Incorporation of LLP
A new trend that has been observed of late is that more and more entrepreneurs and startups have started opting for Limited Liability Partnerships. But what is a Limited Liability Partnership? Structure
Before answering this question we’ll explain you reasons behind the emergence of LLP’s. Till a few years back there used to be only 2 forms of Organizations
- Limited Liability Organizations i.e. Companies
- Unlimited Liability Partnerships i.e. Partnership/ Proprietorship
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Both these forms of organizations have their own Benefits and Losses (plus and minuses). There is limited liability of the Owners in a Company as compared to Partnerships/Proprietorship which are easy to form and operate but Small Businesses & Professionals usually tend to opt for Partnerships as they are easy to form and operate.
However, as Businesses grew there was a need for a form of organization which was a hybrid between the 2 forms of organizations. Moreover, the rapid growth of Service Sector created an environment and a demand for a new form of Organization. Thus, the concept of Limited Liability Partnership was evolved which incorporates the benefits of both Companies as well as Partnerships.
Meaning of LLP
The Law defines LLP as:
“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”
Why LLP is better for Startups
- The LLP has Separate Legal Entity i.e. the LLP and the partners are distinct from each other.
- Minimum of 2 partners are required to form a LLP. However, there is no limit on the maximum number of partners.
- No requirement of Minimum Capital Contribution.
- The LLP Act does not restrict the benefit of LLP structure to certain classes of Professionals only and would be available for use by any enterprise.
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Benefits/Advantages for Forming a LLP
- The Liability of each partner is limited to his share as written in the Agreement filed at the time of creation of LLP.
- The Partners are not liable for the acts of other Partners.
- Less Restrictions and Compliance are enforced on a LLP by the Govt. as compared to the restrictions enforced on a Company.
- 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
- Renowned and accepted form of business worldwide in comparison to Company.
- Low cost of Formation.
- Easy to establish.
- Easy to manage & run.
- No requirement of any minimum capital contribution.
- No restrictions as to maximum number of partners.
- LLP & its partners are distinct from each other.
- Less Compliance level.
- No exposure to personal assets of the partners except in case of fraud.
- Less requirement as to maintenance of statutory records.
- Less Government Intervention.
- Easy to dissolve or windup.
- Professionals can form Multidisciplinary Professional LLP, which was not allowed earlier.
- Audit requirement only in case of contributions exceeding Rs. 25 lakh or turnover exceeding Rs. 40 lakh
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Annual Filing for LLP ( Form 8 & Form 11) Due Dates:
According to Section 34 of Limited Liability Partnership Act, 2008 read with LLP Rules, every LLP shall file statement of Accounts and Solvency Under e-Form 8 with prescribed fee within a period of thirty days from the end of six months of the financial year to which such statement relates.
Due date of filing form 8 is 30th October for each year.
Note: if LLP fails to file Form-8 within prescribed time, an additional fees of Rs. 100/- is payable per day till date of filing
Content of Form – 8:
Part A- Statement of Solvency
Part B – Statement of Accounts, Statement of Income and Expenditure
Attachments – Disclosure under Micro, Small and Medium Enterprises Development Act, 2006
Form 8 is to be signed by digitally by two designated Partner and Certified by Company Secretaries (in whole time practice)/Chartered Accountants (in whole time practice)/Cost Accountants (in whole time practice)
What is Form 11
Form 11 is Annual Return containing number of partners, total contribution received by all partners, details of partners, details of body corporate as partners, summary of partners.
Every LLP shall file Annual Return within Sixty days from the closure of the Financial year along with prescribed fees.
Due date for filing Form 11 is 30th May for each year.
Note: if LLP fails to File Form 11 within prescribed time, the designated partners shall be liable to be punishable with fine which shall not be less than Rs.25000 but which may extend to Five Lakh Rupees.
Difference between LLP & Traditional Partnersh
The basic difference between LLP and Partnership is with regard to the Liability of the Partners.
In a Partnership Firm, every partner is liable, jointly with all the other partners and also severally for all acts of the firm done while he is a Partner.
However, under the LLP structure, liability of the partner is limited only to his agreed contribution. Further, no partner is liable on account of the independent or unauthorized acts of other partners, thus allowing individual partners to be shielded from joint liability created by another partner’s wrongful acts or misconduct.
Difference between LLP & Company
The major difference between LLP’s and Company’s is that there are less Regulatory and other Compliance Regulations applicable on a LLP which makes it Easy and Cost Effective to Manage.
Taxation of LLP’s in India
In India, the Govt. has notified that LLP’s would be taxed in the same form as Partnerships i.e. Tax would be levied on the LLP and the partners would be exempt from Tax.
Moreover, as LLP’s would be taxed in the same form as Partnership Firms, no tax would be levied on the conversion of Partnership Firms into Limited Liability Partnership.
