An Introduction to Limited Liability Partnership
Any kind of business partnership form is prone to suffer from unlimited liability. The liabilities of the partners involved in the business tend to extend to their personal assets. And this, in turn, makes the partnerships undesirable for many entrepreneurs. However, there exists a solution for this kind of issue which is known as limited liability partnerships, which is referred to as the LLPS full form. Let us discuss LLP and Private Limited and how to change from LLP to Private Limited Company.
LLPs are actually very common, and it is not like one needs to be an accountant or a lawyer to actually grasp the meaning behind it. LLPs are very common due to the fact that it deals with limited liabilities. This means a sort of business partnership where all the liabilities a person has been restricted to the money he/she invests only. This means that in case the person is unable to get profitable returns, creditors cannot seize their personal assets.
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Limited Liability Partnerships
Partners of the partnership firms possess unlimited liability for their total debts and legal consequences. In this, their assets are liable to get attached to meet the debts and liabilities of the firm. However, the LLP formation solved this issue.
LLPS have all the primary features of a partnership firm, except that of the unlimited liability of the partners involved and same legal entity status. Also, llps include legal existence and the identities are separate from their partners.
LLP Meaning
The Limited Liability Partnership Act was passed by the Parliament of India in the year 2008 for governing the LLP businesses in the country. The Section 2 of this law states that the LLP is a type of partnership which is registered under this act. Also, the LLP agreement refers to the written agreement between either the LLP partners or the LLP itself and its partners. This agreement tends to define the duties, liabilities, rights and powers of the partners in the LLP.
Since this Limited Liability Partnership Act typically governs the LLPs in India, the Indian Partnership Act, 1932 provisions are not applicable to the Limited Liability Partnerships. They are only applicable to the traditional partnership businesses.
Nature of Limited Liability Partnership
The Limited Liability Partnership consists of the features mentioned below:
1. Distinct Legal Entity
The Limited Liability Partnerships, unlike the traditional partnership firms, are considered as separate legal entities. LLPs may own assets and incur the liabilities in their names. Also, they can enter into the contracts and can sue and be sued in their names.
2. Limited Liability of the Partners Involved
The liabilities of the partners in an LLP are limited and separate. Their personal assets are not liable to the attachment if the LLP is suffering or winding up legal consequences of debt or repayments.
However, the liability of the partners could become unlimited in certain offensive cases like frauds, illegal and wrongful acts, or commission of offences.
3. Profit Sharing
All the partners of the Limited Liability Partnership would share business profit similar to the partners of the traditional firms. However, they are free to decide the profit ratios amongst themselves.
4.Partners of Limited Liability Partnerships
The partners of the LLPs can be either body corporations or individuals. Also, an individual cannot be a partner in an LLP in case he or she is insolvent or does not have a sound mind.
The LLPs should have at least two partners during all the times. Furthermore, the number of the partners that can be involved is unlimited, whereas in the regular partnership firms the partners are restricted to a number of 50 people. If, in case, the number of LLP partners get less than two and if the sole partner carries the business for over six months, then under these circumstances, their liability towards the business’s firm would be unlimited.
LLP and Partnership
Given below is the Difference Between a Limited Liability Partnership and the Traditional Partnership.
Difference Between a Limited Liability Partnership and the Traditional Partnership
The Number of Partners in LLP
Every LLP needs to have at least two people that are partners, and two people that are designated partners. The number can extend to anything beyond this, but this is the minimum that is required. At least one of the designated partners needs to be an Indian citizen and resident. There is no cap on the maximum number of partners that can be there in an LLP.
An Artificial Person for Legal Purposes
The law recognises LLPs as artificial legal persons, and therefore they can have all the rights that a person is supposed to have.
Can a private entity be converted to LLP?
According to the provisions of the Act, it is possible for a private entity or firm to transform into LLP. any unlisted public company can do this at any given time.
Why the need for LLP?
It has been seen that people who mainly depend on LLPs have a certain reputation they can work with. LLPs are usually operated by people who have influence, power and experience so that their venture does not crash. This is also why creditors pay them money. They put together resources to gain more profit and increase the prospects that the LLP has of growing.
