FAQ. 1 Explain the concept of LLP?

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1 1 Explain the concept of LLP? FAQ LLP is an alternative corporate business from that gives the benefits of limited liability of a company and the flexibility of a partnership. 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 What would be legal status/structure of an LLP? What are the salient features of an LLP? LLP shall be a body corporate and a legal entity separate from its partners. It will have perpetual succession. Any change in the partners of an LLP shall not affect the existence, rights or liabilities of the LLP. The salient features of an LLP are: LLP can continue its existence irrespective of changes in partners. LLP is capable of entering into contracts and holding property in its own name. 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 inthe LLP. Liability of the LLP is limited to the extent of its assets. No partner is liable on account of the independent or un-authorized actions of other partners. Thus, the individual partners are shielded from joint liability created by another partner s wrongful acts, business decisions or misconduct. Mutual rights and duties of the partners within an LLP are governed by an agreement between the partners or between the partners and the LLP, as the case may be. LLP however, is not relieved of the liability for its other obligations as a separate entity.

2 3 Why is a new Legislation for LLP required? Why are amendments in Companies Act or Partnership Act not 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, 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 sector find traditional partnership 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 forms/enterprises expand their trade/business or services across States in India as well as abroad. 4 Who are the likely users/beneficiaries of the LLP Law? LLP enable professional/technical expertise and initiative to combine with financial risk taking capacity in an innovative and efficient manner. India has witnessed considerable growth in the 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 professional would be providing accountancy, legal and various other professional/technical services to a large number of entities across the globe. (contd.)

3 Such services would require multidisciplinary combinations that would offer a menu of solution 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 professional such as Chartered Accountants (CAs), Company Secretaries (CSs), Cost and Work Accountants (CW As) Advocates, etc Venture capital funds where risk capital combines with knowledge and expertise Professional 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 and handicraft sector 5 What are the major advantages of LLP form of business? LLP is an organized form of business and operates on the basis of an agreement. It provides greater operational flexibility without much statutory requirements.

4 6 What are the registration formalities relating to LLPs? LLPs can be registered with the registrar of Companies (ROC) (appointed under the Companies Act, 1956) after following the provisions specified in the LLP Act. Broadly, for registration of a LLP, following forms are required to be filed with the office of registrar of Companies along with prescribed filing fee: Reservation of name (Form #1). Filling of Incorporation Document and consent of partners (Forms #2). Filling of LLP Agreement (Form #3) may, however, be done within 30-days of Incorporation. 7 What are the Distinction between LLP and Partnership? The principle points of difference between a LLP and a partnership are as follows: LLP is a separate legal entity and therefore, can be sued or it can sue others without involving the partners. A partnership firm is not distinct from the several persons who compose it. The partners of a LLP would have limited liability i.e., they would not be liable beyond the money contributed by them. Whereas, partners of a firm would have unlimited liability. The retirement or death of a partner would not dissolve the LLP. On the other hand, the death or retirement of a partner would dissolve the partnership firm. In a partnership, the property of the firm is the property of the individuals comprising it. In a LLP, it belongs to the LLP and not to the individuals comprising it. Whereas a partnership can be formed either orally or by a deed of agreement whether registered or not, LLP is formed by an incorporation document and an LLP agreement, thus giving it a legality. (contd.)

5 A LLP has perpetual succession, i.e., the death or insolvency of a shareholder or all of them does not affect the life of the LLP, whereas the death or insolvency of a partner dissolves the firm, unless otherwise provided. Whereas an individual partner would not be able to conduct business transaction with the partnership firm of which he is a partner, a partner of LLP in his separate capacity as a legal person can do business with the LLP since the LLP is a separate legal entity by itself. 8 What is the Distinction between LLP and Company? The principle points of difference between a company and a LLP are as follows: In case of LLP, the need for defining the objects to be pursued and the other matters which are necessary for furtherance of the objects as well as framing the Share Capital clause in the memorandum for incorporating a company is reduced into a simple procedure of filling of the prescribed information in the Incorporation document and statement in Form No. 2. In case of LLP, a limited liability partnership agreement (LLP) is prepared which is a variant of the articles of association of a company. Whereas the memorandum of a company is required to name the state in which it is required to be incorporated, there is no such obligation in the case of LLP. Consequently, the detail procedure involved in changing the registered office from the state of incorporation to another state is not required to be followed in case of a LLP. (contd.)

6 In the LLP Act, there is no such stipulation for meeting of partners either periodically or compulsory at the year end as stipulated for directors and shareholders meetings in the Companies Act. There is no separation between management of the company and the ownership as is observed in a company since all the partners, unlike all the directors, can take part in the day to day affairs of the LLP. In case of a company no individual director can conduct the business of the company but in an LLP, each partner has the authority to do so unless expressly prohibited by the partnership terms. Whereas, the Companies Act contemplates regulating the remuneration payable to directors, there are no corresponding provisions in the LLP Act for remuneration payable to designated partners. The same could be as per the LLP Agreement. In the case of LLP, unlike in the case of companies, there are no restrictions on the borrowing powers. The LLP can choose to maintain the accounts on cash/ accrual basis whereas under the Companies Act, accrued method is compulsory. Audit of a company is compulsory. Conversely, the audit of LLP is not compulsory if the capital contributed does not exceed Rs. 25 lakh or if the turnover does not exceed Rs. 40 lakhs. Cost audit as contemplated in Section 148 of the Companies Act, 2013 has not been prescribed for LLPs. The appointment of Company Secretaries as required under Section 203 of the Companies Act, 2013 is not provided in the LLP Act. However, the annual return of a LLP in form 11 is to be certified as true and correct by a Company Secretary in practice.

7 9 Multiple Choice Questions FAQ I. State whether the following statement is True or False. a) The Indian Partnership Act 1932 shall be applicable to LLPs. True False Correct Answer: False b) The Central Government does not have any powers whatsoever to investigate the affairs of LLP. True False Correct Answer: False c) A partner shall not be personally liable for the wrongful act of omission of any other partner of the Limited Liability Partnership. True False Correct Answer: True

8 II. Choose the correct answer What is the minimum limit for appointment of designated partners in a limited liability partnership? Maximum two designated partners At least two designated partners Any number of designated partners None of the above Correct Answer - b) 10 What are the advantages of the LLP Structure? Separate Property: A LLP as legal entity is capable of owning its funds and other properties. The LLP is the real person in which all the property is vested and by which it is controlled, managed and disposed off. The property of LLP is not the property of its partners. Therefore partners cannot make any claim on the property in case of any dispute among themselves. Taxation: Another main benefit of incorporation is the taxation of a LLP. LLP are taxed at a lower rate as compared to Company. Moreover, LLP are also not subject to Dividend Distribution Tax as compared to company, so there will not be any tax while you distribute profit to your partners. (contd.)

9 Raising Money: Financing a small business like sole proprietorship or partnership can be difficult at times. A LLP being a regulated entity like company can attract finance from PE Investors, financial institutions etc. Capacity to sue: As a juristic legal person, a LLP can sue in its name and be sued by others. The partners are not liable to be sued for dues against the LLP. No Mandatory Audit Requirement: Under LLP, only in case of business, where the annual turnover/contribution exceeds Rs 40 Lacs/Rs 25 Lacs are required to get their account audited annually by a chartered accountant. This provides great relief to small businessmen. Partners are not agent of other Partners: In LLP, Partners unlike partnership are not agents of the partners and therefore they are not liable for the individual act of other partners in LLP, which protects the interest of individual partners. Compliances: As compared to a private company, the number of compliances are on lesser side in case of LLP.

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