LLP is a corporate body registered under the Limited Liability Partnership Act, of 2008.The concept of LLP has given many entrepreneurs and talented individuals a chance to come together and work to establish a profitable business. Fundraising in LLP can be tricky initially since the fund is required, and the contribution from the partners has to be decided based on their share. Funds for LLP can prove to be a hindrance, so the partners have to develop ways to raise funds either internally or from external sources like banks, angel investors, venture capitalists, etc. There are several ways for fundraising in LLP, but the partner’s consent is required from those sources.
How can partners contribute?
Limited Liability Partnership Act, 2008 provides the manner in which a partner contributes to an LLP. The partners of the firm are the contributors initially, and the manner is provided in Section 32(1) of the act through which they can make their contribution to the partnership firm. These are through –
- Tangible Property (either movable or immovable)
- Intangible Property
- Cash Contribution
- Agreement for property contribution
- Promissory Notes
- Service Contracts (performed or to be performed)
The partners can contribute through monetary terms as well as service. The partners need to disclose their contribution according to the provisions laid down in Section 32(2) of the LLP Act, 2008, and Rule 23(2) of the LLP Rules, 2009. In the case of non-monetary contributions, some value is also required for the accounting of the accounts of the LLP. According to the LLP Rules, 2009, these contributions from the partners should be valued by any practising CA, Cost Accountant, or an approved valuer from the panel that has been maintained by the Central Government. The agreement between the partners should contain the details of the contribution to maintain transparency.
Different Ways of Fundraising in LLP
Funds for LLP are needed to grow and expand the business in the future. Some different ways of Fundraising in LLP are –
1. Fundraising by Partners
Fundraising by partners can be very beneficial for the LLP since there will be no external liabilities such as profit sharing or interest on the money raised. Partners can raise funds for LLP amongst themselves, which is comparatively easier and doesn’t involve any other party. A resolution needs to be passed for the same, and on successful contribution, the agreement needs to be revised as per the contribution. Fundraising by partners can be equal or unequal depending upon the budget of each partner, and in the case of unequal contributions, profit sharing would be done accordingly.
2. Fundraising by a new Partner
The LLP can include another partner as well to raise funds since that partner will also contribute to the firm’s accounts. This is different from fundraising by partners since a new partner is added to the existing ones through which fundraising in LLP is done. The consent of the partners needs to be obtained before partnering with a new partner by passing a resolution where it is determined what his/ her share and contribution to the firm will be. The agreement has to be changed according to the change in the contribution of the partners and the addition of a new share with a new partner. These changes have to be informed to the registrar by filling out Form 3 and Form 4.
3. Loan from Partner
A limited liability partnership (LLP) owns and controls a business. By investing in an LLP, partners tend to contribute to the company’s success. In rare situations, however, if an LLP requires funds for a short period, a partner may invest some capital in the LLP under the conditions of a Loan Agreement signed by the other partners.
A Loan Agreement allows an LLP to accept or raise cash capital from one of its partners as a loan at the time when needed. A Limited Liability Partnership is a legal company that is distinct from its partners and can receive loans from them. A few details need to be mentioned in the LLP agreement, like the loan agreement, repayment schedule, and any other clauses as agreed upon by the partners.
4. Fundraising in LLP through Venture Capital
There are many Venture Capitalists who invest in other businesses in return for a share in profit, a stake in the company, or any other benefits. Venture Capitalists usually participate in the management as well, so it can be a con for the partnership firm, but they bring their expertise as well, so it can prove to be a boon for business as well as it can lead to rapid growth in the business.
5. Fundraising in LLP through Angel Investors
Fundraising in LLP can be done through Angel investors as well, which is unlike Venture Capitalists, as angel investors invest in businesses but don’t take part in the managerial decisions of the company. This is a two-way thing as by not participating in the management, they won’t give any expertise to the business. Their sole purpose is to lend money to the business.
6. Bank Loan
Bank loan is also one of the different ways of fundraising in LLP. The government has taken many measures to fund businesses (mostly the MSME sector) and has also allowed banks to provide loans without much trouble to businesses to grow new ideas in the country, which will lead to growth in the economy. Banks provide unsecured Mudra Loans of up to 10 lakhs to establish or grow businesses.
Conclusion
There are several ways through which Fundraising in LLP can be done, and the partners have to decide which option would be better for the firm and its future. Partners need to look into the pros and cons of the investment ways and decide which way would be best suited for the firm in the short term as well as the long term.
Corpbiz can help these individuals by providing the best possible way to raise funds for their business and what would suit their business more. Some businesses may only need funds, while others may require some assistance from the outside, which can be done by adding a partner or a Venture Capitalist.
Frequently Asked Questions
Form 9 is used for the consent of the partner to join an LLP as a partner.
LLP needs to file Form 3 within 30 days of its incorporation under the Companies Act, 2013 with the registrar of companies.
In case of the insolvency of the LLP, no partner is held liable as an LLP is a separate legal entity. No partner has the liability to pay off the debts regardless of his/ her share in the partnership firm. The assets of LLP are frozen, and whatever debts are there are liquidated to clear them off.
Yes, since an LLP is a legal entity, it can enter into loan agreements by providing loans and can also carry out legal transactions as an individual. It can even enter into a contract with others.
No, there is no need to appoint any director in an LLP, but it has to have a minimum of two partners to get incorporated and gain legal status.
Every LLP that is registered under the Limited Liability Partnership Act, 2008 has to file Form 11 relating to the company’s annual returns within 60 days of the end of the previous financial year.
After the increased capital from the partners, a Form 3 has to be filed with the registrar of companies within 30 days of such increase.
Form 6 has to be filed with the registrar to change the name/ address of any of the partners of the LLP.
There is no discrete answer to the question since it depends on the need. If an LLP needs only money, then the funds of the entity can be increased by the partners themselves, which will lead to no external liability. But in case funds are not available, it can look into the other resources. A new partner can be added who will bring some expertise as well.
Yes, fundraising in LLP can be done through an individual as well at an interest rate set before the funds are transferred.
Read Our Article: What Is Trademark Class and Why Is It Important?
