LIMITED LIABILITY PARTNERSHIP (LLP) - An Overview

 

Limited Liability Partnership (LLP)

Nature of Limited Liability Partnership 

• LLP is a body corporate formed & incorporated under LLP Act
• LLP is a legal entity separate from its partners 
• LLP has perpetual succession 
• Existence, Rights & Liabilities of LLP not affected by a change in partners 
• Indian Partnership Act, 1932 does not apply to LLPs 
• Partners
• Individuals / Body Corporate can be partners 
• Minimum two partners 
• Maximum unlimited partners

• If no. of partners fall below 2 for more than 6 months &
• The remaining partner has knowledge of such no. of partners falling below two for period more than 6 months
• Then remaining partner will be personally liable for liabilities incurred by LLP

Designated Partners (DP) 

• At least two DPs
• Only Individuals can be DPs – Can be nominees of Body corporate partner/s
• At least one resident in India 
• Every DP to obtain a Designated Partner Identification No. (DPIN)

Responsibilities  & Liabilities of DPs 

• Responsible for doing all acts, matters & things required to be done by LLP w.r.t compliance of LLP Act including the filing of any document, return, statement & like report under LLP Act & as specified in LLP Agreement
• Liable to all penalties imposed on LLP for any contravention of above

Changes in DPs 

• LLP to appoint DP within 30 days of vacancy
• If no DP is appointed or if, at any time, there is only 1 DP, each partner shall be deemed to be a DP

Disqualifications of DPs

No person can be DP of LLP, if-

• He is adjudged as insolvent within the preceding 5 years
• He has suspended payment to his creditors & not made any composition with them within the preceding 5 years
• He is convicted by Court for any offence including moral turpitude & sentenced to imprisonment not less than 6 months
• He is convicted by Court  for the offence under Section 30 of LLP Act (Defrauding creditors or any other person)

Incorporation

Incorporation Document 

• Is among Prime Documents of LLP
• Must be submitted to the registrar in ‘Form-2’ 
• Requires particular information to be contained in Incorporation Document-
• Name of LLP
• Proposed Business of LLP
• Address of Registered Office (RO) (RO shall be place of all correspondence for LLP)
• Names & Addresses of Partners
• Names & Addresses of DPs
• Other Information as may be prescribed

Effect of Registration

LLP will be able to, in its own name-

• Sue & be sued
• Acquire, hold & develop or dispose of any property
• Have common seal
• Do & suffer  such other acts & things as bodies corporate may lawfully do or suffer
• Name of LLP must end with words ‘Limited Liability Partnership’ or acronym ‘LLP’ 

Procedure for formation of LLP

• Check availability of name on-site ‘llp.gov.in’
• Acquire Digital Signature Certificate (DSC)
• Acquire DPIN by applying in prescribed ‘Form-7’
• Apply for Reservation of Name in prescribed ‘Form-1’ 
• Apply for Incorporation Document in prescribed ‘Form-2’
• Along with the Incorporation Document, submit: 
• Information regarding LLP Agreement in ‘Form-3’
• Appointment of Persons and their consent as such to act as Partners / DPs in ‘Form-4’ & ‘Form-9’, respectively
• Receive Form-2 duly signed by Registrar & certificate from registrar regarding incorporation, within 14 days of filing such documents
• LLP is ready to function

Partners & their Relations 

Eligibility to be partner

• Persons who subscribe to Incorporation Document
• By LLP Agreement

Relationship of partners 

• Rights & duties of partners with other partners & with LLP governed by LLP Agreement
• In absence of any agreement, principles set out in First Schedule will apply

Cessation of Partnership Interest

• In accordance with LLP Agreement 
• By  resignation notice in writing of 30 days 
• On death, dissolution of LLP, or if he is of unsound mind or insolvent as declared by a court

Liability of Outgoing Partner – he still  remains liable to the extent of obligations he incurred while he was a partner 

First Schedule 

• Relates to mutual rights & duties between partners & LLP & its partners' absence of Agreement on such matters
• Partners of LLP entitled to share equally in capital & profits/losses
• Partners shall be indemnified by LLP in respect of payments made & liabilities incurred by him-
• In ordinary & proper conduct of the business of LLP
• In anything necessarily done for Preservation of business or property of LLP
• LLP shall be indemnified by Partners for any loss caused by his fraud in the conduct of the business of LLP
• Partners may participate in the management of LLP
• Partners shall not be entitled to any remuneration for acting in business or management of LLP
• No partner may be introduced without the consent of all other partners
• Any ordinary matter regarding LLP may be decided by resolution passed by the majority of partners
• However, change in nature of the business may be decided only by consent of all partners
• Every decision taken by LLP be recorded in minutes within 30 days of such decision
• Minute Book be maintained & kept at RO of LLP
• Partners must render true accounts & full information of all things affecting LLP to any partner or his legal representative
• Partners to account for & pay overall profits earned from the business of similar nature & competing with LLP, to LLP if there is no consent from LLP in that respect
• Partners to account to LLP for any benefit derived by him without LLP’s consent, from any transaction concerning LLP or from use of name, property or business connection of LLP
• No partner may be expelled by a majority unless there is an express power conferred by LLP Agreement to do so
• All disputes which cannot be resolved by LLP Agreement can be referred to for arbitration as per Arbitration and Conciliation Act, 1996

Liability of LLP & Partners 

• Just like a partnership, every partner is an agent; not of other partners but of LLP. 

