LLP Explained: All About Limited Liability Partnerships

Limited Liability Partnerships (LLPs) have become popular for businesses in India due to their unique blend of partnership and corporate structures. It provides operational flexibility, ease of operation, and tax benefits while maintaining a simplified compliance regime. 

The legal framework for LLPs is governed by the Limited Liability Partnership Act 2008 and regulated by the Ministry of Corporate Affairs. LLPs allow entrepreneurs to focus on business growth without worrying about personal liabilities, making them a boon for startups and small to medium-sized enterprises in India.

In this blog, let’s understand the Limited Liability Partnership and explore its key features, advantages, and legal framework in India. 

Overview of Limited Liability Partnership (LLP Explained)

Entrepreneurs often evaluate various options when choosing the proper legal structure for a business in India. One popular choice is Limited Liability Partnership (LLP), which provides a unique blend of flexibility and liability protection. 

A Limited Liability Partnership (LLP) is a business entity that combines the advantages of both partnerships and companies. It provides its members with limited liability protection, like that of a company, while maintaining a partnership’s flexibility and tax benefits. In an LLP, the partners have limited liability for the firm’s debts and obligations, shielding their personal assets from business risks. LLPs offer limited liability protection to their partners, shielding personal assets from business risks. 

To form an LLP in India, a minimum of two partners is required, and there is no upper limit on the number of partners. Each partner’s liability is limited to their agreed contribution to the LLP, and they are not personally liable for the actions or debts of other partners. This aspect offers a sense of security to entrepreneurs, encouraging them to explore new business opportunities without risking their personal assets.

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Understanding Limited Liability Partnerships 

A Limited Liability Partnership (LLP) is a business entity that bonds the features of a partnership and a corporation. It provides its partners with limited liability protection while retaining the flexibility and tax benefits associated with a partnership.

In an LLP, the partners have limited personal accountability for the liability of the debts and obligations of the partnership. This means that their personal assets are protected, and they are not personally liable for the partnership’s financial liabilities or legal obligations. The LLP itself is considered a separate legal entity distinct from its partners.

To establish an LLP, partners must comply with the regulatory requirements of the respective jurisdiction. This typically involves filing the necessary documents with the appropriate government authorities, such as the incorporation agreement and partner details. LLPs are governed by specific laws and regulations that vary from country to country.

Illustration:

To illustrate the concept of a Limited Liability Partnership (LLP), let’s consider an example of a software development company called “TechGenius LLP”.

TechGenius LLP is a partnership between two talented software developers, Alice and Bob. They decide to form an LLP to combine their skills, resources, and entrepreneurial ambitions while enjoying the benefits of limited liability protection.

In the LLP, Alice and Bob contribute their technical expertise, equipment, and capital to establish the business. They draft a partnership agreement that outlines the terms and conditions of their partnership, including profit-sharing arrangements, decision-making processes, and management responsibilities.

One day, TechGenius LLP secures a large contract from a major client to develop a customised software solution. The project requires significant investment in infrastructure, hiring additional developers, and procuring specialised software tools.

During the development process, a critical bug is discovered in the software, which leads to a temporary system failure for the client. As a result, the client faces financial losses and is considering legal action against TechGenius LLP.

Fortunately, the limited liability protection offered by the LLP structure protects Alice and Bob’s personal assets. Only the assets owned by the LLP itself, such as the equipment and company funds, are at risk. The client can seek compensation from the assets of the LLP, but their claims cannot extend to Alice and Bob’s personal savings, homes, or other personal belongings.

TechGenius LLP takes responsibility for the situation and works diligently to rectify the issue, fix the software bug, and compensate the client for their financial losses. They are able to do so using the funds and assets held by the LLP.

In this example, the LLP structure allows TechGenius LLP to navigate business challenges, share risks, and protect the personal assets of its partners while pursuing growth opportunities in the software development industry.

Features of LLP

Limited Liability Partnerships (LLPs) possess several distinctive features, making them an appealing business structure for entrepreneurs. These features make LLPs a preferable option for businesses in India. 

1. Flexibility in Business Management: 

LLPs provide flexibility in the management and operation of the business. The partners can design the internal structure and management hierarchy according to their preferences. This flexibility allows for efficient decision-making and swift adaptation to market changes.

2. Partner’s Agreement:

LLPs are governed by a partnership agreement outlining the partners’ rights, responsibilities, and obligations. This agreement allows for customisation of the LLP’s internal operations, profit-sharing arrangements, decision-making procedures, and other important aspects of the partnership.

3. Perpetual Succession: 

LLPs enjoy perpetual succession, meaning that the entity continues to exist even if there are changes in the partners’ composition. The retirement, death, or exit of a partner does not affect the existence of the LLP, ensuring continuity and stability for the business.

4. A Corporate Body

According to Section 3 of the Limited Liability Partnership Act 2008, an LLP is a corporate body & legal entity distinct from its partners incorporated under the Act.

5. Artificial Legal Person

For all legal purposes, LLP acts as an artificial legal person. It has all the rights of an individual through legal process. It is intangible and immortal but not apocryphal since it exists.

6. Limited Liability

According to Section 26 of the Act, the liability of each partner has limitations to his agreed contribution to the LLP. This provides personal liability protection to its partners.

