Limited Liability Partnerships (LLP)- An Overview

Limited Liability Partnerships (LLP) are becoming an upcoming trend of corporate structure with increased flexibility of partnerships & lesser compliance costs. The shared slide aims at providing a brief overview about the meaning & statutory requirements for incorporation, pros/cons and formation procedure for LLPs. Certain provisions of the Limited Liability Partnership Act, 2008 have been specified herein. Further, recent notification issued by RBI regarding acceptance of direct investment from the foreign investors in LLPs has also been focused upon.

1. LIMITED LIABILITY PARTNERSHIP (LLP) - An Overview

2. In other words, it is an alternative corporate business vehicle that provides the benefits of limited liability of a company, but allows its members the flexibility of organising their internal management on the basis of a mutually arrived agreement, as is the case in a partnership firm. Corporate structure with- Flexibility of Partnership Advantages of limited liability of a Company Low compliance cost Limited Liability Partnership (LLP) Legal consultants- Handoo and Handoo were first in India to form an LLP. At present, there are about 15,000 LLPs formed and registered under the Limited Liability Partnership Act. LLP shall have at least two "designated partners" who are individuals and at least one of them shall be "resident in India". In case one or more of the partners of a LLP are bodies corporate at least two individuals who are partners of such LLP or nominees of such bodies corporate shall act as "designated partners”. Name of every LLP shall end with the words "Limited Liability Partnership" or "LLP". Every partner of a LLP is, for the purpose of the business of LLP, the agent of LLP, but not of other partners. The accounts of every LLP are required to be audited, except in following situations: Turnover does not exceed Rs. 40,00,000 in any financial year; or Contribution does not exceed Rs. 25, 00,000.

3. Advantages of forming LLP- Organized and operates on the basis of an agreement. Individual partners get protected from joint liability created by another partner’s wrongful business decisions or misconduct. Offers more flexibility and lesser compliance requirements as compared to a company. Simple registration procedure- no requirement of minimum capital, no restrictions on maximum limit of partners. No exposure to personal assets of the partners except in case of fraud. No restriction on limit of the remuneration to be paid to the partners like companies, but the remuneration must be authorized by the LLP agreement. Partners are not liable to be sued for dues against the LLP. Easier to transfer the ownership in accordance with the terms of the LLP Agreement Disadvantages of forming LLP- Any act of the partner without the consent of other partners, can bind the LLP. Under some cases, liability may extend to personal assets of the partners. LLPs are not allowed to raise money from public. Because of the hybrid form of the business, it is required to comply with a number of rules & regulations and legal formalities. Quite difficult to wind up the business in case of exigency as there are a lot of legal compliances under Limited Liability Partnership (Winding Up and Dissolution) Rules and it is very lengthy and expensive procedure.

4. I. Deciding the partners & designated partners for forming II. Obtaining Designated Partners Identification Number (DPIN) & Upload Digital Signature Certificate III. Checking name availability for the LLP IV. Drafting of an LLP Agreement V. Filling up of Incorporation Document VI. Obtaining Certificate of Incorporation All designated partners of the proposed LLP shall obtain “Designated Partner Identification Number (DPIN)” by filing an application individually online in Form -7. Application form shall be submitted online. The system will generate a provisional DPIN.  Partner/Designated partner of LLP/proposed LLP, whose signatures are to be affixed on the e-forms has to obtain class 2 or class 3 Digital Signature Certificate (DSC) from any authorized certifying agency, details of which are available on the home page of the LLP portal under the tab “Certifying Authorities”. Registration to be done on the website of Ministry of Corporate Affairs developed for LLP services: www.llp.gov.in  or through the website of the ministry  www.mca.gov.in . Open Form-1 for reservation of name and fill in the details. Select name of the proposed LLP ( upto 6 choices can be indicated). Any partner or designated partner in the proposed LLP may submit Form-1. Append digital signatures and submit the e-form. Check status of your application by logging on the portal. Form 3 (Information with regard to LLP agreement and changes, if any made therein) and Form-4 (Notice of Appointment of Partner/Designate Partner, his consent etc.) shall be filed along with the prescribed fee. Once the name is reserved  by the Registrar, log on to the portal and fill up Form-2 “Incorporation Document and Statement”. Pay the prescribed registration fee as per the slab given in Annexure A of the LLP Rules, 2009, based on the total monetary value of contribution of partners in the proposed LLP. Certificate of incorporation shall be issued thereafter in Form-16. FORMATION OF AN LLP

