Formation of LLP in India

CONCEPT OF LLP

DEFINITION OF LLP

LLP is a corporate business vehicle that enables professional expertise and entrepreneurial initiative to combine
and operate in flexible, innovative and efficient manner, providing benefits of limited liability while allowing its
members the flexibility for organizing their internal structure as a partnership.

The Limited Liability Partnership Act, 2008(LLP Act) does not provide an exhaustive definition. Sub-section (n)
of section 2 of the Act states that “limited liability partnership” means a partnership formed and registered under
this Act.

NATURE AND CHARACTERISTICS OF LLP

1. The LLP is a body corporate having separate entity from its partners and perpetual succession.

2. An LLP in India is governed by the Limited Liability Partnership Act, 2008 and, therefore, the provisions
of Indian Partnership Act, 1932 are not applicable to it.

3. Every Limited Liability Partnership shall use the words “Limited Liability Partnership” or its acronym
“LLP” as the last words of its name.

4. An LLP is a result of an agreement between the partners, and the mutual rights and duties of partners
of an LLP are determined by the said agreement subject to the provisions of LLP Act, 2008.

5. The LLP being a separate legal entity is liable for all its assets, with the liability of the partners limited only to the amount of contributed by them just like a company. No partner will be individually liable for any wrongful acts of other partners. However if the LLP was formed for the purpose of defrauding creditors or for any fraudulent purpose, then the liability of the partners who had the knowledge will be unlimited.

6. There must be at least two designated partners in every LLP of whom one shall be resident in India.

7. Every LLP shall maintain annual accounts to show its true state of affairs. It must prepare a statement of accounts and solvency every year and file with the Registrar.

8. The Central Government may, whenever it thinks fit, investigate into the affairs of an LLP by appointing a competent Inspector.

9. A firm, private company or an unlisted public company have the option to convert itself into LLP as per the provisions of the Act. Upon such conversion, the Registrar will issue a certificate to that effect. After issuance of a certificate of registration, all the property of the firm or the company, all assets, rights, obligations relating to the company shall be vested in the LLP so formed, and the firm or the company stands dissolved.

10. The name of the firm or the company is then removed from the Registrar of Firms or Registrar of Companies, as the case may be. Like the company, an LLP can be wound up either voluntary or by the Tribunal established under the Companies Act, 2013

11. The LLP Act 2008 also enables the Central Government to apply the provisions of the Companies Act whenever it thinks appropriate.

ADVANTAGES OF LLP

  1. Easy to form: Forming an LLP is an easy process. It is less complicated and time consuming unlike the process of formation of a company.

2. Liability: The partners of the LLP is having limited liability which means partners are not liable to pay the debts of the company from their personal assets. No partner is responsible for any other partner’s misconduct.

3. Perpetual succession: The life of the Limited Liability Partnership is not affected by death, retirement or insolvency of the partner. The LLP will get wound up only as per provisions of the LLP Act.

4. Management of the company: An LLP has partners, who own and manage the business. This is different from a private limited company, whose directors may be different from shareholders.

5. Easy transferability of ownership: There is no restriction upon joining and leaving the LLP. It is easy
to admit as a partner and to leave the firm or to easily transfer the ownership to others.

6. Taxation: an LLP is not subject to Dividend Distribution Tax. (DDT). Distributed profits in the hands of
the partners is not taxable. For Income Tax purposes, LLP is treated on par with partnership firms.

7. No compulsory audit required: Every business has to appoint an auditor for checking the internal
management of the company and its accounts. However, in the case of LLP, there is no mandatory audit required. The audit is required only in those cases where the turnover of the company exceeds Rs 40 lakhs and where the contribution exceeds Rs 25 lakhs.

8. Fewer compliance requirements: An LLP is much easier and cheaper to run than a private limited company as there are just three compliances per year. On the other hand, a private limited company has a lot of compliances to fulfil and has to compulsorily conduct an audit of its books of accounts.

9. Flexible agreement: The partners are free to draft the agreement as they please, with regard to their rights and duties.

10. Easy to wind-up: Not only is it easy to start, it is also easier to wind-up an LLP, as compared to a private limited company.

DISADVANTAGES OF LLP

  1. Restricted Access to Capital Markets: LLPs are small form of business and cannot get its shares listed in any stock exchange through initial public offerings. With this restriction, limited liability partnerships may find it difficult to attract outside investors to buy the shares.

2. Rights of partners: An LLP can be structured in such a way that one partner has more rights than another. So it isn’t a one vote per share system. So, some lesser partners may feel compromised if higher shareholders choose to move the business in a direction that affects their interests.

3. Public Disclosure of LLP Information: A LLP must file its Annual Returns, Financial Statements etc to the Registrar of LLPs annually. Which become public document once filed with Registrar of LLPs and may be inspected by general public including competitors by paying some fees to the Registrar of LLPs. Information disclosure can make an entity competitively disadvantaged. Competitors – especially those not required to disclose any documents – can access that information and use it to improve their own business.

