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Understanding LLPs Better

Tony John , Last updated: 27 February 2012  
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The Limited Liability Partnership (LLP) is viewed as an alternative corporate business vehicle that provides the benefits of limited liability but allows its members the flexibility of organizing their internal structure as a partnership based on a mutually arrived agreement.

It is governed by the LLP Act, 2008 and LLP rules 2009. LLP rules contain administrative provisions for formation, management, reconstruction and winding up of LLPs. Central Government can make applicable any provision of Companies Act to LLP with suitable modifications by issuing notification. The Partnership Act won’t apply to LLP.

Features of LLP Act :

1. LLP shall be a body corporate and a legal entity separate from its partners. It will have perpetual succession.

2. While LLP is separate legal entity, liability of partners is limited to their agreed contribution to LLP.

3. No upper limit on the number of partners unlike ordinary partnership where maximum is 20 (10 for banking)

4. Framework of LLP isn’t limited to professional service alone. Several business activities can be undertaken with LLP structure.

Requirements for registration as LLP:

a. Minimum 2 partners.

b. Minimum 2 Designated partners who are individuals and at least 1 of them should be resident in India.

c. Digital Signature Certificate.

d. LLP name.

e. LLP Agreement.

f. Registered office.

Steps for formation of LLP:

1. Deciding  partners and the Designated partners: 

LLP can be incorporated with a minimum of 2 partners who can be individuals or body corporate through nominees. There should  also be minimum 2 designated partners who are individuals and at least 1 of them is resident in India. A person intending to be and is appointed as a Designated partner of LLP should hold Designated Partner Identification Number (DPIN) allotted by MCA. It can be obtained by submitting application along with address proof and identity proof of the individuals.

2.Obtaining DPIN No. And Digital Signature:     

Section 7 of LLP Act, 2008 provides that every designated partner should obtain a DPIN from the Central Government. DPIN is an eight digit numeric  number allotted by the Central Government in order to identify a particular partner and it can be obtained by making an online application in e-Form 7 to the Central Government and submitting the physical application along with necessary identity and address proof of the person applying with a filing fees of Rs.100

Digital Signature Certificate:

Partner / Designated partner of LLP whose signatures are to be affixed on the e-Forms has to obtain class 2 or class 3 Digital Signature Certificate from any authorizing certifying agency.

3. Checking for Name Availability:

i. The next step is to decide the name for the proposed LLP to be incorporated. Anyone intending to incorporate an LLP has to evaluate his proposed name under the prescribed parameters and make an application in e-Form 1 of Rule 18(5) of the LLP Act, 2008 for reservation of the desired name.

ii. The name of the LLP shall not be similar or identical with that of a Company or LLP already registered in India.

iii. It shouldn’t contain words prohibited under the Emblems and Names (Prevention of improper use) Act, 1950 or which are undesirable in the opinion of the Central Government or which satisfies the conditions under Rule 18(2).

iv. Select the name of the proposed LLP.

v. Any partner or Designated partner in the proposed LLP may submit e-Form 1, along with fees Rs.200

vi. Details of minimum two designated partners of the proposed LLP, and atleast 1 of them are resident in India is required to be filled in the application for reservation of name.

4. Drafting the  Agreement:                                                                                     

Contents include:

i. Name of LLP.

ii. Name of partners/ designated partners.

iii. Form of Contribution.

iv. Profit sharing Ratio.

v. Rights and Duties of partners.

vi. Proposed Business.

vii. Rules governing the LLP.

5. Filing incorporation documents:

i. eForm1 – Name Availability.

ii. eForm2 – Incorporation documents.

iii. eForm3– Details of LLP agreement.

iv. eForm4– Consent of partners.

v. eForm7– Application for Designated partners identification Number.

vi. Subscription Sheet.

vii. LLP agreement duly stamped.

viii. Address proof of the registered Office.

All the e-Forms shall be digitally signed by any designated partner and shall be certified by an Advocate/ CA/CS/CWA in practice engaged in the formation of the LLP.

6. Certificate of Incorporation:

After the Registrar is satisfied that all formalities are complied with, he issues a Certificate of Incorporation as to the formation of the LLP within a14 days of filing eForm2 and will issue a Certificate of Incorporation in Form 16, which  shall be conclusive evidence as  to the formation of the LLP.

Advantages of an LLP: The main advantage of forming an LLP is that the partners' liability is limited to their agreed contribution in the LLP which may be of tangible or intangible nature or both tangible and intangible in nature.

The other major advantages are:

1. Separate legal entity.

2. Easy to establish.

3. Flexibility without imposing complicated legal and procedural requirements.

4. Perpetual existence irrespective  of change in partners.

5. No requirement of min capital contribution.

6. Personal assets aren’t exposed except in case of fraud.

7. No restrictions  as to the max number  of partners.

8. LLP and partners are distinct from each other.

9. Partner aren’t liable for act of other partners.

10. Less cost of formation compared to a company.

11. Easy to dissolve or wind-up.

12. Professionals like CA/ CS/ CWA/ Advocate can form Multi- Disciplinary Professional LLPs.

13. No requirement to maintain statutory records except Boks Of Accounts.

14. Internationally renowned form of business  in comparison to companies.

Disadvantages of an LLP: Though the LLP has many benefits and advantages, it still has some disadvantages too. But the advantages undoubtedly outweigh the disadvantages. Some of them are given below:

1. LLP can’t raise funds from the public.

2. Any act of a partner without the other may bind the LLP.

3. No separation of Management from the owners.

4. Under some cases, liability may extend to personal assets of the partners.


Published by

Tony John
(Chartered Accountant)
Category Corporate Law   Report

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