A few decades ago, the meaning of business was restricted to only a company, a partnership, or a sole proprietorship. Each type of organization had benefits and drawbacks; for example, partnerships and proprietorships were simpler to set up and run but lacked limited liability, a key component of a company. A Limited Liability Partnership (LLP) in India is a combination of the advantages of a company and a partnership. It was created as a result of changes in how businesses operate. In this article, you will learn everything there is to know about LLP in India, including its benefits and how to form one.
Limited Liability Partnership Act of 2008
In order to regulate LLP firms in the nation, the Indian Parliament passed the Limited Liability Partnership Act in 2008. The LLP is a type of partnership that is registered under this Act, according to Section 2 of the statute. The written agreement between the LLP partners or the LLP and its partners is also referred to as the LLP agreement. The obligations, liabilities, rights, and powers of the LLP partners are generally outlined in this agreement.
The Indian Partnership Act, 1932 regulations do not apply to LLPs because this Limited Liability Partnership Act typically controls LLPs in India. Only conventional partnership businesses are subject to them.
Before we discuss the partnership agreement and its terms, it is crucial to be aware of a few critical portions of the Act. The Sections are as follows:
Under Chapter One: General Clause
- Section 2(m) of the Limited Liability Partnership of 2008, defines the term, foreign LLP
- Section 2(n) of the Limited Liability Partnership of 2008, defines the term, limited liability partnership
- Section 2(o) of the Limited Liability Partnership of 2008, defines the term, limited liability partnership agreement
- Section 2(q) of the Limited Liability Partnership of 2008, defines the term, partner
- Section 2(ra) of the Limited Liability Partnership of 2008, defines the term, regional director
Under Chapter two: Nature of Limited Liability Partnership
- Section 3 of the Limited Liability Partnership, 2008, discusses about the LLPto be a body corporate.
- Section 4 of the Limited Liability Partnership, 2008, discusses about the non-applicability of the Indian Partnership Act, 1932.
- Section 5 the Limited Liability Partnership, 2008, discusses about the partners.
- Section 6 of the Limited Liability Partnership, 2008, discusses about the minimum number of partners.
- Section 7 the Limited Liability Partnership, 2008, discusses about the designated partners.
- Section 8 the Limited Liability Partnership, 2008, discusses about the liabilities of designated partners.
- Section 9 of the Limited Liability Partnership, 2008, discusses about the changes in designated partners.
- Section 10 of the Limited Liability Partnership, 2008, discusses about the punishment for contravention of Sections 7 and 9.
Under Chapter three: Incorporation of Limited Liability Partnership and matters incidental thereto
- Section 12 of the Limited Liability Partnership, 2008, discusses about the incorporation by registration.
- Section 13 of the Limited Liability Partnership, 2008, discusses about the registered office of LLP and change therein.
- Section 14 of the Limited Liability Partnership, 2008, discusses about the Effect of registration.
- Section 19 of the Limited Liability Partnership, 2008, discusses about the Change of registered name.
- Section 20 the Limited Liability Partnership, 2008, discusses about the penalty for improper use of the words limited liability partnership or “LLP”.
Under Chapter four: Partners and their relations
- Section 22 of the Limited Liability Partnership, 2008, discusses about the eligibility to be partners.
- Section 25 of the Limited Liability Partnership, 2008, discusses about the registration of changes in partners.
Under Chapter five: Extent and limitation of Limited Liability Partnership and partners
- Section 26 of the Limited Liability Partnership, 2008, discusses about the partner as an agent.
- Section 27 of the Limited Liability Partnership, 2008, discusses about the extent of liability of a LLP.
- Section 29 of the Limited Liability Partnership, 2008, discusses about the holding out
- Section 30 of the Limited Liability Partnership, 2008, discusses about the unlimited liability in case of fraud
- Section 31 of the Limited Liability Partnership, 2008, discusses about the whistle blowing.
Under Chapter seven: Financial disclosures
- Section 34 the Limited Liability Partnership, 2008, discusses about the maintenance of books of account, other records, and audit, etc.
- Section 35 of the Limited Liability Partnership, 2008, discusses about the annual return.
- Section 36 of the Limited Liability Partnership, 2008, discusses about the Inspection of documents kept by the Registrar.
- Section 37 of the Limited Liability Partnership, 2008, discusses about the penalty for false statements.
- Section 38 of the Limited Liability Partnership, 2008, discusses about the power of the Registrar to obtain information
- Section 39 of the Limited Liability Partnership, 2008, discusses about the compounding of offenses.