Sometimes, LLPs may have junior partners who work for a salary and have no stake whatsoever in the LLP. It is possible that they work with the hopes of becoming senior partners someday and then having a share in the LLP. This is an important method of delegating responsibilities.
FAQs on Limited Liability Partnership (LLP): Features and Benefits
1. What are the key features of a Limited Liability Partnership (LLP)?
A Limited Liability Partnership has several distinct features defined under the LLP Act, 2008. The main features are:
- Separate Legal Entity: An LLP is legally separate from its partners. It can own assets and incur debts in its own name.
- Limited Liability: The liability of each partner is limited to their agreed contribution in the LLP. Their personal assets are protected from business debts.
- Perpetual Succession: An LLP's existence is not affected by the death, retirement, or insolvency of its partners.
- Minimum and Maximum Partners: It requires a minimum of two partners to form, with at least two designated partners, but there is no maximum limit on the number of partners.
- LLP Agreement: The rights, duties, and profit-sharing ratios of the partners are governed by a mutually agreed-upon LLP agreement.
2. What are the main benefits of forming an LLP over a traditional partnership?
The primary benefit of forming an LLP is the protection of limited liability, which means partners are not personally responsible for the business's debts beyond their capital contribution. Other significant advantages include its status as a separate legal entity with perpetual succession, which provides business continuity. Unlike a traditional partnership, an LLP can own property and enter into contracts in its own name, lending it more credibility and stability.
3. How does the liability of partners in an LLP differ from that in a traditional partnership?
The core difference lies in the extent of liability. In a traditional partnership, partners have unlimited liability, meaning their personal assets can be used to settle the firm's debts. In contrast, in a Limited Liability Partnership (LLP), a partner's liability is limited to the amount of capital they have contributed to the business. This structure protects the personal assets of the partners from any business-related financial crisis.
4. Can you provide some real-world examples of businesses that typically operate as LLPs?
LLPs are a popular business structure for professional services where multiple experts collaborate. Common examples include:
- Firms of Chartered Accountants (CAs), Company Secretaries (CSs), and Cost Accountants.
- Legal firms and law offices.
- Consultancy businesses, including management, technology, and financial consultants.
- Architectural firms and real estate agencies.
5. Why is an LLP considered a separate legal entity, and what are the practical implications?
An LLP is considered a separate legal entity because it is incorporated under the Limited Liability Partnership Act, 2008, which grants it a legal status distinct from its partners. This is unlike a traditional partnership, which is not separate from its owners. The key practical implications are:
- It can sue and be sued in its own name.
- It can buy, own, and sell property in its own name.
- Its existence continues irrespective of changes in its partners, a concept known as perpetual succession.
6. What happens to an LLP's existence if a partner dies or decides to leave the firm?
The exit or death of a partner does not affect the legal existence of the LLP. This is due to its feature of perpetual succession. The LLP continues to operate as long as there are at least two partners. The partnership can continue by admitting a new partner in place of the outgoing one, as per the terms laid out in the LLP agreement, ensuring business continuity without dissolution.
7. In what specific situations can a partner's liability in an LLP become unlimited?
While an LLP offers limited liability, this protection is not absolute. A partner's liability can become unlimited if they are found guilty of fraudulent activities. If a partner has acted with an intent to defraud creditors or for any other fraudulent purpose, they will be held personally liable for the losses incurred due to their wrongful acts, without any limit.
8. How does an LLP provide a better alternative than a Private Limited Company for certain businesses?
For many small to medium-sized businesses and professional firms, an LLP is often a better choice than a Private Limited Company for two main reasons:
- Lower Compliance Burden: LLPs have fewer compliance requirements. For instance, a statutory audit is only mandatory if turnover exceeds a certain threshold, and holding formal board meetings is not required.
- Greater Flexibility: The internal governance of an LLP is managed through the LLP agreement, which can be easily tailored to the partners' needs. This offers more operational flexibility compared to the rigid structure of a company governed by the Companies Act, 2013.
