Law and You > Corporate Laws > Companies Act, 2013 > Limited Liability Partnership (LLP)

Limited Liability Partnership (LLP) is a corporate business vehicle that provides the benefits of limited liability of a company to its members and also allows to manage their internal management on the basis of mutually arrived agreement as in case of a partnership firm. Partners have lower liabilities to any debt which may arise in future in running the business. It contains elements of both ‘a corporate structure’ as well as ‘a partnership firm structure’ and is called a hybrid between a company and a partnership. The Partners are required to contribute towards the LLP as specified in the LLP Agreement. Their share can be in any form i.e. tangible or intangible, movable or immovable property, monies and cash. In terms of liability under Limited Liability Partnership the Company is liable for losses or debts incurred in running the business where the individual members of the LLP shall not be liable for such losses or debts.

Thus,

LLP = Traditional Partnership – (Mutual Agency among Partners) – (Unlimited Liability) – (Uncertainty of Life)

LLP combines the advantages of flexibility of organising management on the basis of an agreement like traditional partnership firm and limited liability like a company.

Limited Liability Partnership Act, 2008

• Limited liability partnership is governed by LLP Act 2008 and LLP rules 2009.
• It came as a result of the recommendations made by several expert committees like Bhatt Committee of 1972, Naik Committee of 1992, Abid Hussain Committee of 1997, Gupta Committee of 2001, Naresh Chandra Committee of 2003 and the JJ Irani Committee of 2005.
• The limited liability partnership bill received the assent of the president on 7 January 2009. The Limited Liability Partnership Act 2008 was thereafter notified in the official gazette dated 9 January 2009.
• The Act came into force by way of notification dated 31st march 2009
• The Act is divided into 14 chapters containing 81 Sections and 4 Schedules
• The LLP rules 2009 were notified in the official gazette on 1st April 2009.
• The first LLP was in India established on 2nd April 2009. At present more than 10000 LLPs are registered all over India
• Limited liability partnership act 2008 applies to whole of India.

Salient Features of LLP:

• Body Corporate: According to Section 3 of the Limited Liability Partnership Act 2008 (LLP Act), an LLP is a body corporate, formed and incorporated under the Act. It is a legal entity separate from its partners. Every Limited Liability Partnership shall use the words “Limited Liability Partnership” or its acronym “LLP” as the last words of its name.
• Formation for Business and Profit Purpose Only: Limited Liability Partnerships cannot be formed for charitable or non-profit purposes. It is essential that the entity is formed to carry on a lawful business with a view to earning a profit.
• LLP Agreement: Being the separate legislation (i.e. LLP Act, 2008), the provisions of Indian Partnership Act, 1932 are not applicable to an LLP and it is regulated by the contractual agreement between the partners. The mutual rights and duties of the partners of an LLP are governed by LLP Agreement. The partners can devise the agreement as per their choice. If such an agreement is not made, then the Act governs the mutual rights and duties of all partners.  
• Separate Legal Entity: Just like a company, it is a separate legal body. Further, it is completely liable for its assets. Also, the liability of the partners has certain limitations in their contribution to the LLP. Hence, the creditors of the LLP are not the creditors of individual partners. For all legal purposes, LLP is an artificial legal person. A legal process creates it and has all the rights of an individual. It is invisible, intangible, and immortal but not fictitious since it exists. It can enter into contracts and hold property in its name.
• Designated Partners: In a Limited Liability Partnership (LLP), designated partners are individuals appointed to manage the operations and ensure compliance, much like directors in a company.  They are responsible for legal and regulatory requirements, including filing annual returns and managing the LLP’s financial and legal obligations. 
• Common Seal: If the partners decide, the LLP can have a common seal. It is not mandatory though. The common seal can be affixed only in the presence of at least two designated partners of the LLP.
• Perpetual Succession: Unlike a general partnership firm, a limited liability partnership can continue its existence even after the retirement, insanity, insolvency or even death of one or more partners.
• Limited Liability: Every partner is an agent of the LLP for the purpose of the business of the entity. However, he is not an agent of other partners. Further, the liability of each partner has limitations to his agreed contribution to the LLP. It provides personal liability protection to its partners.
• Minimum and Maximum Number of Partners in an LLP: Every Limited Liability Partnerships must have at least two partners and at least two individuals as designated partners. At any time, at least one designated partner should be resident in India. There is no maximum limit on the number of maximum partners in the entity.
• Business Management and Business Structure: The partners of the LLP can manage their business. However, only the designated partners are responsible for legal compliances.
• Control: The power to investigate the affairs of an LLP resides with the Central Government. Further, they can appoint a competent authority for the same.