Under Chapter twelve: Compromise, arrangement or reconstruction of Limited Liability Partnership
- Section 60 of the Limited Liability Partnership, 2008, discusses about the Compromise, or arrangement of limited liability partnerships
- Section 61 of the Limited Liability Partnership, 2008, discusses about the Power of the Tribunal to enforce compromise or arrangement.
- Section 62 of the LLP of 2008, discusses about the Provisions for facilitating the reconstruction or amalgamation of LLPs
Under Chapter thirteen: Winding up and dissolution
- Section 63 of the LLP, 2008, discusses about the winding up and dissolution.
- Section 64 of the LLP, 2008, discusses about the circumstances in which a LLP may be wound up by Tribunal
- Section 65 of the LLP, 2008, discusses about the rules for winding up and dissolution.
Features of Limited Liability Partnership
In this section, the author has mentioned all the attractive features of an LLP in India:-
- The LLP has a perpetual succession and is a body corporate and separate legal entity from its partners.
- An agreement between partners must control the rights and obligations that each partner has. The reciprocal rights and obligations shall be established in accordance with Schedule 1 of the Act if there is no LLP agreement.
- The provisions of the Indian Partnership Act of 1932 do apply to LLPs because that entity is governed by a different law.
- Every LLP must have at least two partners and two designated partners, one of whom must be an Indian resident. Each partner would be responsible for their own independent actions.
- Any business, whether it be a private company or an unlisted public company, would be permitted to change into an LLP in compliance with the terms of the Act.
- Each LLP must keep annual records, and each LLP must submit an annual statement of accounts and solvency to the Registrar. Audits of LLPs’ accounts are also required.
- Like a corporation, the LLP, a separate legal body, is responsible for all of its assets, with the partners’ responsibility being restricted to the amount they contributed. No partner will be held personally accountable for the wrongdoing of any other partners. However, if the LLP was established with the intent to cheat creditors or for any other fraudulent purpose, the partners who knew will be held entirely liable.
- Each LLP must keep annual accounts that reflect the true state of its finances. Every year, it must create and file a statement of finances and solvency with the Registrar.
- The Central Government may, whenever it sees fit, hire a qualified Inspector to look into the business dealings of an LLP.
- A company, private company, or unlisted public company has the option to convert itself into an LLP in accordance with the Act’s provisions. The Registrar will issue a certificate to that effect following the conversion. Following issuing a certificate of registration, the firm or company is declared to be dissolved, and all of its assets, rights, and responsibilities are transferred to the newly created LLP. The company or firm’s name is then deleted from the appropriate Registrar of Firms or Registrar of Companies.
- An LLP, like a corporation, may be dissolved voluntarily or by a tribunal that is created in accordance with The Companies Act of 2013.
- The LLP Act of 2008 also allows the Central Government to apply the Companies Act’s provisions whenever it deems appropriate. To that end, the Central Government must issue a notification, which must be laid before both houses of Parliament for a total of 30 days and subject to any modifications that may be approved by both Houses.
Incorporation of Limited Liability Partnership
A minimum of two individuals, at least one of whom must be a resident of India, must engage in profitable lawful activity and sign an incorporation form in order for an LLP to be incorporated. The proposed names of the LLP are approved when Form-1 is filed. The incorporation paperwork, which must be in Form-2, includes the name of the LLP, its proposed business, the registered office address, the Registrar’s address, the names, addresses, and pictures of the partners. An affirmation that all requirements under the Act and rules have been met in regard to incorporation must be filed with the Registrar of the State in the prescribed form and made by either an advocate, a company secretary, a chartered accountant, or a cost accountant who maintains a full-time practice in India, along with the prescribed fee. The Registrar must then issue the certificate of incorporation within fourteen (14) days. The Registrar’s certificate, which attests to the fulfilment of all requirements, is evidence of this. Within 30 days of incorporation, Form-3 containing the LLP Agreement, which establishes the rights and obligations of the LLP and its partners, shall be filed with the Registrar. The agreement typically includes the following:-
- Contributions made by both designated partners.
- An agreed-upon profit-and-loss sharing ratio.
- The LLP’s goals and objectives.
- The rights and obligations of partners and designated partners.
- A withdrawal clause for any current partners.
- The scope of the LLP’s liabilities.