• LLP not bound by unauthorized acts of partners in dealing with a person if that person knows that the partner had no authority or did not know him to be a partner of LLP 

• LLP liable in respect of wrongful acts or omissions of partners in course of its business or with its authority 

• Obligation of LLP is solely an obligation of LLP & shall be met out of the property of LLP 

• Partners not personally liable for wrongful act or omissions of another partner

• Liability of partner(s) committing wrongful acts or omissions will be unlimited 

• Partnership by Holding out  (LLP liable only if it has taken benefits of the act)

• Unlimited Liability in case of fraud 

• If fraud done with knowledge/authority of LLP, LLP’s & partner’s liability will be unlimited. LLP’s liability = Partner’s liability
• Otherwise, LLP will not be liable
• Imprisonment for 2 years & fine up to Rs. 5 Lacs

Assignment & Transfer of Partnership Rights 

• Right of partner to share profits is transferable/assignable (in whole or in part)
• Transfer does not imply that transferor/assignor has ceased to be a partner 
• Likewise, transferee/assignee does not have the right to participate in management 
• Transferee / assignee has no right to obtain any information of transactions of LLP

Investigation

• Central Government (CG) may appoint one or more inspector(s) to investigate into affairs of LLP & report thereon, if-
• Not less than 1/5 th of partners apply for investigation on payment of prescribed security to Central Government
• LLP applies for investigation
• CG is of opinion that-

• Business of LLP is with intent  to defraud its Creditors, Partners or any other Person
• Affairs of LLP are not being conducted in accordance with provisions of this Act
• On receipt of Report of Registrar or any other Regulatory Agency, there exist sufficient reasons that affairs of LLP ought to be investigated

• Inspector cannot be partnership firm, body corporate or other association 
• Investigator has the power to investigate in matters of any entity which has been associated, or is associated, to LLP unless it is irrelevant to do so 
• Investigator must obtain prior approval of CG
• It shall be the duty of DPs & Partners to-

• Preserve & produce before investigator all documents relating to LLP or, as case may be, any other entity
• Give assistance to an investigator in connection to the investigation
• Investigator has the power to keep such documents in custody up to 30 days

• Investigator has the power to seize documents relating to LLP, if he believes that such documents may be-
• Destroyed
• Mutilated
• Altered
• Falsified or 
• Secreted

• Investigator shall make reports (Interim & Final) to CG & such report such act as evidence in any legal proceeding 
• Application by CG for Winding-up of LLP pursuant to an investigation 
• Expenses of Investigation (by guilty party)

Conversion of Firm to LLP 

• All partners of LLP must be partners of the original firm & no one else.

• On such conversion-
• All assets & liabilities of firm would get vested in LLP
• Firm stands dissolved
• Will be removed from records of Registrar of Firms
• Every partner will continue to be personally liable jointly & severally with LLP, for liabilities prior to conversion / arising out of a contract entered prior to conversion 
• Partner to be indemnified by LLP in respect of such liability subject to anything contrary in LLP Agreement 

• Every official correspondence of LLP for 1 year, must bear a statement that it was, from the date of registration converted from a firm into an LLP along with the name & registration, if applicable, of the firm from which it was converted
• Partnership Firm proposing to convert to LLP must apply to ROC in the prescribed form along with Statement of Partners.
• ROC must issue certificate of registration.
• Upon receipt of application LLP must apply, within 15 days of registration, to Registrar of Firms to strike-out name of Firm in prescribed.

Conversion of Companies to LLP

• Company can be converted into LLP provided-
• All partners of LLP must be shareholders of that company & no one else
• There is no security interest in its assets
• Upon conversion, all assets & liabilities get vested in LLP and principally all other provisions are similar as that for firms

• Listed Public Company cannot be converted into LLP

Winding-up

The winding-up of a limited liability partnership may be either voluntary or by the Tribunal and limited liability partnership, so wound up may be dissolved.

• A limited liability partnership may be wound up by the Tribunal,-

1. If the limited liability partnership decides that limited liability partnership be wound up by the Tribunal;
2. If, for a period of more than six months, the number of partners of the limited liability partnership is reduced below two;
3. If the limited liability partnership is unable to pay its debts;
4. If the limited liability partnership has acted against the interests of the sovereignty and integrity of India, the security of the State or public order;
5. If the limited liability partnership has made a default in filing with the Registrar, the Statement of Account and Solvency or annual return for any five consecutive financial years; or
6. If the Tribunal is of the opinion that it is just and equitable that the limited liability partnership be wound up.

Comparison with Companies

Comparison with Partnership Firms