All you need to know about a Limited Liability Partnership

Introduction

Up until a few decades, businesses were limited to being either a company, partnership or sole proprietorship. Each kind of organisation had its own advantages and disadvantages; for instance, Partnership and proprietorship were easier to form and operate but did not have a limited liability which was a prominent feature of a company. The development in the way businesses function has resulted in the formation of a Limited Liability Partnership (LLP) which could be termed as a fusion between the benefits of a company and a partnership. This article will tell you all about limited liability partnerships, their advantages and the procedure to set up an LLP.

Meaning and features of a Limited Liability Partnership (LLP)

LLP is a fairly new concept in the world of businesses. Section 3 of the Limited Liability Partnership Act, 2008 defines an LLP as “a body corporate formed and incorporated under this Act and is a legal entity separate from that of its partners.” In layman’s terms, it can be understood as an amalgamation of a company and partnership due to its business model which allows the organisation to reap the benefits of limited liability to the partners at relatively low costs compared to traditional models. This form of organisation is suitable for small and medium-size businesses.

Salient features of a Limited Liability Partnership

• Corporate Body — It is stated under Section 3(1) of the Limited Liability Partnership Act, 2008 that an LLP comes under the head of a ‘corporate body’. In simpler terms, it is a corporate entity that has a legal existence and such legal existence is a result of the registration of incorporation with a registered LLP office.


• Separate Legal Entity — Section 3(1) of the Limited Liability Partnership Act, 2008, also mentions that an LLP is a separate legal entity. The term can be understood as ‘a person recognised by law.’ The term separate legal entity was discussed in the landmark case of Salomon vs Salomon & Co. Ltd. (1897) wherein it was established that an entity that has its own legal rights and obligations, separate from those running the business operations.


• Perpetual succession — Section 3(2) of the Limited Liability Partnership Act, 2008, states that an “LLP”, just like a “joint-stock company”, has a “perpetual succession” i.e., it can only be formed and dissolved by a legal process. This also implies that the assets and liabilities of the LLP belong to itself irrespective of the retirement, insanity, insolvency or even death of one or more partners. In a nutshell, no partner is allowed to claim any part of the company in case of either continuance or winding up.


• Mutual agency — Mutual Agency can be described as a type of agreement between the partners of a firm in which the actions of one partner are binding on the others. In the case of an LLP, there is no mutual agency unlike in a traditional partnership firm. This implies that all the partners simply serve as an agent to the LLP and the action of one partner does not bind the other.


• Artificial legal person — As an LLP is created by a legal process, it is assumed that it is a non-fictitious legal person with all the rights bestowed upon an individual. It however is deemed artificial as it has no physical existence, thereby becoming invisible, intangible and immortal. It cannot hence exercise rights like marrying and divorcing or be sentenced to jail or taking an oath.


• Limited liability — Section 26 of the Limited Liability Partnership Act, 2008 states that every partner is regarded as an agent to an “LLP”, i.e., They share a relationship of principal and agent. This however is not applicable amongst the partners as they do not serve as each other’s agents. In a nutshell, the liability of each partner is limited to the agreed amount in the LLP agreement.


• Common seal — It is not mandatory for an LLP to have a common seal. A common seal can be defined as an official seal of an organisation that is used to execute contracts. However, Under Section 14(c) of the Limited Liability Partnership Act, 2008, it is possible to create a common seal if desired under an authorised official of the organisation.


• Profit-driven — In order to form an LLP, it is crucial that the business should be formed in accordance of law with the aim of earning a profit. This implies that a Limited Liability Partnership cannot be formed for organisations that are charitable or not-for-profit in nature.

Composition of a Limited Liability Partnership

In order to form a limited liability partnership, it is mandatory to have at least two persons with no limitation to the maximum number of persons. The following ‘persons’ can be involved as partners: Individuals, Limited Liability Partnerships, Companies, Foreign Limited Liability Partnerships, Foreign Companies. Apart from the above conditions, it is mandatory that one of the partners is a resident in India.

Structure of a Limited Liability Partnership

The LLP Act states that an LLP shall be a ‘body corporate’ and a ‘legal entity’ which is separate from its partners. It is also given that the organisation would have perpetual succession. The only factors excluding an individual from being capable of becoming a partner of an LLP are: unsound mind (court-declared), undischarged insolvent, or pending insolvency adjudication.

Responsibilities of partners in a Limited Liability Partnership

Section 2(g) of the Limited Liability Partnership Act, 2008 states that in an LLP, a “Partner” is regarded to be a person who becomes a “partner in the LLP in accordance with the LLP agreement.” Key duties include:

• Carrying on business advantageously and faithfully, rendering true accounts.


• Indemnifying for fraud caused by a partner.


• Notifying the Registrar of changes (structure, partners' details, office address).


• Filing annual returns, statements of accounts, and preserving documents.


• Designated partners sign statements of accounts & solvency.

How to set up a Limited Liability Partnership

1. Obtaining the Digital Signature Certificate (DSC) — For all designated partners (required for online filing).


2. Applying for the Director Identification Number (DIN) — Via Form DIR-3 for designated partners.


3. Approval of name for the LLP — File Form LLP-RUN (up to 2 names); check uniqueness on MCA portal; fees apply; resubmit within 15 days if needed.


4. Incorporation of LLP — File Form FiLLiP with the state Registrar; fees per rules.


5. Filing the LLP agreement — File Form 3 within 30 days of incorporation (on stamp paper; value varies by state).

Drawbacks of setting a Limited Liability Partnership

• Unequal partner rights (depends on LLP agreement, no equal voting like shares).


• Heavy penalties (e.g., Rs. 100 per day for non-filing of returns).


• Funding problems (no equity shareholders; relies on promoters/debt).

Difference between LLP and general partnership

Difference between LLP and LLC

Laws applicable on Limited Liability Partnerships in India

Governed primarily by the Limited Liability Partnership Act, 2008. The Central Government can apply modified provisions of the Companies Act, 1956 via notification.

A brief overview of Limited Liability Partnerships functioning in other countries

LLPs exist in the UK, USA, Australia, Singapore, etc. Two main models: Texas (limited vicarious liability for wrongful acts) and Delaware (liability shifted to LLP; India follows Delaware more closely). Brief mentions of Japan (introduced 2006), UK (early 2000s), US (late 1990s, state-varying), and Singapore (2005).