a separate legal entity, liable to the full extent of its assets, with the liability of the partners being limited to their agreed contribution in the LLP which may be tangible or intangible in nature or both tangible and intangible in nature.
  • No partner would be liable on account of the independent or un-authorized acts of other partners or their misconduct.
  • Every LLP shall have at least 2 partners and shall also have at least 2 individuals as Designated Partners, of whom at least one shall be resident in India.
  • A LLP shall maintain annual accounts reflecting true and fair view of its state of affairs.
  • A statement of accounts and solvency shall be filed by every LLP with the ROC every year.
  • Accounts of LLPs shall also be audited.
  • The Central Government has power to investigate the affairs of an LLP by appointment of competent inspector for the purpose.
  • The Indian Partnership Act, 1932 shall not be applicable to LLPs.
  • A partnership firm, a private company and an unlisted public company may convert themselves to LLP in accordance with provisions of the proposed legislation.
  • The Central Government has made rules for carrying out the provisions of the LLP Act.

Subject to the MOA & AOA, any sui juris (a person who is competent to contract on its own behalf) except the company itself can become a member of a company. Being an incorporated body under the statute, LLP can become a member of a company.

Eg: Value Rating Advisors LLP can become shareholder in Reliance Industries Limited

Partners [Section 5] : Any individual or body corporate may be a partner in a LLP.

Disqualification of partners in LLP : An individual shall not be capable of becoming a partner of a limited liability partnership, if –

• • He has been found to be of unsound mind by a Court of competent jurisdiction.
  • He is an un-discharged insolvent.
  • He has applied to be adjudicated as an insolvent and his application is pending.

Following is procedure for incorporation of LLP in India:

Step 1 : Application for DIN or DPIN :

All designated partners of the proposed LLP shall obtain “Designated Partner Identification Number (DPIN)”. File Form DIR-3 in order to obtain DIN or DPIN. A person already having a DIN (Director Identification Number) can use the same as a DPIN

Step 2 : Acquire/Register DSC :

All filings done by the LLP(s) are required to be filed with the use of Digital Signatures by the person authorized to sign the documents.

Acquire Digital Signature from licensed Certifying Authority.

Step 3 : Name reservation: The first step in incorporation of an LLP is reservation of name of the proposed LLP. There are two ways of reserving name of the proposed LLP.

i. File an application under LLP-RUN for ascertaining availability and reservation of the name of an LLP

ii. Name can be proposed in eform FiLLiP, an application for incorporation of LLP

Step 4 : Incorporate a LLP

Apply for the name of the LLP to be registered by filing Form RUN-LLP. After that depending upon the proposed LLP, file required incorporation document in Form FiLLip.

Once the form has been approved by the concerned official of the Ministry, email will be received by the applicant regarding the same and the status of the form will get changed to Approved.

Step 5 : File LLP Agreement

After incorporation of LLP, an initial LLP agreement is to be filed within 30 days of incorporation of LLP. The user has to file the information in Form No. 3 (Information with regard to Limited Liability Partnership Agreement and changes, if any, made therein).

Annual Return [Section 35] : Every LLP shall file an annual return duly authenticated with the ROC within 60 days of closure of its financial year i.e., by 30^th May every year

Description of Form:- Annual return is the summary of Statement of Management Affairs

Form of Annual Return – Annual return will be filed in Form 11

Certificate from Designated Partner:- Annual return of an LLP having turnover up to ` 5 Crore during the corresponding financial year or contribution up to ` 50 lakh shall be accompanied with a certificate from a designated partner, other than the signatory to the annual return, to the effect that annual return contains true and correct information.

Certificate from Company Secretary:- In all other cases, the annual return shall be accompanied with a certificate from a Company Secretary in practice to the effect that he has verified the particulars from the books and records of the limited liability partnership and found them to be true and correct.

Minimum number of partners [Section 6] : Every LLP shall have at least 2 partners.

If at any time the number of partners of a LLP is reduced below 2 and the business of the LLP is carried by the remaining one partner even after 6 months from the reduction of number below 2, he shall be liable personally for the obligations of the LLP incurred after 6 months.

Maximum number of partner : There is no upper limit on number of partners in an LLP.

Conclusion:- There are no shareholders in limited liability partnership, instead there are partners.

Liabilities of designated partners [Section 8] : A designated partner shall be –

(a) Responsible for the doing of all acts, matters and things as are required to be done by the LLP in respect of compliance of the provisions of the Act including filing of any document, return, statement and the reports and

(b) Liable to all penalties imposed on the limited liability partnership for any contravention of those provisions.

Responsibilities of Designated Partner – Where the LLP has contravened the provisions of LLP Act: They would be required to pay all the monetary fines imposed on the LLP. There is no provision in the Act providing for the reimbursement of such monetary penalties to him by the LLP. Further in the following instances apart from the LLP, the designated partner would also be imposed monetary penalties under the Act –

• • For non-compliance with the directions of the Central Government for change of name.
  • For non-maintenance of books of account, non-filing of accounts, duly audited where such an audit is mandatory.
  • For non-filing of the annual return of the LLP.

Foreign limited liability partnership [Section 59] : The Central Government may make rules for provisions in relation to establishment of place of business by foreign LLPs within India and carrying on their business.

As per Rule 18(4), a foreign LLP or firm or company may apply in Form No. 27 to the Registrar for reserving its existing name by which it is registered in the country of its regulation or incorporation and not allotting to any LLP in India. Such reservation shall be valid for 3 years but may renewed on a fresh application along with payment of fee.