5. Specific P rovisions of the  Limited Liability Partnership Act, 2008 - The LLP shall be a body corporate and a legal entity separate from its partners. Any two 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 Registrar, form a Limited Liability Partnership. The LLP will have 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 and the partners subject to the provisions of the LLP Act 2008 . The act provides flexibility to devise the agreement as per their choice. The LLP will be 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 of tangible or intangible nature or both tangible and intangible in nature. No partner would be liable on account of the independent or un-authorized actions of other partners or their misconduct. The liabilities of the LLP and partners who are found to have acted with intent to defraud creditors or for any fraudulent purpose shall be unlimited for all or any of the debts or other liabilities of the LLP. Every LLP shall have at least two partners and shall also have at least two individuals as Designated Partners, of whom at least one shall be resident in India. The duties and obligations of Designated Partners shall be as provided in the law. The LLP shall be under an obligation to 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 Registrar every year. The accounts of LLPs shall also be audited, subject to any class of LLPs being exempted from this requirement by the Central Government. (Continued…)

6. The Central Government has powers to investigate the affairs of an LLP, if required, by appointment of competent Inspector for the purpose. The compromise or arrangement including merger and amalgamation of LLPs shall be in accordance with the provisions of the LLP Act 2008. A firm, private company or an unlisted public company is allowed to be converted into LLP in accordance with the provisions of the Act. Upon such conversion, on and from the date of certificate of registration issued by the Registrar in this regard, the effects of the conversion shall be such as are specified in the LLP Act. On and from the date of registration specified in the certificate of registration, all tangible (moveable or immoveable) and intangible property vested in the firm or the company, all assets, interests, rights, privileges, liabilities, obligations relating to the firm or the company, and the whole of the undertaking of the firm or the company, shall be transferred to and shall vest in the LLP without further assurance, act or deed and the firm or the company, shall be deemed to be dissolved and removed from the records of the Registrar of Firms or Registrar of Companies, as the case may be. The winding up of the LLP may be either voluntary or by the Tribunal to be established under the Companies Act, 1956. Till the Tribunal is established, the power in this regard has been given to the High Court. The LLP Act 2008 confers powers on the Central Government to apply provisions of the Companies Act, 1956 as appropriate, by notification with such changes or modifications as deemed necessary. However, such notifications shall be laid in draft before each House of Parliament for a total period of 30 days and shall be subject to any modification as may be approved by both Houses. The Indian Partnership Act, 1932 shall not be applicable to Limited Liability Partnerships.

7. The Reserve Bank of India (RBI) has notified on April 16, 2014 that limited-liability partnerships can accept direct investment from foreign investors, subject to certain riders. Limited-liability partnerships in all sectors where 100% FDI is permitted would be eligible to get FDI, the RBI said. However, such investments would need prior government approval. Further, an Indian company with foreign investment can make a downstream investment in a limited-liability partnership only if both the company and the partnership operate in the sectors where 100% FDI is allowed under the automatic route. Such FDI in a limited-liability partnership, either by way of capital infusion or acquisition or transfer of ‘profit shares’, would have to be more than or equal to the fair price as worked out with any internationally accepted valuation norm. Any transfer of capital contribution/profit share from a resident to a non-resident would be for a consideration equal to or more than the fair price of the capital contribution or the profit share of the partnership. Further, any transfer of capital contribution/profit share from a non-resident to a resident would be for a consideration which is less than or equal to the fair price of the capital contribution/profit share of the partnership. RECENT NOTIFICATION BY RBI – (As per RBI/2013-14/566 A.P. (DIR Series) Circular No. 123)