Without such an agreement, the provisions outlined in the First Schedule shall govern the rights and obligations of the LLP and its partners
Advantages of forming an LLP
The following points talk about all the advantages of a Limited Liability Partnership:-
- An LLP is a separate legal organisation from its partners, and each partner is exempt from joint liability caused by the bad behaviour of another partner.
- LLPs have less regulation and more latitude, allowing for management participation.
- The LLP’s registration process is straightforward, and joining or leaving the LLP is simple. Both a minimum capital requirement and a maximum limit are not present.
- Disadvantages of forming an LLP
- Section 34 requires the disclosure of financial information, which compromises its privacy.
- The LLP requirements need a lot of legal compliances, making it challenging to close the business down in an emergency.
- The concept has only recently entered the corporate world and has not yet demonstrated its viability as a business entity, which adds to the legal uncertainty.
Accounting Aspect of Limited Liability Partnership
Every LLP is required to keep books of account that detail all payments made and received, as well as the LLP’s assets and liabilities, a cost-of-goods-purchased statement, inventories, work-in-progress, and finished goods. Each LLP is required to submit a Statement of Accounts and Solvency in Form-8, which must be essentially signed by designated partners, within 30 days of the conclusion of the first half of the fiscal year. Any LLP whose annual turnover exceeds INR 40 lakh or whose total partner contributions surpass INR 25 lakh is required to have its financial statements audited. According to the LLP Rules from 2009, the liability partnership’s accounts should be audited. Within 60 days of the end of the fiscal year, each LLP must submit a Form-11 annual return to the Registrar along with the required fee. A certificate from a designated partner stating that the information in the annual return is accurate must be included with it if an LLP’s turnover is up to five crore rupees or its contribution is up to fifty lakh rupees.
Conversion of existing firms into an LLP
A partnership firm may convert itself to an LLP in accordance with Section 55 and the second schedule of the act. A private company may convert itself into an LLP in accordance with Section 56 and the third schedule, and an unlisted public company may do so in accordance with Section 57 and the 4th schedule of the act. When this happens, the conversion’s results must match those described in the act. All assets, rights, and liabilities related to the corporation or firm, including tangible and intangible property, must be transferred to and must vest in the LLP as of the registration date indicated in the certificate of registration. The company or firm will be removed from the Registrar of Companies or Registrar of Firms’ databases, as applicable, and will be presumed to have been dissolved.
Winding up of LLP in India
The winding-up procedure ends the existence of a LLP. Due to the fact that LLP is a legal entity, it must be created and dissolved by following the legal procedures. Subsequently, the General Public is notified in the manner required and the name of the LLP is removed from the Register of LLPs.
The Limited Liability Partnership Act of 2008, under Section 63 outlines the two methods for dissolving an LLP in India:-
- Voluntary Winding: By the Partners of LLP
- Compulsory Winding Up: By Tribunal
What is the procedure for the voluntary winding up of a Limited Liability Partnership?
The following procedure for the Voluntary Winding up of an LLP was created under the Limited Liability Partnership Act of 2008 and the LLP (Winding up and Dissolution) Rules of 2010:
Special Resolution by Partners
The first stage in winding up an LLP’s business voluntarily is for 3/4th of the firm’s partners to agree on a specific resolution. The approval of a special resolution is considered to have signalled the start of the voluntary dissolution process.
- File Special Resolution with ROC – Form No. 1
Within 30 days after the resolution’s adoption, a copy of the aforementioned resolution must be submitted in Form No. 1 to the Registrar of Companies.
- Declaration of Solvency under Form No. 2
The majority of Designated partners [they must not be lesser than two (2)] must then submit a Form No. 2 for declaration of solvency.
Objectives of the Declaration are as follows:
- LLP must declare that it is able to pay its debts within a year of the start of the winding-up process.
- To state that LLP is not being dissolved in order to deceive others.
- File declaration of solvency under Form No. 3
The LLP in India must then submit a declaration under Form No. 3 together with the following documents to the ROC within a period of fifteen (15) days of the passing of the resolution:
- Two authorised partners must formally attest under Form No. 4 , the statement of assets and liabilities of the partnership
- A valuator must also produce an asset evaluation report of the partnership.
- Creditors meeting
The LLP’s creditors must all receive the aforementioned declaration of solvency in order to get their approval for winding up.
- Consent of creditors
The process of winding up the LLP must be approved by at least two-thirds of the creditors, who must also affirm that the winding up will not affect the interests of the stakeholders or creditors.
The creditor must approve within a period of thirty (30) days from the date of receiving such declaration; the creditors must give their consent.
