Incorporating Limited Liability Partnership (LLP) in India

The introduction of Limited Liability Partnership (LLP) in India has created a huge difference in how corporate bodies are structured, run and taxed in this country. Traditionally speaking, the corporate structures prevalent in India were incorporated companies, proprietorships or partnerships. Further, proprietorships and partnerships in India lacked business capital which created a hindrance to business expansion and exposed the partners of such firms to unlimited liabilities extending to their personal assets. With the introduction of the LLP alternate vehicle structure, statute based corporate governance has been created that allows organizational flexibility and tax status of partnership firms with the advantages of limited liability for its partners.

LLP is a body corporate of unlimited capacity having a legal entity separate from that of its partners, where no member or partner are liable on account of the independent or the unauthorized action of one’s partner, and whose liability is limited to the respective stake of each in the LLP. An LLP can be called a company in the sense that its partners has limited liability, whereas in actuality it is also a partnership where the partners have the flexibility of defining their internal organization based on mutual agreement.

Origin of LLP

The concept of LLP primarily emerged in the US around 1990s when the real estate bubble had burst and there was probability of huge claims being charged against the law firms that had advised the banks. To shield such law firms, limited liability partnerships emerged and LLPs were later introduced into the Uniform Partnership Act of US in 1996. In UK too, the Limited Liability partnerships Act, 2000 governs the LLP structured partnerships and such structures are also prevalent in Singapore and Japan.

In India, the government introduced the Limited Liability partnership (LLP) Bill, 2006 in the Rajya Sabha on the 15th December, 2006. It was referred to the Department Related Parliamentary Standing Committee on Finance for examination and report. The Hon’ble Committee presented its 58th Report to the Lok Sabha on 27th November, 2007 and also laid the said Report in the Rajya Sabha on the same day. The Hon’ble Committee made several recommendations which were examined and considered by the Government. Most of the recommendations made by the Hon’ble Committee were accepted by the Government and on 12th Dec 2008, the Parliament passed the Limited Liability Partnership Bill, 2008. The Limited Liability Partnership Bill, 2008 received the assent of the Hon’ble Indian Presidenton 7th January, 2009 and it was thereby enumerated as the Limited Liability Partnership Act, 2008 since it became notified from 31st March, 2009. However, some sections of the LLP Act, 2008 related to conversion of partnership firms or companies into LLPs have been brought into effect from 31st May, 2009.

The Need for Limited Liability Partnership in India

The concept of joint and several liabilities which is a part of a partnership firm implies that the personal property of the partners is also liable for attachment for the satisfaction of the company’s debts in addition to the capital contributed by the partners in the firm. The unlimited liability attached a to a partnership makes it a risky affair.  Law does not permit incorporated companies to practice as a company’s secretaries, chartered accountants, lawyers or related professionals. The only option available with such professionals is to either work in conventional partnership firm set up or as a sole proprietor. Further, Section -11 of the Companies Act, 1956 specifically provides that a partnership firm cannot expand beyond 20 partners without being incorporated as a company. This acts as a major deterrent in the growth and development of service based organizations and is incompatible with the policy of globalization and liberalization adopted in India during the 1990’s and has a detrimental effect on the foreign direct investment in India.

Requirements for Forming an LLP

Today, Startup companies have thronged the marketplace with the opening of the Indian economy and for any Startup, the LLP structure provides the best of both the corporate as well as partnership world. Before embarking on incorporating an LLP it is important to check whether the proposed LLP name is available with the Registrar of Companies. It is also important to obtain the Director Identification Number (DIN) and the Digital Signature for the LLP in advance. One of the basic requirements of an LLP is a minimum of two partners but there is no limit to the maximum number of partners allowed in a limited liability partnership firm. Again, the minimum two designated partners of the LLP must be individuals, of whom at least one is a resident of India. However, body corporate or organization, a foreign company, a foreign LLP can also be partners of a LLP as long as the above requirement of two designated partners is fulfilled.

LLP structure allows small and medium sized enterprises (SMEs) as well as Startups with the freedom of incorporating with bare minimum capital. There is no minimum capital contribution required from the partners and the partners can even contribute in instalments into the LLP without any limitations.

Incorporating an LLP

The incorporation of an LLP is always by way of registration with the Registrar of Companies (ROC). The partnership agreement (if any), incorporation document containing the name of limited liability partnership firm, the proposed business that the firm intends to get into, the registered office address of the LLP and the name, address, photographs and consent of the proposed partners and designated partners of the LLP need to be sent to the ROC along with a statement of compliance from any practicing Advocate or Chartered Accountant or Company Secretary. This culminates the process of registering the LLP. This process can also be done online on www.llp.gov.in by payment of the prescribed fees given in Annexure A of the LLP Rules, 2009 and filing of the necessary forms such as Form 2, Form 3 and Form 4.

Once the ROC receives the documents of incorporation and on being satisfied with the same, the ROC would issue an Incorporation Certificate to the LLP that would act as the conclusive proof regarding the incorporation of the limited liability partnership.

It is important to note that registration of LLP is compulsory as without registration the firm might be considered as a regular partnership firm with unlimited liabilities. Once the LLP gets registered it becomes a separate legal entity from its partners and attains a perpetual succession. An LLP firm must have the world limited liability partnership or LLP at the end of its name.

Conversion of Existing Partnership Firm into LLP

Another facet of the LLP Act, 2008 is that partnership firms already working can also opt to convert into the LLP structure in the following manner:

Section -55 of the LLP Act 2008 provides as follows:

“Conversion from firm to limited liability partnerships: A firm may convert in to a limited liability partnership in accordance with the provision of this Chapter and the Second Schedule”

Clause 1 (a) of the Second Schedule of the LLP Act 2008 provides that “firm” means a firm as defined in section 4 of the Indian Partnership Act, 1932.

Now section 4 of the Partnership Act, 1932 provides that persons who have entered in to partnership with one another are called individually “partners” and collectively a “firm”

Clause 3 of the Second Schedule of the LLP Act 2008 provides:

“Eligibility for Conversion: A firm may apply to convert into a limited liability partnership in accordance with this Schedule if and only if the partners of the limited liability partnership in to which the firm is to be converted, comprise, all the partners of the firm and no one else.

Clause 4 of the Second Schedule provides the details of the Statements to be filed:

“Statements to be filed: A firm may apply to convert into a limited liability partnership by filing with the Registrar-

a) A statement by all of its partners in such form and manner and accompanied by such fee as the Central Government may prescribe, containing the following particulars, namely:-

i) the name and registration number, if applicable, of the firm; and

ii) the date on which the firm was registered under the Indian Partnership Act 1932 or under any other law, if applicable, and

b) incorporation document and statement referred to in section-11.

The above sections indicate the fact that the partnership need not be compulsorily registered to be converted into an LLP. Clause 3(a) specifically mentions that the registration number only if its applicable shall be required for the conversion of the firm into LLP. The requirement of registration of partnership as a condition for converting into LLP has not been explicitly incorporated in the LLP Act.