Advantages of LLP:

• Limited Liability: The biggest advantage of LLP is limited liability. This means that the personal assets of the partners are protected in case of any legal disputes. The liability of each partner has limitations to his agreed contribution to the LLP. It provides personal liability protection to its partners.
• Flexibility: LLP has more flexibility and lesser compliance requirements as compared to a company. The partners can decide the terms and conditions of their partnership and also have the freedom to transfer their ownership. It is easy to become a partner or leave the LLP or otherwise.
• Capital Requirements and Returns: No minimum capital requirements. Partners can withdraw capital subject to LLP agreement. It is also possible for a partner to reduce contribution liability after giving notice to creditors. LLP can provide interest on capital without any approval subject to LLP Agreement.
• Dividend Distribution Tax (DDT): There is no Dividend Distribution Tax. Profit after tax will be credited to partners’ account and it will not be taxable in the hands of partners again.
• Easy to Form: LLP is easy to form as compared to a private limited company. It requires fewer compliances and formalities. There are simple registration procedure, no requirement of minimum capital, no restrictions on maximum limit of partners.
• Membership: A partner continues as a partner in the LLP even after transferring all his rights in the LLP unless LLP agreement provides otherwise. A partner can even resign from the LLP. It is possible to remove a partner from the LLP subject to the LLP agreement.
• Better Remunerations: No restriction on limit of the remuneration to be paid to the partners like companies, but the remuneration must be authorized by the LLP agreement and it cannot exceed the limit prescribed under the agreement.
• Tax Benefits: LLP is taxed as a partnership, which means that the profits and losses are passed through to the partners and are taxed at their individual tax rates. This results in tax savings for the partners.
• Audit Requirements: Accounts to be audited by a Chartered Accountant only if the turnover exceeds Rs.40 lakh or contribution exceeds Rs.25 lakh.
• Keeping of Records: LLP is not required to maintain any registers, records and minutes unless specifically mandated by LLP agreement. Partners are at liberty decide the requirements.
• Limited Compliance: LLP has fewer compliance requirements as compared to a private limited company. It is not required to hold annual general meetings, maintain a board of directors, or file as many documents with the Registrar of Companies.
• Better Management: In LLP, the partners are also the owners and managers, which leads to better decision-making and faster implementation of plans. LLP is managed by partners as per LLP agreement. Partners can delegate management power to a management team or single partner.
• Separate Legal Entity: As LLP is a separate legal entity, it can enter into contracts, hold property, and sue and be sued in its own name. This provides more credibility to the business.

Disadvantages of LLP:

• Limited Growth Opportunities: LLP cannot issue shares to the public, which limits its ability to raise funds from investors. This can be a disadvantage for businesses that require a large amount of capital. Hence LLP may not be suitable for businesses that require a large amount of capital as it cannot issue shares to the public.
• Limited Recognition: LLP is not as widely recognized as private limited companies, which may cause difficulty in raising funds from investors.
• Compliance Requirements: Though the compliance requirements for an LLP would be minimal, it is essential to adhere to them, else it can lead to heavy penalties. LLP is required to comply with various statutory requirements such as filing of annual returns, maintenance of books of accounts, etc.
• Limited Liability Protection: While LLP provides limited liability protection, there are certain situations where the personal assets of the partners can be at risk. For example, if a partner engages in fraudulent activities or does not comply with the provisions of the LLP agreement, the personal assets of the partner can be attached.
• Limited Life: LLP has a limited life as it is dissolved upon the death, retirement, or insolvency of any of the partners. This can be a disadvantage for businesses that require long-term sustainability.
• Lack of Secrecy: Public disclosure is the main disadvantage of an LLP. The documents filed through the Ministry of Corporate Affairs portal are public documents.

Pre-requisites for Registration of a LLP:

• Minimum two partners (Individual or body corporate).
• Minimum two designated partners who are individuals and at least one of them should be resident in India.
• Digital signature certificate
• LLP Name
• LLP Agreement
• Registered office

Contents of LLP Agreement:

• Name of LLP
• Name and address of partners and designated partners
• Form of contribution and interest on contributions
• Profit sharing ratio
• Remuneration of partners
• Rights of partners in case of admission resignation retirement cessation and expulsion
• Proposed business
• If no agreement is framed the rights and duties as prescribed under schedule 1 to LLP Act 2008 shall be applicable.
• LLP agreement must be duly stamped as per relevant stamp act of the state.

Effect of Registration of LLP:

On getting the certificate of registration from the registrar of companies, the LLP enjoys the status of body corporate and becomes a legal entity separate from its members. Such LLP is entitled to exercise the following rights:

• It can sue and be sued by others in its own name.
• It can acquire, own, hold, develop or dispose of property whether movable or immovable, tangible or intangible.
• It may have a common seal. Thus it is not mandatory for LLP to have a common seal.
• It can do and suffer such other acts and things as bodies corporate may lawfully do and suffer.

Distinction between Partnership and LLP:

A Limited Liability Partnership (LLP) and a partnership firm are two types of business structures through which partners can carry out their business. A minimum of two persons willing to be partners are required to establish an LLP or a partnership firm. LLP is a new concept, while a partnership firm is an old concept.