- Filing of the decision of creditors under Form No. 5
Afterward, the LLP must submit the creditors’ decision to the ROC in Form No. 5 within a period of fifteen (15) days of receiving the creditors’ approval.
- Publication of resolution notice
After receiving the approval of its creditors, the LLPs in India must publish the notice of resolution to voluntarily wind up the LLP. The notice shall be published:
- Within a period of fourteen (14) days of receiving creditor approval;
- To inform the parties concerned that the LLP is being voluntarily wound up.
- Appointment of a liquidator
The selection of a liquidator to oversee the LLP’s dissolution is the next step.
It is necessary to appoint the LLP liquidator within 30 days of:
- Adoption of a resolution (in case of no creditors)
- Getting Creditors’ Permission (in case of creditors)
- Getting Creditors’ Permission (in case of creditors)
- Submitting Form No. 7 to ROC
The LLP must submit Form No. 7 with the ROC (Registrar of Companies) outlining the appointment of the liquidator within 10 days of the appointment date.
Last but not least, the Liquidator is believed to have all of the designated partners’ and LLP partners’ rights and powers.
Liquidator’s Report on Progress – Form No. 8
The Liquidator’s duties include:-
- Supervising and resolving the list of creditors and partners;
- Maintaining the records of accounts.
- Offset the LLP’s assets.
- To distribute the assets’ revenues to partners and creditors.
After that, the liquidator is required to provide the partners and creditors with Form No. 8 outlining the progress of the winding up on the following dates: March 31, June 30, September 30, and December 31.
Liquidator’s Final Report – Form No. 9
Once the LLP’s affairs have been completely wound up, the liquidator is expected to prepare a final report and submit it to partners and creditors. The following must be mentioned in the report:-
- The manner in which winding up was done
- The way that LLP’s property was disposed of
- Closing accounts and providing justifications in Form No. 9
- Debts are completely forgiven
Dissolution of Limited Liability Partnership under Form No. 10
If creditors or partners are happy with the aforementioned report, then they must adopt a resolution to dissolve the LLP within thirty (30) days after the day they have received the report. The report must be approved by at least two-thirds of the creditors or partners (as applicable) of the firm.
The Liquidator must then take the following actions within fifteen (15) days from the day when the aforementioned resolution was passed:-
- The Registrar of the company must be provided with the final winding up accounts, explanation, and report in Form No. 10;
- After that, submit the above-mentioned document to the Tribunal.
- Finally, the tribunal will issue a decree dissolving the LLP within a period of sixty (60) days from receiving the application. Following this, the liquidator has to submit the order under Form 11 to the ROC within a period of thirty (30) days from the date of passing the order.
- Upon receiving such an order, the ROC will then publish the dissolution of LLP in the Official Gazette.
Grounds for Compulsory Winding up of LLP by Tribunal
Following is the list of grounds where a Tribunal has all the power to wind up a LLP in India:-
- When the LLP decides the Tribunal ought to dissolve it.
- If an LLP goes longer than six months without having more than two partners.
- When an LLP is unable to meet its obligations.
- If the LLP in any way compromised national security, public order, or Indian sovereignty and integrity
- When the LLP fails to submit its annual report or statement of accounts to the ROC by the due date five times in a row.
- The Tribunal thinks that terminating the LLP is fair and just.
Who can file an application to the Tribunal for the Winding Up of a Limited Liability Partnership?
The following individuals are permitted to apply before the Tribunal for the winding up of the Limited Liability Partnership under Rule 26 of the LLP (Winding up and Dissolution) Rules, 2010:-
- LLP itself or the partners of the firm
- Secured Creditor(s) of the firm
- Registrar of Companies (ROC)
- Any person authorized by Central Government under Section 51 of the Limited Liability partnership Act of 2008
- Central Government or State Government under Section 64(d) of the Limited Liability partnership Act of 2008
The government of India passed the Limited Liability Partnership Act of 2008 to recognise evolving trends in the modern business world. The main aim behind introducing LLP as a new business form is to stimulate joint ventures and to, expand the Indian service industry, and make them globally competitive. To sum up, it can be said, an LLP is a hybrid form that combines elements of a company and a partnership (i.e. limited liability with flexibility).it protects the partner from being personally liable for the liabilities of the business.
LLPs in India are protected and governed under the Limited Liability Partnership Act of 2008 and it’s implementing rules, referred to as the Limited Liability Rules of 2009.
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