CMA KNVV Sri Vidya - Sri Kanth (C.A.Final (New) ICWAI FINAL (New))   (11269 Points)

15 April 2009  


1. Concept of “limited liability partnership”
  • LLP is an alternative corporate business form that gives the benefits of limited liability of a company and the flexibility of a partnership.
  • The LLP can continue its existence irrespective of changes in partners. It is capable of entering into contracts and holding property in its own name.
  • The LLP is a separate legal entity, is liable to the full extent of its assets but 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 misconduct.
  • Mutual rights and duties of the partners within a LLP are governed by an agreement 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’ as well as ‘a partnership firm structure’ LLP is called a hybrid between a company and a partnership.
2. Structure of an LLP 

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

3. Advantages of LLP form
LLP form is a form of business model which:

(i) is organized and operates on the basis of an agreement.

(ii) provides flexibility without imposing  detailed legal and procedural requirements

(iii) enables professional/technical expertise and initiative to combine with financial risk taking capacity in an innovative and efficient manner
4. Other countries where this form is available
The LLP structure is available in countries like United Kingdom, United States of America, various Gulf countries, Australia and Singapore. On the advice of experts who have studied LLP legislations in various countries, the LLP Act is broadlybased on UK LLP Act 2000 and Singapore LLP Act 2005. Both these Acts allow creation of LLPs in a body corporate form i.e. as a separate legal entity, separate from its partners/members. 
5.  Difference between LLP & “traditional partnership firm”
  • Under “traditional 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.
  • Under LLP structure, liability of the partner is limited to his agreed contribution.  Further, no partner is liable on account of the independent or un-authorized acts of other partners, thus allowing individual partners to be shielded from joint liability created by another partner’s wrongful acts or misconduct. 
6. Difference between LLP & a Company
  • A basic difference between an LLP and a joint stock 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.
  • The management-ownership divide inherent in a company is not there in a limited liability partnership.
  •  LLP will have more flexibility as compared to a company.
  • LLP will have lesser compliance requirements as compared to a company.
7. Whether the LLP Act is applicable to any specific services like professional services regulated by Statutes?
No. Any two or more persons associating for carrying on a lawful business with a view to profit may set up an LLP.
In the light of various inputs received by this Ministry for applicability of the LLP form to small entities and venture capital funded enterprises, it is proposed that the framework should not be restricted to professional services alone as was earlier recommended by Naresh Chandra Committee. Accordingly, the LLP Act does not restrict the benefit of LLP structure to certain classes of professionals only.
8. Likely users/beneficiaries of the LLP Law?
India has witnessed considerable growth in services sector and the quality of our professionals is acknowledged internationally. It is necessary that entrepreneurship knowledge and risk capital combine to provide a further impetus to our impressive economic growth. Equally the services sector promises an economic opportunity similar to that provided by information technology over the past few years. It is likely that in the years to come Indian professionals would be providing accountancy, legal and various other professional/technical services to a large number of entities across the globe. Such services would require multidisciplinary combinations that would offer a menu of solutions to international clients.  In view of all this, the LLP framework could be used for many enterprises, such as:-
  • Persons providing services of any kind
  • Enterprises in new knowledge and technology based fields where the corporate form is not suited.
  • For professionals such as Chartered Accountants (CAs), Cost and Works Accountants (CWAs), Company Secretaries (CSs) and Advocates, etc.
  • Venture capital funds where risk capital combines with knowledge and expertise
  • Professionals and enterprises engaged in any scientific, technical or artistic discipline, for any activity relating to research production, design and provision of services. 
  • Small Sector Enterprises (including Micro, Small and Medium Enterprises)
  • Producer Companies in Handloom, Handicrafts sector
9.  Whether an entity which has objectives like “charitable or other not for profit objectives” would be able to set up under LLP Act?
No. The essential requirement for setting LLP is ‘carrying on a lawful business with a view to profit’.
10. Whether provisions of Indian Partnership Act, 1932 would be applicable to LLPs?
No, these shall not be applicable to LLPs.
11. Why a new legislation for LLP? Why not amendments in Companies Act or Partnership Act are made?
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.
12. Committees, which have made recommendations for legislation on LLPs in India
The desirability of LLP form has been expressed in the context of small enterprises by :-
  • Bhat Committee (1972);
  • Naik Committee (1992);
  • Expert Committee on Development of Small Sector Enterprises headed by Sh. Abid Hussain in 1997 and
  • Study Group on Development of Small Sector Enterprises (SSEs) headed by Dr. S P Gupta (2001).
Following Committees set up by M/o Company Affairs have also recommended for legislation on LLPs:-
  • Committee on Regulation of Private Companies and Partnerships headed by Sh. Naresh Chandra (2003)
  • The Committee on New Company Law (Dr. J.J. Irani Committee) (2005)
13. Whether Ministry has adopted a “Consultative Approach” while bringing out the LLP Act?
Yes. The Ministry of Corporate Affairs, on 2nd November, 2005, placed a Concept Paper on LLP Law on its website so that all interested stakeholders may express their opinions on the concepts involved and suggest formulations for the consideration of the Ministry on various aspects of LLP Law.  The Concept Paper was also circulated to various concerned Ministries/Departments and autonomous bodies like Comptroller and Auditor General of India (C&AG), Securities and Exchange Board of India (SEBI), Insurance Regulatory Development Authority (IRDA) etc. for their comments.         
Large number of comments and suggestions were received by the Ministry on the Concept Paper. These were examined in light of international practice/law on the subject. The Act has been prepared keeping in view the Indian requirements.  
14. What are the restrictions in respect of minimum and maximum number of partners in an LLP?  
minimum of two partners will be required for formation of an LLP. There will not be any limit to the maximum numberof partners.
15. Whether a body corporate may be a partner of an LLP?
16. What are the qualifications for becoming a partner?
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 undischarged insolvent; or
(c)   he has applied to be adjudicated as an insolvent and his application is pending.
17. What are the requirements in respect of “Designated Partners”?
Appointment of at least two “Designated Partners” shall be mandatory for all LLPs. “Designated Partners” shall also beaccountable for regulatory and legal compliances, besides their liability as ‘partners, per-se”.
18. Who can be a “Designated Partner”?
Every LLP shall be required to have atleast 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.
19. Should the number of designated partners resident in India not be more than partners from outside India?
LLPs, particularly those as may be engaged in the services or technology-based sectors, may provide services globally. This may require any number of its partners to locate them abroad.  In view of liability structure of partners, designated partners and LLP, clearly provided for in the Act, there does not appear to be any necessity and justification for restriction relating to designated partners to out-number partners located abroad. In fact it may pose unnecessary restriction.
20. Whether there would be any requirement of ‘identification number’ of Designated Partner? Whether Designated Partners would be subject to any other condition/requirement before they are appointed as such?
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’.