Introduction

The traditional business vehicles most often seen in India are proprietorships, partnerships and incorporated companies. Of these, the former two are most vulnerable to lack of adequate capital and the business risks. The quantum of capital which these two business groups can bring in is limited and consequently, it is a hindrance to business expansion. Additionally the liabilities incurred by these groups during their ordinary course of business extend to their personal assets, particularly in the case of partners of a business firm. This has been a limiting factor for partners to undertake vertical and horizontal business expansion as the liability to creditors is unlimited. This has, to a certain extent, hindered faster development of entrepreneurship.

In order to mitigate the aforesaid hardships, there has been an urgent need for a new corporate form that would provide an alternate to traditional partnership, with unlimited liability, on the one hand and statute based governance structure of limited liability on the other. The resultant structure is the Limited Liability Partnership [LLP], which is a combination of both these features as it allows the benefit of limited liability and the flexibility of organizing the internal structure, as a partnership based on the mutual agreement. The professionals and the small and medium entrepreneurs eminently fit into the framework of the LLP to organize their business in a most efficient manner.

Incorporation of an LLP

The LLP Act, 2008 inter area, provides for incorporation of LLP's as a business vehicle. Two or more individuals or organizations, by subscribing their names to an "Incorporation document" and by giving details pertaining to the name of LLP, proposed business, address of the registered office, name, address & photographs of the proposed partners of the LLP, and name and address of the persons who are named as "Designated Partners" for compliance with the legal provision of the Act. Such an LLP can be formed to carry on any lawful business and to make profits.

In terms of minimum number of partners required, the provision of LLP is analogous to a private limited company under the Companies Act, 1956 (Companies Act).. There is no limit on the maximum number of partners unlike in the Partnership Act.

The incorporation document together with the partnership agreement, if any, between the partners should be delivered to the Registrar of Companies (ROC). A statement of compliance with the LLP Act duly signed by an Advocate or Company Secretary or Chartered Accountant, who is in whole time practice is also required to be delivered to the ROC.

The ROC on receiving the documents aforesaid and if satisfied with the documents, will register the LLP and issue an "Incorporation certificate". The certificate is the conclusive proof that all the statutory requirements of the Act have been complied with and the LLP has been incorporated by the name stated in the Incorporation Certificate.

Funding of an LLP

Funding of an LLP is described in the LLP Act as "Contribution" of partners. This may consists of tangible or intangible property, movable or immovable or other benefit to the LLP. This means contribution of a partner may be in cash or kind or provision of service to the LLP, as per the partnership agreement. This will make capital contribution quite flexible, unlike in the case of a company where initial capital has to be made by subscribing in cash to the share capital of a company. The partnership agreement, which forms the basis of contribution, is a public document, and a creditor who has provided credit to the LLP placing reliance on the partnership agreement, may enforce the obligation undertaken by a partner of the LLP.

Composition of an LLP

An individual or a body corporate may become a partner of an LLP and it should also have two "Designated Partners" who are individuals and atleast one of them should be a resident of India. Where the LLP consists of only bodies corporate, atleast two individuals who are nominees of the bodies corporate should act as "Designated Partners". A designated partner is responsible for doing all acts, matters and things as are required to be done by an LLP in respect of compliance of the LLP Act, including in particular filing of documents, returns, statements and the like report and also for all penalties imposed on the LLP for contravention of any of the provision of the Act. Any vacancy in the position of the "Designated Partners" will have to be filled up within 30 days.

On incorporation of an LLP, the persons who have subscribed their names to the incorporation document become the partners of the LLP. Any other person may also join as a partner of the LLP in accordance with the partnership agreement and with the consent of all the existing partners. The mutual rights and duties of the partners are governed by the partnership Agreement. Each partner is an agent of the LLP but not an agent of other partners and consequently the obligation of a partner is to the LLP.

In the absence of a partnership agreement between the partners of the LLP, the provisions of first schedule to the LLP Act will apply. The first schedule inter alia, provides that (a) all the partners are entitled to share equally in the capital, profits and losses of the LLP, (b) the LLP should indemnify each partner in respect of payments made by him and personal liability incurred by him in the ordinary and proper conduct of the business of the LLP and for anything done for the preservation of the business or property of LLP. A person ceases to be a partner on his death or dissolution of LLP as the case may be. The cessation of a partner does not itself discard the partner from any obligation to the LLP or other partners. A former partner is entitled to his/her share of profit and on the death, insolvency of a partner; his legal heirs are entitled to receive an equal share in the accumulated profit of the LLP after deduction of accumulated losses if any. The legal heir will not have any right to interfere in the management of the LLP.

A partner of an LLP may resign from partnership of the LLP by filing a notice with the LLP. The registrar is also required to be notified of the cessation of any partner or a new person becoming a partner of the LLP.

Liability of Partners

Every partner of an LLP is an agent of the LLP. An LLP is not bound by anything done by a partner in dealing with a person, if the partner has no authority to act and the person dealing with such a partner knows that he has no authority to act as a partner of the LLP. The LLP is also liable, if a partner is liable to any person on account of wrongful act or omission on his part in the normal course of business or with its authority. A liability created whether arising in contract or otherwise shall be the sole obligation of the LLP and such liability shall be met out of the property of the LLP. The business dealing of a partner will have the effect of holding himself out as a partner of the LLP and as such he becomes liable to any person who has given credit to an LLP.

