What is a Limited Liability Partnership (LLP) and Who Should Use it?

[Updated On 04/01/2018]

What Is A Limited Liability Partnership (LLP)?

An LLP is a business structure that came into being by the passing of the LLP Act, 2008 and the notification of the LLP Rules, 2009. It is a relatively new structure in India. Its features are considered to be an amalgamation of the features of a traditional partnership firm, formed under the Indian Partnership Act, 1932 and a Company, formed under the Companies Act, 1956. However, it is closer to the concept of a partnership firm than a Company.

Section 3 of the LLP act declares an LLP as a body corporate formed and incorporated under the Act and is a legal entity separate from its partners. Thus the liabilities of the LLP are not the personal liabilities of the partner and the personal assets of the partner will not be used to pay off the liabilities of the LLP except in certain cases of fraud.

While the owners of an LLP have their liabilities limited to the business assets, there is such no comfort for the partners in a partnership firm. Their liabilities are unlimited i.e. it extends to the personal or home assets as well.

Let us take an example:

Suppose Mr X and Mr Y are partners in an LLP and have invested Rs. One lakh as Capital. The Company, unfortunately, makes a huge business loss of Rs. 25 lakhs. But the liability is limited to just the investment in business and the business assets i.e. Rs. One lakh. The Creditors cannot touch their personal and home assets to recover the remaining Rs. 24 lakhs.

But if Mr X and Mr Y are partners in a Firm and the business makes the loss of Rs. 25 lakhs, then the partners are personally liable. It means that the partners are personally liable and even their home and business assets can be sold off to recover the Rs. 25 lakhs.

LLP would be most suitable for the following:

1. Small and medium scale Enterprises
2. Professional Firms
3. Venture Businesses
4. Family operated businesses
5. Information Technology Firms

Comparison Of An LLP With A Company And A Firm

Comparative Criteria	Partnership	Company	LLP
Applicable Law	The Indian Partnership Act, 1932 and the rules made thereunder.	Companies Act, 2013 Companies Rules Notifications of MCA	‘The Limited Liability Partnership Act, 2008 LLP Rules, 2009
Separate Legal Status?	Not a separate legal entity	Is a separate legal entity under the Companies Act, 2013	Is a separate legal entity under the Limited Liability Partnership Act, 2008.
Registration	Registration is optional except in the State of Maharashtra.	Mandatory registration with Registrar of Companies	Mandatory registration with Registrar of Companies
Main documents	Partnership Deed	Memorandum of Association Articles of Association	LLP Agreement
Number of Partners/ Shareholders	Minimum 2 partners Maximum 20 (10 in case of a Firm carrying on the business of banking)	Private Company Minimum- 2 shareholders Maximum-200 Public Company Minimum – 7 No bar on maximum number of shareholders	Minimum 2 partners No bar on maximum number of partners
Liability of Partners/Share-holders	Unlimited. Partners are severally and jointly liable for actions of other partners and the firm and liability extend to their personal assets.	Limited to the amount required to be paid up on each share or where the number of share-holders fall below the minimum	Limited, to the extent their contribution towards LLP, except in case of intentional fraud or wrongful act of omission or commission by the partner or where the number of partners fall below the minimum.
Tax Structure	Income of Partnership is Taxed at a Flat rate of 30%. No surcharge. Also profit-making firms but tax-exempt don’t have to pay Minimum Alternate Tax (MAT)	Income of Company is Taxed at a Flat rate of 30% or 25% Plus surcharge as applicable. Profit-making Companies but those claiming Tax Exemption (except SEZ) have to pay 15% Minimum Alternate Tax (MAT)	Same as Partnership Firm. But Two disadvantages as compared to a firm: Levy of Minimum Alternate Tax like Companies where book profit taxes is levied in case the income is tax exempt Presumptive taxation benefit not available u/s 44AD. Two key advantages over Companies:   No Deemed Dividend Taxes No Dividend Distribution Taxes
Name of Entity	Any name as per choice.	Name to contain ‘Limited’ in case of Public Company or ‘Private Limited’ in case of Private Company as the suffix.	Name to contain ‘Limited Liability Partnership’ or ‘LLP’ as the suffix.
Statutory Meetings	No provisions regarding holding of meetings.	Board Meetings and General Meetings are required to be held in the prescribed procedure and for the prescribed number of times.	Same as partnership Firm. This makes regulatory hassles much lower than a Company.
Voting Rights	Depends upon the Partnership Agreement. Generally on the basis of Profit Sharing Ratio.	Voting rights are decided as per the number of shares held by the members.	As per the terms of LLP Agreement.
Remuneration of Managerial Personnel	The firm can pay remuneration to its partners. Generally, the tax laws are kept in mind while devising an efficient remuneration structure.	Company can pay remuneration to its Directors subject to Companies Act.	Remuneration to partner will depend upon LLP Agreement. Generally, the tax laws are kept in mind while devising an efficient remuneration structure.
Maintenance of Statutory Records	No Statutory records but may have to keep records as per the Income Tax Act.	Required to maintain books of accounts on Double Accounting System and on an accrual basis. Records involve Ledgers, statutory registers, minutes etc.	Required to maintain books of accounts on a Double Entry system and on an accrual basis.
Annual Filing	No return is required to be filed with Registrar of Firms.	Annual Financial Statements including Balance Sheet, Profit and Loss, Notes to Accounts etc. to be filed with the Registrar of Companies every year.	Annual Statement of accounts and Solvency & Annual Return is required to be filed with Registrar of Companies every year.
Audit of accounts	Partnership firms are only required to have tax audit of their accounts as per the provisions of the Income Tax Act	Companies are required to get their accounts audited annually as per the provisions of the Companies Act, 1956,	All LLP except for those having turnover less than Rs.40 Lacs or Rs.25 Lacs contribution in any financial year are required to get their accounts audited annually as per the provisions of LLP Act 2008.
Foreign Equity holding	Foreign Nationals and Non Residents cannot form Partnership Firm in India except under very very stringent conditions.	Foreign Nationals and Non-resident Indians can be a member of a Company as per the FDI policies. It is much easier to attract FDI in A Company than a partnership or an LLP.	Foreign Nationals or Non-Resident Indians can be a Partner in an LLP but subject to some restrictive guidelines and compulsory approval. The FDI guidelines have been liberalized to a large extent for LLPs now.
Restrictions on receipt of money from shareholders/ Directors/ Partners and Others (except banks and NBFC)	No such restrictions under the Indian Partnership Act, 1932	Considerable restrictions as per the Companies Act 2013and the Acceptance of Companies Deposits Rules. It has become difficult for Shareholders and others to lend money to Companies because of the same.	No such restrictions as per the LLP Act or LLP Rules.

 

Requirements & Procedure For Formation Of A Limited Liability Partnership

The primary documents required are:

1. Permanent Account Number (PAN) Cards and acceptable residence proofs for all Partners/ Designated Partners.
2. Digital Signatures
3. No Objection Certificate from the owner and the Address proof of the place which shall be the registered office address of the LLP

Disclaimer: The author CA. Bhavesh Savla is a practising Chartered Accountant based in Mumbai.  Please contact him at [email protected] or [email protected] or you can visit www.cabks.in in case of any further queries about LLP. Please note that this write-up is intended to give a general overview and under no circumstances, can be taken as actionable professional advice. While all due care has been taken to provide accurate information, readers are expected to take further professional advice before acting on an LLP. No liability rests or exists or is created against the author for any action taken by anyone on the basis of this article.