Guide to Limited Liability Partnership (LLP) Act

The LLP Act refers to legislation governing Limited Liability Partnerships (LLPs). The Act provides a framework for the incorporation and operation of LLPs, providing benefits like limited liability to partners and allowing businesses to enjoy the flexibility of a partnership structure while having a separate legal identity like a corporation.

Table of Contents

1. Introduction
2. Rigidity in Companies Act
3. LLP is ideal blend of partnership and company
4. Overview of contents of LLP Act
5. LLP at a glance
6. Basic features of LLP
7. Small Limited Liability Partnership
8. Comparison between traditional partnership and LLP
9. Comparison between Company and LLP
10. Procedure for Incorporation of LLP at a glance
11. Incorporation of LLP
12. Name of LLP
13. Rectification of name of LLP
14. Publication of name and limited liability

Check out Taxmann's LLP Law Manual which is an authoritative compendium covering India's Limited Liability Partnership Laws' updated, amended, and annotated text. It includes the LLP Act, 2008, integrated LLP Rules, Circulars & Notifications, and FDI policies, catering to legal professionals, scholars, and corporate enthusiasts.

1. Introduction

Major forms of business organisation are proprietary firm, partnership firm under Indian Partnership Act and company under Companies Act.

Proprietary firm has limitation in growth and does not have perpetual succession.

Partnership form of organisation provides flexibility of operations and limited growth potential. However, its basic disadvantage is unlimited liability and the fact that partners are agents of partnership firm as well as other partners, since act of partner binds partnership firm which in turn binds other partners also.

2. Rigidity in Companies Act

Companies Act does remove defect of unlimited liability but over the years, lot of rigidity has entered the Companies Act. There are many restrictions on managerial remuneration, loans, investments, guarantees, selling agents, contracts where directors are related etc. Many procedural formalities like registration of charges, periodic meetings and filing of numerous documents with ROC is required. Many statutory registers and records are to be maintained.

This rigidity is acceptable and indeed required when public money is involved i.e. in case of listed companies. However, in case of private companies and small public companies, these restrictions reduce flexibility in operations and increase administration costs.

Solution – The solution is provided in form of LLP, major portion of which has become effective from 1-4-2009.

3. LLP is ideal blend of partnership and company

You mix Companies Act and Indian Partnership Act, remove all defects of traditional partnership firm, remove all procedural hassles and rigidity in Companies Act, keep good points of both Indian Partnership Act and Companies Act and what you have is Limited Liability Partnership! This, in brief, is the description of Limited Liability Partnership Act, 2008.

LLP is excellent hybrid of Partnership Act and Companies Act. LLP is a very good substitute to formation of a private limited company.

LLP may not be a good substitute for small family owned partnerships, but will be excellent tool for professional or purely business partnerships.

Even in case of small partnerships, in certain situations, LLP may be a good option. If the proposed activity is of manufacture, service providers, import/export etc.; there can be a sudden huge tax liability. if some unexpected tax demand comes. In such cases, LLP gives protection.

LLP is also a good alternative for partnerships where some of the partners are willing to provide finance but do not want to be saddled with unlimited liability which can accrue in case of traditional partnership firm.

Higher cost compared to normal partnership – Costs of running LLP are high compared to traditional partnership under Indian Partnership Act. Various documents are to be filed periodically with Registrar of LLP (Mostly, he is Registrar of Companies also) and accounts and records have to be maintained and audited.

Much fewer procedures – Procedures are much fewer compared to Companies Act. However, there is scope for further reduction in procedures.

4. Overview of contents of LLP Act

The overview of contents of LLP Act, 2008 are as follows –

LLP Rules, 2009 – ‘Limited Liability Partnership Rules, 2009’ are notified effective from 1-4-2009. These rules also contain provisions relating to conversion of firm or company to LLP [rules 32, 33, 38, 39 and 40]. These rules have also been made effective from 31-5-2009.

Annexure to the Rules prescribe fees payable for registration, filing of documents etc.

LLP (Winding up and Dissolution) Rules, 2012 notified on 10-7-2012 make provision for winding up and dissolution of LLP.

Recent Amendments in LLP Law – LLP (Amendment) Act, 2021 has been notified and made effective from 1-4-2022. The amendments are mainly to align provisions of LLP Act with Companies Act. Correspondingly, LLP Rules have been amended. Some procedural changes have been made by amending LLP Rules on 4-3-2022.

Some provisions of Companies Act have been made applicable to LLP w.e.f. 11-2-2022.

