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LLP Defined

A Limited Liability Partnership (LLP) is a unique and hybrid business model that combines the features of a Company as well as a traditional partnership firm. An LLP is governed by the provisions of the Limited Liability Partnership Act, 2008. An LLP is a body corporate that has a separate legal entity and perpetual succession.

The LLP form of business entity is most beneficial for small and medium enterprises, service sector, professionals and knowledge based enterprises.

Salient features of an LLP are enumerated below:

1. An LLP is a body corporate and a separate legal entity

2. It has perpetual succession. Its existence does not depend on that of its partners.

3. It can purchase and own property in its own name.

4. The liability of partners is limited to the extent of their capital contribution.

Formation of LLP

The primary requirements for the formation of an LLP are:

1. Minimum 2 Designated Partners, who must be individuals AND at least one of whom must be a resident of India.

2. An LLP can have as many partners as desirable.

3. If a body corporate intends to become a partner/designated partner in an LLP, it can do so by appointing a nominee.

4. A proposed name for the LLP must be decided beforehand. The proposed name must conform to the guidelines issued by the Ministry of Corporate Affairs in this regard. Also, the name of an LLP must end with the words “Limited Liability Partnership” or the abbreviation “LLP”.

The steps involved in the formation of an LLP are enumerated below:

1. Obtaining Digital Signatures for each of the Designated Partners/Partners.

2. Making an application for allotment of Designated Partner Identification Number (DPIN) for each of the Designated Partners/Partners.

3. Making an application for reservation of name for the LLP.

4. Drafting and Filing of LLP incorporation documents.

If the Registrar is satisfied that all the documents for incorporation of an LLP have been legibly and correctly filed, he shall issue a Certificate of Incorporation of the LLP under his hand and seal. The LLP comes into existence on and from the date mentioned in the Certificate of Incorporation.

5. After incorporation, all the partners/ designated partners must enter into an LLP agreement setting out their mutual rights and liabilities, and the manner of operation of the LLP. This agreement has to be registered with the Registrar of Companies/LLPs within 30 days from the incorporation of LLP.

6. Simultaneously, details of all the partners/ designated partners of the LLP along with their consent to be appointed as such, have to be filed with the Registrar.

7. The PAN card for an LLP can be obtained post incorporation by making an application in the prescribed format.

8. Opening of Bank Account(s), registration with other statutory authorities, if required, can be done once an LLP has been incorporated.

FDI in LLPs

A person resident outside India or an entity incorporated outside India can make investment in an LLP registered in India subject to compliance with the guidelines and circulars issued by the Reserve Bank of India.

The following points must be noted in this regard:

• FDI, in case of LLPs, in the form of capital contribution, is allowed through the Automatic route, only in sectors where 100% FDI under Automatic Route is allowed.

• LLPs having FDI can make downstream investments in any other LLP or company engaged in any business in which 100% FDI is allowed through the automatic route and there are no FDI-linked performance related conditions.

• An Indian Company, having FDI, will be permitted to make downstream investment in LLPs only if both the company, as well as the LLP is operating in sectors where 100% FDI is allowed through the automatic route and there are no FDI-linked performance related conditions.

• Pricing of FDI in LLP must be equal to or more than the fair value derived by any internationally accepted method of valuation. A valuation certificate in this regard is to be obtained from a Chartered Accountant.

• The FDI received must be reported to RBI in the prescribed form within 30 days of receipt.

Regular/Ongoing compliances for LLPs

Every LLP, after its incorporation, has to complete certain compliances and procedural matters to be able to function smoothly. However, the overall compliance requirement for an LLP is less cumbersome as compared to the compliance requirements for a company. Some of the major compliances to be made by an LLP are enumerated hereunder:

• Every LLP has to maintain books of accounts as per double entry system of accounting.

• An LLP whose annual turnover exceeds Rs.40 lacs or whose capital contribution exceeds Rs. 25 lacs is required to get its accounts audited by a CA.

• Every LLP has to file its income tax return on or before the following due dates:

i) July 31st, for LLPs whose accounts are not required to be audited.
ii) September 30th, for LLPs whose accounts are required to be audited.

• An LLP is required to file the following documents with the Registrar of Companies on a yearly basis:

i) An Annual Return, to be filed within 60 days from the close of financial year, i.e., upto May 30th each year.

ii) A statement of account and solvency, to be filed within 30 days from the expiry of 6 months from the close of financial year, i.e., upto October 30th each year.

It is pertinent to note that non-filing of the above documents in time leads to a penalty of Rs.100/- per day with no ceiling on the maximum fine that may be imposed on the LLP as well as its Partners. Therefore, it is best to ensure timely compliance with law.

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