A foreign LLP shall, within 30 days of establishing a place of business in India, file with the ROC:

• • A copy of the certificate of incorporation or registration of the LLP;
  • The full address of the registered or principal office of the LLP in the country of its incorporation;
  • The full address of the office of the LLP in India which is to be deemed as its principal place of business in India; and
  • List of partners and designated partners, if any, and the names and addresses of two or more persons resident in India, authorized to accept on behalf of the LLP, service of process and any notices or other documents required to be served on the LLP.

LLP agreement means any written agreement between the partners of the LLP or between the LLP and its partners which determines the mutual rights and duties of the partners and their rights and duties in relation to that LLP.

LLP agreement defines the roles, responsibilities, rights, and powers of the partners to LLP and to each other. Hence, it creates the foundation for the smooth running of LLP. LLP agreement clarifies the managerial, operational as well administrative responsibilities and sets clear methodologies for decision making, adding a new partner and disassociation of existing partner.

Essential clauses to be included in the LLP Agreement:

• • Interpretation/Definitions : This clause is the essence of any LLP agreement. An LLP Agreement must provide for various definitions such as the definition of designated partners, the accounting period, business of LLP and the name with which the LLP will be known. The agreement must also provide with full address of the registered office of the LLP as well as the address of all the partners.
  • Designated Partners : LLP agreement shall clearly mention the name, age and address of each of the Designated Partners correctly.
  • Name of the LLP and changes to it : This clause shall state that business of the LLP shall be carried on in the name and style of _______ [Name of LLP]. Any change in the name of the LLP shall be notified to the Registrar by the Designated Partner.
  • Registered Office of the LLP : LLP agreement shall state that partnership business shall be carried on at the under mentioned address, which shall also be its registered office. The business shall also be carried from such other places as may be mutually decided by the partners from time to time.
  • Business of the LLP : This clause must clearly specify the nature of the business that the LLP will be carrying on. The LLP may engage in any and all activities necessary, desirable or incidental to the accomplishment of the conduct of such business of the LLP including but not limited to such ancillary business. It may also include any other business conducted in such manner as may be decided by the majority of partners from time to time.
  • Capital Contribution : Total contribution of the LLP and the contribution by each partner along with the percentage of contribution to be mentioned in this clause. Manner in which contribution can be withdrawn by the partners shall also be stated in this clause.
  • Profit Sharing Ratio : An ideal LLP Agreement must also mention the ratio in which the profits and the losses of the business will be shared among the partners. The partners must clearly state the amount of profit that each member receives, or the amount of the loss that they’re liable for will be set out in the agreement.
  • Rights & Duties of Designated Partners : The LLP Agreement must specify the various rights and duties of the Designated Partners as may be mutually agreed by them. In the absence of such separate agreement between the partners about such rights and duties, etc., the provisions of Schedule I of the Limited Liability Act, 2008 will apply as given in Section 23(4) of the said act.
  • Admission, Retirement, Resignation & Expulsion of Partners : LLP agreement must include the provisions regarding admission of new partners, retirement as well as the death of a partner, etc. The agreement must provide guidelines for the expulsion of partners as well.
  • Remuneration & interest to be paid to partners : The LLP agreement shall contain a clause regarding the amount of remuneration to the Designated Partner(s), for rendering the services as such. This clause shall contain the rate of interest to be paid to the partners on their capital contribution.
  • Bank Account : This clause shall set out the modus operandi of the bank account transactions of the LLP.
  • Books of account and accounting year : The LLP agreement shall contain clause relating to maintenance of books of account and other documents, method of accounting and the details relating to the Accounting year of the LLP.

All LLPs registered under the LLP Act, 2008 need to file Annual Returns and Statement of Accounts for every Financial Year. It is mandatory for a LLP to file a return irrespective of whether it has done any business or not. There are three mandatory compliance requirements to be followed by LLPs which are given below:

(1) Filing of Statement of Account and Solvency : Every LLP shall, within a period of 6 months from the end of each financial year, prepare a Statement of Account and Solvency in Form No. 8 and such statement shall be signed by the designated partners of the LLP. Every LLP shall file the Statement of Account and Solvency with the ROC every year on or before 31st October.

(2) Audit of accounts : Every LLP whose turnover exceeds, in any financial year, ` 40,00,000 or its contribution exceed ` 25,00,000 has to get accounts audited from a Chartered Accountant.

(3) Filing of Annual Return : Every LLP shall file an annual return duly authenticated with the ROC within 60 days of closure of its financial year in prescribed form. Annual return has to be filed in Form No. 11. Annual return of an LLP having turnover up to ` 5 Crore during the corresponding financial year or contribution up to ` 50 lakh shall be accompanied with a certificate from a designated partner, other than the signatory to the annual return, to the effect that annual return contains true and correct information. In all other cases, the annual return shall be accompanied with a certificate from a Company Secretary in practice to the effect that he has verified the particulars from the books and records of the limited liability partnership and found them to be true and correct.

(4) Filing of Income Tax Return : Every LLP has to file Income Tax Return every within the due date prescribed in Income-tax Act, 1961.

In the case of LLP, there is no mandatory audit required. But as per Rule 24 of LLP Rules, The audit is required only in those cases where the turnover of the LLP exceeds ` 40 lakhs and where the contribution exceeds ` 25 lakhs.

Also voluntarily if partners decided to get auditing done they may appoint Chartered Accountant and then financial statement will be audited by Chartered Accountant

Therefore the statement that financial Statements of LLP are not mandatorily required to be audited by a Chartered Accountant is incorrect.