Partnership	LPP
It is governed by Partnership Act, 1932	It is governed by Limited Liability Partnership Act, 2008
Partnership Act provisions are different in various states as the enforcement of the act is at State level	The enforcement of LLP Act is made by the Central Government which is applicable to all States.
The Registration of Partnership is not compulsory. However, the unregistered Partnership firm cannot be sued	The Registration of LLP is compulsory with the Registrar of Companies (ROC).
Minimal compliance requirements compared to LLPs, mainly including maintaining basic records.	Requires registration with the Ministry of Corporate Affairs (MCA) and must comply with annual reporting and audit requirements.
The partnership may dissolve if a partner dies or leaves.	The LLP continues to exist even if a member leaves or dies.
Every Partner is liable, jointly for the acts of other partners alone or for all the acts of the firm in course of partnership.	Under LLP the liability of partners are limited as per their share of contribution.
Partnership firm has no separate legal entity	LPP has separate legal entity
No returns are to be filed with the Registrar of Firms	The annual statement of accounts and annual return has to be filed with ROC
Partnership interests are not easily transferable without the consent of all other partners.	Transfer of ownership is typically governed by the LLP agreement.
Minor can become partner in Partnership	In LLP minors cannot become partners.
Typically managed by all partners, with decisions made by mutual agreement.	The LLP agreement can specify management roles and responsibilities.

Distinction between a Company  and Limited Liability Partnership (LLP):

A Limited Liability Partnership (LLP) and a Company are both popular forms of business structures in India, but they differ significantly in their legal nature, management, and regulatory requirements.

Company	Limited Liability Partnership (LLP)
A company is a fully incorporated entity, governed by the Companies Act, 2013. It is a separate legal entity from its shareholders or members, with a more rigid structure.	LLP is a hybrid entity, combining the benefits of a partnership and limited liability. It is a separate legal entity from its partners, but its structure is more flexible and partnership-like.
Company is governed by the Companies Act, 2013	LLP is governed by the Limited Liability Partnership Act, 2008.
In a limited liability company, the liability of shareholders is limited to the amount unpaid on their shares. Members are not personally liable for the company’s debts beyond this amount.	The liability of partners is limited to the extent of their agreed contribution to the LLP. However, partners are not liable for the misconduct or negligence of other partners.
Company is managed by a Board of Directors. Ownership (shareholders) is typically separate from management (directors), and there are formal governance structures in place.	Partners have the flexibility to manage the LLP directly. The management structure is usually informal and more aligned with a partnership.
Companies, particularly public ones, are subject to stricter regulatory oversight. They must file annual reports, conduct board and shareholder meetings, and adhere to corporate governance requirements.	In LLP, compliance requirements are lower compared to companies. LLPs are required to file annual returns, but there are fewer regulations in terms of meetings, audits, and filings.
Every company, regardless of its size, is required to have its accounts audited annually.	In case of LLP, audit is mandatory only if the annual turnover exceeds ₹40 lakh or the contribution exceeds ₹25 lakh.
A company faces double taxation—corporate tax on profits and tax on dividends distributed to shareholders (dividend distribution tax, though this has been modified under recent tax amendments)	LLPs are taxed as a partnership firm under the Income Tax Act, 1961, meaning there is no dividend distribution tax, and profits are taxed only at the entity level.
In the case of a public company, shares can be easily transferred, making it a more flexible structure for investors. For private companies, share transfer may be restricted but is still possible.	In LLP, Ownership cannot be easily transferred, as it depends on the agreement between partners. The entry or exit of a partner may require a change in the LLP agreement.
A company has perpetual succession and is unaffected by changes in its members. It continues to exist even if all shareholders or directors change or leave.	An LLP enjoys perpetual succession, similar to a company, but it may dissolve upon the death or insolvency of all partners unless provided otherwise in the LLP agreement.
A company raises capital through the issuance of shares. It can issue different types of shares (equity, preference) and raise funds through securities.	There is no concept of share capital in an LLP. The capital contribution is agreed upon by the partners.
FDI in companies is more flexible, with broader avenues for investment, especially in public companies.	Foreign direct investment (FDI) is allowed in LLPs in sectors where 100% FDI is permitted under the automatic route, but it is subject to certain restrictions.
Closing a company is more complex and involves a lengthy process under the Companies Act, particularly for public companies.	Winding up an LLP is simpler and less costly than winding up a company.

Conclusion:

In conclusion, a Limited Liability Partnership (LLP) offers a compelling combination of partnership flexibility and limited liability company benefits, making it an attractive option for many businesses. LLPs allow for active partner participation in management while shielding personal assets from business debts. This structure is particularly well-suited for small to medium-sized enterprises and professionals seeking a balance between control and risk mitigation. 

Partners are not personally liable for the LLP’s debts, protecting their personal assets from business liabilities. LLPs offer more flexibility in management and decision-making compared to traditional companies. Compared to private limited companies, LLPs often have lower compliance requirements and associated costs. LLPs can enjoy certain tax advantages, making them an attractive option for businesses. LLPs are generally easier and less expensive to form than other business structures. 

A formal LLP agreement is crucial to define the rights, responsibilities, and operational rules of the partnership. While less demanding than some other structures, LLPs still have compliance requirements, including annual filings. While LLPs offer flexibility, clear communication and a well-defined LLP agreement are essential to prevent potential disputes among partners. 

In essence, LLPs provide a valuable middle ground for businesses seeking a structured yet flexible legal entity. They are a strong contender for those who want to actively participate in their business while minimizing personal financial risk. 

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