5. LLP at a glance

• LLP is Good hybrid of partnership and company form of organisation
• Removes defects of unlimited liability under partnership and rigidity of provisions as prevalent under Company Law.
• LLP has limited liability and perpetual succession.
• LLP is a ‘body corporate’ having legal entity different from its partners. It can hold property in its own name
• Maximum flexibility in respect of internal management, remuneration to partners, specific powers like management power or veto powers to some partners.
• LLP can be formed for carrying out any lawful business with a view to profit. Thus ideal for medium businesses, professionals, joint ventures but not available for charitable organisations.
• A partner can bind LLP but cannot bind other partners. LLP Agreement can curtail powers, duties and liabilities of some partners.
• A company, LLP, foreign LLP and foreign company can be partner of LLP [However, there would be difficulties in repatriation of profits or capital, unless FEMA provisions are amended].
• Minimum two partners. No limit on maximum number of partners.
• No restriction on number of LLPs of which a person can become a partner.
• Minimum two partners should be nominated as ‘designated partners’ to fulfil statutory obligations under LLP Act. Other partners will not be normally held liable, except in case of fraud.
• Procedure for incorporation of LLP is similar to incorporation of Company.
• Incorporation document (parallel to memorandum) and LLP agreement (parallel to Articles of Association) is required to be filed electronically.
• No formalities of board meetings, general meetings, registration of charges, restrictions on managerial remuneration,  issue and transfer of shares, election of directors, restrictions on powers of Board etc.
• Accounts are to be maintained but small LLP may be exempt from audit provisions.
• Electronic Filing of annual return, statement of accounts and solvency is required.
• Change in partners is required to be reported within 30 days.
• Concept of ‘holding out’ by partner incorporated.
• Provisions of reconstruction, amalgamation and compromise, winding up, inspection and  investigation are similar to those under Companies Act.
• Existing partnership firms, private companies and unlisted companies can convert themselves into LLP. There will be no capital gains on such conversion to company or its shareholders if conditions as specified in section 47(xiib) of Income Tax Act are satisfied. Further, issue relating to stamp duty is a cause of worry.
• LLP will be taxed the same way as a partnership. The exception is that a partner of partnership firm is liable personally for income tax liability of firm. In case of LLP, all partners are jointly and severally liable for income tax liability, but a partner can escape the liability if he proves that non-recovery cannot be attributed to any gross neglect, misfeasance or breach of any duty on his part.
• Visit www.mca.gov.in for registration, filing of documents, instruction kit, write up on LLP etc.

6. Basic features of LLP

Basic features of LLP are as follows –

1. Limited liability and perpetual succession – LLP is a body corporate having perpetual succession [Section 3(1) of LLP Act, 2008]. It is a legal entity separate from its partners [Section 3(2) of LLP Act, 2008].

Any change in the partners of a limited liability partnership shall not affect the existence, rights or liabilities of the limited liability partnership [Section 3(3) of LLP Act, 2008].

No partner is personally liable to liabilities of LLP except in case of fraud [Sections 27 and 28 of LLP Act, 2008]. Liability of LLP is not liability of individual partners.

2. LLP can be appointed as auditor, though LLP is ‘body corporate’ – A body corporate other than a Limited Liability Partnership registered under the LLP Act cannot be appointed as auditor – section 141(3) of Companies Act, 2013.

3. Partner of LLP is agent of LLP but not of other partners – Every partner of LLP is agent of LLP but not of other partners. Thus, he can bind LLP by his acts but cannot bind other partners.

4. Flexibility in operations of LLP – The LLP Act provides great flexibility in management and operations of LLP. In many of the cases, provision as contained in LLP Agreement prevails.

5. Accounts and annual returns – Each LLP will have to maintain accounts. It will have to prepare Statement of Account and Solvency. This statement and Annual Return is required to be filed with Registrar of LLP. The. LLP having turnover/contribution beyond prescribed limits will have to get their accounts audited by Chartered Accountant.

6. Ministry of Corporate Affairs is administrating ministry – Ministry of Corporate Affairs, Government of India is the administrating ministry. Registrar of LLP ((Mostly, he is Registrar of Companies also) of respective State is the administrative authority where all documents are to be filed.

All thinking and concepts of company law have come in LLP since administrative ministry is same. Procedures regarding incorporation of LLP, e-filing of returns, inspection and investigation, reconstruction and amalgamation, compromise, winding up etc. are identical or similar to Companies Act.

7. Indian Partnership Act does not apply – Provisions of Indian Partnership Act will not apply to LLP [Section 4 of LLP Act, 2008].

7. Small Limited Liability Partnership

“Small limited liability partnership” means a limited liability partnership:

1. the contribution of which, does not exceed Rs. 25 lakh or such higher amount, not exceeding Rs. five crore, as may be prescribed; and
2. the turnover of which, as per the Statement of Accounts and Solvency for the immediately preceding financial year, does not exceed forty lakh rupees or such higher amount, not exceeding fifty crore rupees, as may be prescribed; or
3. which meets such other requirements as may be prescribed, and fulfils such terms and conditions as may be prescribed – section 2(1)(ta) of LLP Act, inserted vide LLP Amendment Act, 2021 w.e.f. 1-4-2022.

The purpose is to provide relief in case of certain procedures. The penalty imposed on small LLP will be 50% of normal penalty under section 76A(3)(a) of LLP Act, inserted vide LLP (Amendment) Act, 2021 w.e.f. 1-4-2022.

