The concept:
A Limited Liability Partnership (LLP) is a partnership in which some or all partners (depending on the jurisdiction) have limited liabilities. It, therefore, exhibits elements of both partnership and corporation and is called a hybrid between a partnership and a company. In an LLP, one partner is not responsible or liable for another partner’s misconduct or negligence. This differs from the traditional concept of unlimited partnership under the Partnership Act, in which each partner has joint and several liability. In an LLP, some partners have a form of limited liability similar to that of the shareholders of a corporation.
A more formal partnership:
To understand a limited liability partnership, it is best to start with the general partnership. A general partnership may be defined as a relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. This is a very technical way of explaining the relation between/among two or more people working together to make money. A general/traditional partnership can be quite informal. All it takes is a shared interest, perhaps a written contract (though not necessarily), and a handshake.
Of course, with the informal nature of a general partnership, there is a downside. The most obvious risk is that of legal liability. In a general partnership, all partners share liability for any issue that may arise. For example, if A and B are partners in a fast-food venture and a bad batch of snacks gets people sick, they can both be personally sued for damages. Hence, nowadays, many people take recourse to a Limited Liability Partnership, where one partner isn’t liable for the other’s wrongdoing.
The Limited Liability Partnership Bill having been passed in December, 2008, by both the Houses of Parliament, received the President’s assent on January 7th, 2009. It came into force as the Limited Liability Partnership Act in 2009 (6 of 2009). The LLP Act provides that, while the liability of the LLPs would be limited to the extent of the assets owned by them, the liability of the partners would be limited to the extent of their contribution. Besides, no partner would be liable on account of the independent or unauthorized actions of co-partners, allowing individual partners to escape joint liability.
Why choose an LLP over other forms of corporate entity?:
An LLP is an amalgamation of the features of a company and a partnership. Most of the drawbacks of both these forms have been removed in this form of corporate entity. LLP allows professionals and enterprises engaged in information technology, science and technology, venture capital to create commercially efficient vehicles for providing business and services of high quality. It also helps lawyers, company secretaries, accountants and architects to organize their business better and increase the number of partners, which is capped at 20 under the Companies Act, 1956.
“In an increasingly litigious market environment, the prospect of being a member of a partnership firm with unlimited personal liability is risky and unattractive. This makes an LLP the most suitable instrument for partnerships among lawyers and accountants.”
Here are some of the notable features of an LLP:
- It is a body corporate having a distinct legal entity
- It has a perpetual succession
- It has a distinct name, personality and a common seal
- It can sue and can be sued in its own name
- There is no limit on the maximum number of partners who may constitute the LLP
- Professionals like CS / CA / CWA / Lawyers can form Multi-disciplinary Professional LLP
- Liability of partners/members shall be limited. This puts LLP on a different footing with a traditional partnership firm where the liability of the partners is unlimited.
- It shall be registered with the Registrar of Companies (ROC)
- ROC is empowered to strike off defunct LLPs
- Electronic filing of returns by LLPs would be allowed.
- The Indian Partnership Act, 1932, shall not be applicable to LLPs
- Like a partnership firm, both agreement and sharing of profit are essential ingredients of an LLP. But, mutual agency, which is one of the basic elements of a partnership, is not there in LLP. Thus it can be said that each partner is an agent of the LLP but not of other partners.
- LLP cannot raise funds from Public
- No separation of Management from owners
Difference between LLP and 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.
Difference between LLP and company:
- A basic difference between an LLP and a joint stock company lies in the internal governance structure. A company is regulated by statute (i.e. Companies Act, 1956), whereas, an LLP is regulated by a contractual agreement between partners.
- The management-ownership divide inherent in a company is not there in a limited liability partnership.
- LLP has more flexibility as compared to a company.
- LLP has lesser compliance requirements as compared to a company.
- Unlike in the case of a company, there is no requirement for minimum capital contribution for an LLP.
How to register an LLP:
For details regarding registration, click on http://www.mca.gov.in/LLP/RegisterNewComp.html
Bottom Line:
LLPs are flexible legal and tax entities that allow partners to benefit from economies of scale by working together while also reducing their liability for the actions of other partners. This form of Corporate Entity is a very good option for entrepreneurs looking for self employment without incurring extra risk. The best part is that, even professionals can form LLPs and avoid the risk earlier suffered by traditional partnership.