4. Limitations in Formation of LLP: LLP cannot be formed by a single person. A non – resident Indian and a Foreign National willing to form a LLP in India must have one person resident in India to act as Designated Partner. Further FDI in LLP is allowed only through government route only and that too in those sectors only where 100% FDI is allowed under automatic route under the FDI Policy. This limitation makes LLP an unattractive form of business.

5. Offenses and penalties: Limited Liability Partnership Act, 2008 provides that for non-compliance on procedural matters such as delay in filing of e-forms, one has to pay default fee for every day for which the default continues. Such default fee would be payable at the rate of rupee one hundred per day after the expiry of the date of filing up to a period of three hundred days. The offense can result in either:-

(i)through payment of fine or

(ii) through payment of fine as well as imprisonment of the offender.

6. Exit Options are Not Easy for LLPs in default of Filings: A LLP who has defaulted in filings its
statement of accounts and annual return with the Registrar of LLPs, willing to shut down its operations
and wind up, will have to make its default good first by filing necessary e-forms with late filing fee. This
provision is making LLP an unattractive form of business as in India there are many businesses that are
ignorant about compliances.

7. Limitation in External Commercial Borrowings (ECB): Limited Liability Partnerships are not allowed
to raise ECB. Therefore, a LLP cannot avail commercial loans from its foreign partners, FIIs, Foreign
Banks, and any financial institution located outside India.

PROCEDURE FOR AN INCORPORATION OF LLP

The incorporation document shall be filed in Form FiLLiP (Form for incorporation of Limited Liability Partnership)
with the Registrar having jurisdiction over the State in which the registered office of the limited liability partnership
is to be situated.

If an individual required to be appointed as designated partner does not have a DPIN or DIN,application for allotment of DPIN shall be made in Form FiLLiP The application for allotment of DPIN shall not be made by more than two individuals in Form FiLLiP: an application for reservation of name may be made through Form FiLLiP: Provided also that where an applicant had applied for reservation of name under rule 18 in Form RUN-LLP (Reserve Unique Name-Limited Liability Partnership) and which has been approved, he may fill the reserved name as the proposed name of limited liability partnership.

THE SUMMARIES PROCEDURE FOR

Incorporation of LLP is as under:

  1. Procure DSC and DIN:

Procure DSC and DIN for the individuals acting as Designated Partners of LLP. A person, who already has a DIN, is not require to obtain any new DIN. Existing DIN to be used for Designated Partner (However, DIN should have all latest details such as resident of India, name, address etc.). Any person proposed to become the Designated Partner in a new LLP shall have to make an application through eform FiLLiP. An application for allotment of DIN up to two Designated Partners, shall be filed in an e-form FILLiP with the Registrar, in case of proposed Designated Partners not having approved DIN.

2. Name reservation: The first step in incorporation of an LLP is reservation of name of the proposed LLP. There
are two ways of reserving name of the proposed LLP.

i. File an application under LLP-RUN for ascertaining availability and reservation of the name of an LLP.

ii. Name can be proposed in eform FiLLiP, an application for incorporation of LLP.

3. Incorporate LLP: After reserving a name under LLP-RUN, applicant should file eform FiLLiP for incorporating a
new LLP. eform FiLLiP contains the details of LLP proposed to be incorporated, Partners’/ Designated Partners’
details and consent of the Partner/ Designated Partners to act as Partners/ Designated Partners. On approval
of the form, the RoC will issue the certificate of incorporation.

Where the Registrar, on examining Form FiLLiP, finds that it is necessary to call for further information or
finds such application or document to be defective or incomplete in any respect, he shall give intimation to the
applicant to remove the defects and re-submit the e-form within fifteen days from the date of such intimation
given by the Registrar.

After re-submission of the document, if the Registrar still finds that the document is defective or incomplete in
any respect, he shall give one more opportunity of fifteen days time to remove such defects or deficiencies:
Provided that the total period for re-submission of documents shall not exceed thirty days.

Documents to be attached with form FiLLiP:

i. Consent of the partners.

ii. In case of the partners who are body corporates, certified true copy of the board resolution is passed by such body
corporate partners.

iii. Proof of address of registered office of LLP.

iv. Subscribers’ sheet including consent.

v. Detail of LLP(s) and/ or company(s) in which partner/ designated partner is a director/ partner.

vi. Copy of approval obtained from any sectoral regulator/in-principle approval.

vii. Identity and address proof of individuals acting as Partner and/or Designated Partner.

viii. List of main objects of an LLP.

ix. If the name proposed is liked to registered trademark, NoC from the trade mark owner.


x. NOC of foreign body corporate for usage of name (In case of foreign entities intending to incorporate
LLPs in India).

WEBSITES REFERRED

  1. https://icsi.edu/media/webmodules/SBEC_BOOK_2020.pdf
  2. https://www.filingbazaar.com/service/llp-registration