8. Comparison between Traditional Partnership and LLP

9. Comparison between Company and LLP

10. Procedure for Incorporation of LLP at a glance

• Two partners to be designated as ‘designated partners’ should apply and get DIN (Director Identification Number) from Central Government by applying electronically
• The designated partners should obtain Digital Signature Certificate (DSC) Class II or above from a Certification Agency (CA).
• User registration – Register DIN and DSC with LLP by visiting www.mca.gov.in.
• Check name availability which is available on the aforesaid website. Name should not be similar to other LLP/Company or in violation of trade mark provisions or undesirable.
• Apply for reservation of name in RUN-LLP. Alternatively, application for reservation of name can be made along with incorporation document in form FiLLiP [Form for incorporation of Limited Liability Partnership]
• After obtaining reservation of name, fill up e-form FiLLiP [Form for incorporation of Limited Liability Partnership]. It has to be digitally signed by designated partner and a professional (advocate/practising CA/CS/CMA). Upload the form and pay fees electronically.
• LLP will be incorporated by Registrar and registration certificate will be granted by Registrar of LLP in form No. 16
• File form 3 (Information with regard to LLP Agreement) and form 4 (Notice of appointment of partner/designated partner) electronically with fees. The form can be submitted either with form FiLLiP [Form for incorporation of Limited Liability Partnership] itself or within 30 days of date of incorporation. If not submitted within 30 days, additional fee would be payable
• Send LLP Agreement which should be duly stamped.
• LLP is now ready for commencing business.

11. Incorporation of LLP

Two or more persons can associate for carrying out any lawful business with a view to profit. They have to file ‘incorporation document’ [similar to Memorandum of Association of a company], containing prescribed details like name, proposed business, address of registered office, name and address of partners, name and address of designated partners and other information as may be prescribed by rules [Section 11(2) of LLP Act, 2008].

The incorporation document should be filed electronically with Registrar having jurisdiction over the registered office of LLP in form FiLLiP [Form for incorporation of Limited Liability Partnership] [Rule 11 of LLP Rules, 2009].

First step is obtaining name approval. Second step is to file documents for incorporation.

12. Name of LLP

Last words of name shall be LLP or ‘Limited Liability Partnership’.  LLP should have name which should not be similar to name of other entity or trade mark of other person.

Every limited liability partnership shall have either the words “limited liability partnership” or the acronym “LLP” as the last words of its name – section 15(1) of LLP Act.

Name should not be undesirable. [Section 15(2)(a) of LLP Act, 2008].

Name should not identical or too nearly resembling to that of any other limited liability partnership or a company or a registered trade mark of any other person under the Trade Marks Act, 1999 – Section 15(2)(b) of LLP Act, amended vide LLP (Amendment) Act, 2021 w.e.f. 1-4-2022.

Name should be got reserved from ROC under section 16 of LLP Act, by submitting application in form RUN-LLP (Reserve Unique Name – LLP) with prescribed fees (fee is as specified in Annexure A of LLP Rules, 2009).

The reservation of name will be communicated by ROC within seven days. If suggested name is rejected, one opportunity for submission shall be given for rectification of defects within 15 days [Rule 18(5) of LLP Rules, 2009].

Name approved will be reserved for a period of three months from date of intimation by ROC [Rule 18(6) of LLP Rules, 2009].

Criteria for approval of name – The name should not be in violation of Emblems and Name (Prevention of improper use) Act, 1950 [Rule 18(1) of LLP Rules, 2009]. Name should not be offensive, similar to existing LLP, name of registered trade mark etc. Names like Cooperative, National, Union, Central, Federal, Republic, President, Rashtrapati, Consulate, Municipal, Panchayat, local authority etc. are not allowed. Names like Bank, Insurance, Company Secretaries, Chartered Accountant, Advocate etc. will not be allowed without approval of the regulatory authority [Rule 18(2) of LLP Rules, 2009]

13. Rectification of name of LLP

Provision relating to rectification of name, where the name of LLP is identical or too similar to name of other LLP or company or violates provisions of Trade Marks Act, are made in section 17 of LLP Act as inserted w.e.f. 1-4-2022. If name of LLP is identical or too nearly resembling to that of any other limited liability partnership or a company or a registered trade mark of any other person under the Trade Marks Act, 1999, Registrar can order change of name. Application from proprietor of trade mark should be made within three years. However, subsequently the company can again change the name, if it so desires.

14. Publication of name and limited liability

Every limited liability partnership shall ensure that its invoices, official correspondence and publications bear the following, namely –

• the name, address of its registered office and registration number of the limited liability partnership; and
• a statement that it is registered with limited liability – section 21(1) of LLP Act.

If the limited liability partnership contravenes the provisions of section 21, the limited liability partnership shall be liable to a penalty of ten thousand rupees – Section 21(2) of LLP Act, substituted vide LLP (Amendment) Act, 2021 w.e.f. 1-4-2022 [earlier sub-section provided for fine].