7. Number of Partners in an LLP

Every Limited Liability Partnership must have at least two partners. There is no maximum limit on the number of maximum partners in the entity.

8. Actions of a Partner

In an LLP firm, one partner’s independent or unauthorised actions do not make the other partners liable.

9. Common Seal of the Company

If the partners decide, the LLP can have a common seal for the firm [Section 14(c)]. It should be affixed only in the presence of at least two designated partners of the LLP. It is not mandatory, though. 

10. Business With Margins

Limited Liability Partnerships cannot be charitable or non-profit organisations. It’s a lawful business with a goal of earning a profit.

11. Investigation

Only the Central Government has the authority to investigate the affairs of an LLP.

12. Business Arrangements

Any dispute, arrangement or compromise, like a merger or amalgamation, must be in accordance with the Act.

13. Conversion into LLP

A private company or small business can be transformed into an LLP in accordance with the provisions of the Act.

Legal Framework and Compliance:

LLPs in India are governed by the Limited Liability Partnership Act 2008 and regulated by the Ministry of Corporate Affairs (MCA). To establish an LLP, partners must file the necessary documents, such as the incorporation agreement and partner details, with the Registrar of Companies (RoC).

LLPs are required to maintain proper books of accounts and file annual returns with the RoC. However, audit requirements depend on the LLP’s turnover and contribution. If the annual turnover exceeds a certain threshold or the contribution surpasses a specified limit, the LLP must get its accounts audited.

Advantages of Limited Liability Partnerships:

1. Limited Liability Protection

The primary advantage of an LLP is that it offers limited liability protection to its partners. This means partners are personally safeguarded from the business’s liabilities and debts, limiting their financial risks.

2. Flexibility and Ease of Operation

LLPs offer operational flexibility and less stringent compliance requirements than companies. Partners have the freedom to manage the business and make decisions without excessive bureaucratic procedures.

3. Tax Benefits 

LLPs enjoy tax advantages, as they are not subject to dividend distribution tax and can pass through profits or losses directly to the partners. This avoids the double taxation that companies often face.

4. Limited Compliance Burden 

LLPs have a simplified compliance regime compared to companies. They are not required to conduct audits for businesses below a certain threshold, reducing compliance costs and administrative burdens.

5. Separate Legal Entity

An LLP is considered a separate legal entity from its partners. An LLP can own assets, get into contracts, and sue or be sued in its own name. This distinct identity enhances the business’s credibility and perception in the stakeholders’ eyes.

6. Reduced Compliance Requirements

Compared to other companies, LLPs have relatively relaxed compliance requirements. They are not obligated to hold annual general meetings, and there are fewer statutory filings. LLPs’ compliance burden is further reduced below a certain turnover and contribution threshold, minimising administrative costs.

Did you know? If you are an LLP-registered company in India, you don’t get a CIN (Corporate Identification Number); instead, you can avail of LLIP (Limited Liability Identification Number). The LLIP provides you with your unique firm identification number for your business on your incorporation documents and in public register government portals.

Banking With Limited Liability Partnerships

Banking is difficult in an LLP firm as some partners have unlimited liability while others have limited access to capital towards investment and maintenance via the organisation. It’s crucial to have good banking and payment gateway support.

NTT DATA Payment Services provides you with the best payment gateway support. You get banking support from over 50+ banks and can access 100+ payment options. With NTT DATA Payment Services, you can have a robust set of capabilities to aid your business in growing revenue unlimitedly, and it’s completely risk-free & secure.

NTT DATA Payment Services offers a complete payment solution to advance your offline and online businesses from,

• Online Payment Gateway
• POS machines
• IVR payments
• Mobile applications, and
• Bharat QR Scan and Pay

We ensure maximum comfort, convenience, and safety for all your payments.

Incorporation of LLP is Good For Your Business

Limited Liability Partnerships (LLPs) have emerged as a popular choice for businesses in India, providing flexibility, liability protection, and tax benefits. The concept of LLPs has gained traction due to its ease of compliance, minimal capital requirements, and the ability to adapt to changing business dynamics. By opting for an LLP, entrepreneurs can focus on their business growth without worrying about personal liabilities.

With proper planning and professional guidance, an LLP can be an effective vehicle for business growth and success in the dynamic Indian market.

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Frequently Asked Questions (FAQs)

1. What is the major advantage of LLP?

The major advantage of an LLP firm is that all the partners’ personal assets are not subjected to inception or action as they are all limited to the individual. Each partner is only liable for their actions, not responsible for the actions of other partners.

2. What is the purpose of LLP?

LLP allows you to have the benefits of a limited company and is also flexible of a partnership at the same time. LLP can continue to exist even if the partners change. It is capable of holding property in its own name.

3. How many partners are needed in an LLP firm?

An LLP must have at least 2 partners, to begin with; It can scale up to more than 50+ partners. However, you can run your LLP business for a maximum of 6 months if you are a single partner, and you will be held accountable for all your actions during the course of time.

4. Is GST required for LLP?

No GST is not mandatory to file an LLP. Eventually, you will be required to submit your GST details during taxation based on your turnover and service type.

5. What is the tax percent in LLP?

LLP firms are subjected to a 30% tax, similar to a partnership firm. The partners are expected to file their tax returns on 30%.