Limited Liability Partnership (LLP) is a relatively new form of business entity that was formed to overcome the limitations of the existing forms of business entity mainly, Partnership and Company. The need for LLP grew as small business owners who usually started off with the Partnership form of business had to bear unlimited liability despite their meager means. Thus, Limited Liability Partnership (LLP) provided the much needed respite by combining the best of both worlds. By drawing its characteristics from both the partnership and the company form, it is slowly catching up to be a popular way of organising the business. As a hybrid, it makes the liability of the partners limited to the extent of their contribution to the firm and frees them from being held liable for the negligence or misconduct of their partners. This has therefore made it an attractive form of business entity.
Limited Liability Partnership (LLP) as constituted in India
The Limited Liability Partnership Act, 2008 came into effect from 31st March, 2009 for the reasons as stated above. Being a part of the Indian corporate structure it is organised as follows:
1) Like any other Partnership firm, LLP is subject to income tax.
2) It protects individual partners from the joint liability created by another partner’s misconduct or wrongful business decisions.
3) LLP has a separate legal entity which is distinct and separate from its owners unlike a partnership. Partners may come and go but the firm continues to exists due to its perpetual succession like a limited liability company. There is no limit on the maximum number of members as it is not governed by the Indian Partnership Act, 1932. As per the LLP Act, 2008 at least one partner in the LLP should be an Indian Citizen and an Indian National.
4) The authority to control and register LLPs is the Registrar of Companies.
Features Of Limited Liability Partnership (LLP)
Independent Entity: Like any living person, Limited Liability Partnership (LLP) has its own individual identity which is separate and distinct from its owners. This makes it similar to a company and ensures that partners may come or go but the business continues to exist.
Minimum amount of Capital: Capital acts as the food for an enterprise and a good amount of capital makes the survival of the firm long-term. Therefore, the minimum amount of capital of LLP is decided before hand by the partners rather than any Act and is contributed by them.
Optional Audit: Audit ensures that the books of accounts of the firm are presented in a true and fair manner. It also safeguards the interests of the stakeholders involved which in the case of a company are huge in numbers. That is why, it is mandatory for a company to have regular audits. However, Unlike a company, audit of LLP’s books of accounts is not mandatory, except:
- If the contributions of the LLP exceeds 25 lakhs; or
- If the annual turnover exceeds 40 lakhs.
Minimum Number of Members: Having shared some of its features with the Partnership, Limited Liability Partnership (LLP) can also be constituted with a minimum of two members having a Directors Identification Number (DIN) and also acting as designated partners. However, there is no limit on the maximum number of partners all of whom are required to have their Directors Identification Number(DIN). Registration process is same as that of a company.
Advantages Of Limited Liability Partnership (LLP)
The reason LLP is called a hybrid of partnership and company form is the feature of limited liability of the members to the extent of their contribution in the firm. It thereby overcomes the disadvantage of a Partnership firm. However, it draws some similarity with it by preparing an agreement that is similar to a Partnership Deed.
Limited Liability Partnership (LLP) allows more flexibility to the members to organise their internal structure. This is owing to the fact that in a company the Articles of Associations are drawn up by the management and others have to follow them blindly but this is not the case with the LLP. Here, the members mutually decide and arrive at the internal structure of the firm.
Companies are bound by the Act and henceforth do not have the autonomy to raise and utilise funds as per their will. LLP thus overcomes this limitation by allowing the partners to raise and use the funds at their own discretion.
LLP can have any number of partners without having to worry about any prescribed limit which is not the case with a company.
Limitations Of Limited Liability Partnership (LLP)
Limited Liability Partnership (LLP) is not immune from the acts of its partners who might act to the disadvantage of the firm. Thereby making the firm liable for their acts.
LLP’s sources of funds are limited to the extent that it does not raise money from the public in general.
LLP is not considered a very lucrative investment by venture capital firms who prefer private limited over LLP. This is because LLP is a relatively new concept in India which they do not wish to test. LLPs having their own agreements that might state a duration for which the firm will exist. Also, some of the advantages of LLP like that of optional audit does not go well with the objectives of a venture capitalist.
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