The Income Tax Return shall be signed and verified by the designated partner and where for any unavoidable reason the designated partner is not able to sign the return of income or where there is no designated partner, by any other partner.
Key Incorporation Requirement:
- Designated Partners
- Director Identification Number
- Digital Signature Certificate
- LLP Name
- LLP Agreement
- Registered Office
Atleast 2 persons (natural or artificial) are required to form a LLP. In case any Body Corporate is a partner, than he will be required to nominate any person (natural) as its nominee for the purpose of the LLP.
In case of LLP, there is no concept of any share capital but every partner is required to contribute towards the LLP in some manner. The said contribution can be tangible, movable or immovable or intangible property or other benefit to the limited liability partnership, including money, promissory notes, and other agreements to contribute cash or property, and contracts for services performed or to be performed.
‘Designated Partner’ means a partner who is designated as such in the incorporation documents or who become a designated partner by and in accordance with the Limited Liability Partnership Agreement.
Every limited liability partnership shall have at least two designated partners who are individuals and at least one of them shall be a resident in India
Director Identification Number
Every Designated Partner is required to obtain a DIN from the Central Government. If a person already has a DIN, the same can be used for forming LLP.
Digital Signature Certificate
All the forms like eForm 1, eForm 2, eForm 3 etc which are required for the purpose of incorporating the LLP are filed electronically through the medium of Internet. Since all these forms are required to be signed by the partner of the proposed LLP and as all these forms are to be filed electronically, it is not possible to sign them manually. Therefore, for the purpose of signing these forms, all the Designated Partner of the proposed LLP needs to have a Digital Signature Certificate (DSC).
The Digital Signature Certificate once obtained will be useful in filing various forms which are required to be filed during the course of existence of the LLP with the Registrar of LLP.
Selection of the name for the proposed LLP to be incorporated is one of the important process of the entire incorporation process, ideally the name of the LLP should be such which represents the business or activity intended to be carried on by the LLP.
For the purpose of forming a LLP, there should be agreement between the partners interested in forming the LLP to be known as LLP Agreement. The said Agreement forms the basis of the formation of LLP and lays down its founding structure. The LLP agreement is an agreement between the Partners and between the LLP & its partners.
The basic contents of Agreement are:
- Name of LLP
- Name of Partners & Designated Partners
- Form of contribution
- Profit Sharing ratio
- Rights & Duties of Partners
In case no agreement is entered into, the rights & duties as prescribed under Schedule I to the LLP Act shall be applicable. It is possible to amend the LLP Agreement but every change made in the said agreement must be intimated to the Registrar of LLP.
The Registered office of the LLP is the place where all correspondence related with the LLP would take place, though the LLP can also prescribe any other for the same. A registered office is required for maintaining the statutory records and books of Account of LLP.
At the time of incorporation, it is necessary to submit proof of ownership or right to use the office as its registered office with the Registrar of LLP.
Procedure/Steps Involved in Formation:
|1||DSC ( Digital Signature Certificate)||Documents Required (Self attested):|
|2||DPIN (Designated Partner Identification Number)|
Approved DPIN is a pre-requisite for incorporation process
| Apply for DPIN and get a provisional DPIN|
Certification/Attestation of Director’s Personal Details
Sending the same to the MCA cell and getting it approved
|3||Pre-Name Application Search||Ø The promoters have to provide atleast 6(six) names in the order of priority|
Ø To make an online search of availability of names as desired by the Promoters
|4||Application for name availability|
Filing of From 1
6 Name for the proposed LLP
Main object Clause
|To draft the Main Object to be pursued by the LLP after Incorporation|
|5||Representation before ROC on behalf of Promoters||Changes to be made in the Name application, if any, suggested by the ROC|
|6||Documents required for incorporation of an LLP|
From 2 (Statement by Promoter)
Form 3 (Information regarding the LLP Agreement)
Form 4 & Form 9 (Notice of Consent & Appointment of Designated Partners with their Personal details)
Subscription sheet signed by the promoters
Duly stamped LLP Agreement
Proof of Address of Registered Office
| Drafting the LLP Agreement and after getting it vetted by Promoters, sending it for Printing|
Processing of e-forms
Filing all the above documents with the ROC, follow up with the ROC
Making changes in LLP agreement/other Incorporation documents as suggested by the ROC
| Online uploading of e-forms|
Payment of Registration Fees
Issue of Certificate of Incorporation
Formation of an Indian Limited Liability Partnership
- Minimum 2 Partners
- Minimum 2 Designated Partners
- At least 1 of the designated partners shall be an Indian Resident
- If a body corporate is a partner, it has to nominate a natural person as its nominee
- The partners and designated partners can be same person
- There is no concept of share capital, but there has to be some sort of contribution from each partner.
- DPIN (Designated Partner Identification Number) for all the Partners
- DSC (Digital Signature Certificate) for one of the Designated Partners