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LLP | Hybrid between a company and a partnership firm

CA. Kapil Goel, DISA(ICAI) 
Updated on 08 April 2021

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Concept: Limited Liability Partnership, LLP is another corporate form of business which gives the benefits of limited liability of a company and the flexibility of a partnership firm. The LLP can continue its existence irrespective of changes in partners just like a company. It is capable of entering into contracts and holding property in its own name also. The LLP is a separate legal entity & is liable to the full extent of its assets but, just like in case of company, liability of the partners is limited to their agreed contribution in the LLP. Further, no partner is liable on account of the independent or un-authorized actions of other partners, thus individual partners are shielded from joint liability created by another partner’s wrongful business decisions or misconducts. Mutual rights and duties of all the partners within a LLP are governed by an agreement entered between the partners or between the partners and the LLP as the case may be. The LLP, however, is not relieved of the liability for its other obligations as a separate entity.

Since LLP contains elements of both ‘a corporate structure’ & ‘a partnership firm structure’ LLP is called a hybrid between a company and a partnership firm. 

Structure : LLP is a body corporate and a legal entity separate from its partners. It have perpetual succession. A minimum of two partners will be required for formation of an LLP. But there is no limit to the maximum number of partners a LLP can have. A body corporate can also be a partner in a LLP.

The qualifications for becoming a partner in LLP : Any individual or body corporate may be a partner in a LLP. However an individual shall not be capable of becoming a partner of a LLP, if—

(a) he has been found to be of unsound mind by a Court of competent jurisdiction and the finding is in force;

(b) he is an un-discharged insolvent; or 

(c) he has applied to be adjudicated as an insolvent and his application is pending.

Note : Appointment of at least two “Designated Partners” shall be mandatory for all LLPs. “Designated Partners” shall also be accountable for regulatory and legal compliances, besides their liability as ‘partners, per-se”. 

Every LLP shall be required to have at-least two Designated Partners who shall be individuals and at least one of the Designated Partner shall be a resident of India. In case of a LLP in which all the partners are bodies corporate or in which one or more partners are individuals and bodies corporate, at least two individuals who are partners of such LLP or nominees of such bodies corporate shall act as designated partners.

Every Designated Partner would be required to obtain a Designated Partner’s Identification Number (DPIN) on the lines similar to “Director’s Identification Number” (DIN) required in case of directors of companies. Enabling provisions have been made to prescribe under rules conditions, which would have to be fulfilled by an individual who is eligible to be appointed as a ‘designated-partner’. 

Advantages : LLP is a form of business model which is organized and operates on the basis of an agreement. It provides flexibility without imposing detailed legal and procedural requirements. And it enables professional / technical expertise and initiative to combine with financial risk taking capacity in an innovative and efficient manner

Difference between LLP & "a partnership firm"

a. Under “a partnership firm”, every partner is liable, jointly with all the other partners and also severally for all acts of the firm done while he is a partner in the firm.

b. Under LLP structure, liability of the partner is limited to his agreed contribution to the entity. Further, no partner is liable on account of the independent or un-authorized acts of other partners of the entity, thus allowing individual partners to be shielded from joint liability created by another partner’s wrongful acts or misconducts.

Difference between LLP & "a Company"

a. A basic difference between an LLP and a company lies in that the internal governance structure of a company is regulated by statute (i.e. Companies Act, 1956) whereas for an LLP it would be by a contractual agreement between partners.

b. The management-ownership divide inherent in a company is not there in a limited liability partnership firm.

c. LLP will have more flexibility as compared to a company.

d. LLP will have lesser compliance requirements as compared to a company.

Applicability : Where, any two or more persons associating for carrying on a lawful business with a view to making profit may set up an LLP. 

Users of LLP Law : The LLP framework could be used for many enterprises, such as:-

a. Persons providing services.

b. Enterprises in new knowledge and technology based fields where the corporate form is not suited.

c. For professionals such as Chartered Accountants (CAs), Cost and Works Accountants (CWAs), Company Secretaries (CSs) and Advocates, etc.

d. Venture capital funds where risk capital combines with knowledge and expertise.

e. Professionals and enterprises engaged in any scientific, technical or artistic discipline, for any activity relating to research production, design and provision of services.

f. Small Sector Enterprises (including Micro, Small and Medium Enterprises)

g. Producer Companies in Handloom, Handicrafts sectors.

A new legislation is formed for LLP only : The Companies Act is not suited to the liability and governance structure intended for LLPs. The overall intent of the legislation to regulate widely-held companies is different. Therefore, in accordance with the recommendations of the Irani Committee, it is felt appropriate to bring about a separate legislation for LLPs. The administration and enforcement of partnership firms under the Indian Partnership Act, 1932 is at the State level. Besides, a partnership firm involves full joint and several liability of the partners. Because of this, many firms/enterprises engaged in biotech, information technology, Intellectual property and other knowledge based sectors find traditional partnerships unsuitable. The traditional partnerships are also considered unsuitable for multi-disciplinary combinations comprising a large number of partners, seeking a flexible working environment but with limited liability. LLP structure would promote growth and enable such firms/enterprises expand their trade/business or services across States in India as also abroad.

Regards !
CA. Kapil Goel
cakapilgoel.wordpress.com


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