Financial Disclosures

The financial provisions in the LLP Act are analogous to the provision of the Companies Act. As in the case of companies, LLP's are also required to maintain proper books of accounts, as may be prescribed, relating to its affairs every year, on cash or accrual basis and according to double entry system of accounting. The books of accounts are to be maintained at the registered office of the LLP.

Every the LLP is required to prepare, within a period of six (6) months from the close of the financial year, a statement of accounts and solvency, in such form as may be prescribed. These are to be audited, signed by Designated Partners of the LLP and filed with ROC. Failure to do so attracts heavy penalty on the LLP and the Designated Partners. The LLP is also required to file with the Registrar an Annual Return (AR), duly authenticated within 60 days of the closure of the financial year. Failure to do so also attracts heavy penalty.

The above documents as also the incorporation document, names of partners and changes, if any made therein are open for inspection by any person, in such manner as may be prescribed. Access to these documents will give an opportunity to those who deal with the LLP to understand the LLP's constitutional and its financial position at the end of each financial year. This will place the LLP on par with companies and ensures transparency in their operations.

Conversion to an LLP

This is a unique feature of the LLP Act. It provides for conversion of a firm, a private company and unlisted public company into a LLP, in accordance with the procedure laid down in the Second, Third & the Fourth schedules to the LLP Act. The advantages of conversion, lies in the organisation flexibility for each of it partners to carry on the business of LLP as its agent and not the agent of other partners. The equation of partners with LLP is on one to one basis

The Second Schedule provides for detailed procedure for conversion of a firm into an LLP, subject to the condition that all the existing partners of a firm should be partners of the LLP and no one else. The procedure for conversion starts with the presentation of certain information to the Registrar, containing: (i) A statement by all the partners containing the name & registration no. of the firm, if applicable; (ii) The date on which the firm was registered under the Indian Partnership Act, 1932 or any other law, as may be applicable. (iii) Incorporation document containing - (a) the name of the LLP, (b) the proposed business of the LLP, (c) the address of the registered office, (d) the name & address of each of the persons who are to be partners of the LLP, on incorporation, (e) the name & address of the persons who are to be Designated Partners of the LLP, on incorporation.

On receiving the documents referred to above, the Registrar will register the documents and issue a certificate of registration stating that the Firm is, on and from the date specified therein, registered under the LLP Act. The LLP, within 15 days of its incorporation, inform the Registrar of Firms about the conversion into an LLP.

The effects of registration into an LLP are as under:-

a) All tangible property (movable & immovable) as well as intangible property vested in the firm, all assets, interests, rights, privileges, liabilities, obligations relating to the firm and the whole of the undertaking of the firm are transferred to and vest in the LLP without further assurance, act or deed, and

b) The firm is deemed to be dissolved and if registered under the Indian Partnership Act, 1932 removed from the record maintained under that Act.

c) All proceedings by or against the firm, every agreement, deeds, contract including employment contracts, appointments of the firm etc are enforceable against LLP.

d) Notwithstanding what is stated above, every partner of a firm that has been converted into LLP will continue to be personally liable for the liabilities and obligations of the firm, incurred prior to the conversion.

e) If any partner discharges any liability as aforesaid, he shall be entitled to be indemnified by the LLP, subject to the terms of any agreement.

f) The LLP is required to ensure that for a period of 12 months commencing not later than 14 days of the registration, every official communication of the LLP should bear a statement that it was converted from firm into LLP, together with the name and registration of the firm from which it was converted.

Conversion of a Private Company into an LLP

The Third Schedule provides for conversion of a private company into LLP if and only if (a) there is no security interest subsisting in force at the time of application for conversion, and (b) the partners of the LLP consist of the shareholders of the private company and no one else. All other procedures as mentioned above in the case of a firm are also applicable in the case of a private company except that the conversion of private company into LLP and dissolution of the private company should be informed to the Registrar of Companies.

Conversion of an unlisted public company into an LLP

The Fourth Schedule to the LLP Act provides for conversion of unlisted public company into an LLP. The procedure detailed above and applicable in the case of a private company is equally applicable in the case of unlisted public company.

Foreign Limited Liability Partnership

Section 59 of the LLP Act empowers the Central Government to prescribe rules for the establishment of a place of business by foreign limited partnerships within India for the purpose of carrying on business. This may be done by applying or incorporating, with such modifications, as may be appropriate under the Companies Act, 1956 or with such regulatory mechanism as may be prescribed.

Other matters

The LLP Act also provides for the following:-

a) Compromise, Arrangement or Reconstruction of LLP's

b) Winding up & Dissolution of LLP's

c) Investigation into the affairs of LLP.

The Central Government is empowered by the LLP Act to direct that any of the provisions of the Companies Act, 1956 as specified in the notifications shall apply to LLP or shall apply to any LLP with such exception, modification and adaptation as may be specified.

Conclusion

It is expected that a number of firms, private and unlisted public companies will get the benefit of limited liability and the flexibility it offers for internal management of business by the LLP Act. In particular, professionals and small entrepreneurs will find the LLP model an ideal opportunity to regulate their business under the LLP Act and make best use of the protective umbrella that the statue offers. All these will result in faster expansion of business and add a new dimension to the economic growth of Indian economy.