The concept of LLPs emerged as a hybrid form of business entity. It combines the flexibility and benefits of a partnership with the limited liability protection. A corporation usually offers this protection. However, traditional partnerships have limitations and complexities, creating the need for special laws for LLPs. The LLP incorporation process gives businesses a flexible structure. It combines features of a private company and a partnership, providing limited liability and easy operations, making the LLP incorporation process a preferred choice for many entrepreneurs.
Features of Limited Liability Partnership (LLP)
The LLP Incorporation Process is a crucial step for entrepreneurs looking to establish a business structure that combines the flexibility of a partnership with the benefit of limited liability. A Limited Liability Partnership (LLP) is a popular choice as it protects partners’ personal assets while allowing operational flexibility. Understanding the LLP Incorporation Process ensures compliance with legal requirements and a smooth business setup.
Therefore, here are its key features in the LLP incorporation process:
1. Separate Legal Entity
An LLP has its own legal identity, separate from its partners. It can also own assets, sign contracts, and start or face lawsuits in its name.
2. Limited Liability of Partners
Partners in an LLP are only responsible for the amount they agree to contribute. The law also protects their personal assets and does not hold them liable for other partners’ debts or misconduct.
3. Flexible Management
Unlike a private limited company, an LLP does not need directors or shareholders. Instead, the partners manage the business according to the LLP Agreement.
4. No Minimum Capital Requirement
An LLP does not require a minimum capital to start. Instead, partners can agree on their contribution.
5. Perpetual Succession
An LLP stays active even if partners leave or change. Only legal steps can close it.
6. Fewer Compliance Requirements
LLPs have fewer compliance requirements than private limited companies. They must file annual returns and financial statements but follow simpler rules.
7. Tax Benefits
The government taxes LLPs as partnership firms, meaning they do not pay dividend distribution tax (DDT) like companies. The system taxes profits only once at the LLP level.
8. No Limit on Partners
An LLP must have at least two partners, but there is no maximum limit.
9. Easy Ownership Transfer
Partners can transfer ownership as stated in the LLP Agreement, but it is not as simple as transferring company shares.
10. Governed by LLP Act, 2008
LLPs in India follow the Limited Liability Partnership Act, 2008, which provides legal guidelines for their operations.
LLP Incorporation Process
(A) Incorporation Document
Section 11(1) of the Act outlines the requirements for forming an LLP:
(a) First, at least two people must come together to start a legal business for profit. They must sign an incorporation document.
(b) Next, the incorporation document must be submitted to the Registrar of the State where the LLP’s registered office will be. It must be filed in the required format along with the necessary fees.
(c) Additionally, a legal professional, such as an advocate, Company Secretary, Chartered Accountant, or Cost Accountant, must submit a statement along with the incorporation document. Furthermore, one of the signatories must also confirm that all legal requirements have been fulfilled.
According to Section 11(2) of the Act, the incorporation document shall be:
(a) To begin with, the application must be filed in Form FiLLiP with the Registrar who has jurisdiction over the State where the LLP’s registered office is located. Additionally, the prescribed fee must be paid along with the application.
- If an individual needs to be appointed as a designated partner but does not have a DPIN or DIN, they must apply for a DPIN through Form FiLLiP.
- However, no more than five individuals can apply for a DPIN in a single Form FiLLiP application.
- Additionally, an application for name reservation can also be made using Form FiLLiP.
- Moreover, if an applicant has already reserved a name under Rule 18 using Form RUN-LLP and it was approved, they can use that name as the proposed LLP name.
Further, the incorporation document shall:
(b) Additionally, it must state the name of the limited liability partnership.
(c) state the proposed business of the limited liability partnership;
(d) Moreover, it must state the address of the registered office of the limited liability partnership.
(e) In addition, it should include the name and address of each person who will be a partner of the limited liability partnership upon incorporation.
(f) Finally, it must contain any other relevant information concerning the proposed LLP.
If the Registrar finds issues in Form FiLLiP, they will notify the applicant. The applicant must fix the issues and resubmit the form within 15 days.
If the applicant resubmits the document and it still has issues, the Registrar will give one more chance. The applicant must fix the issues within 15 days.
Note that the total period for resubmitting documents must not exceed thirty days.
The Registrar will issue the LLP’s Certificate of Incorporation in Form 16. This certificate will also include the Permanent Account Number (PAN) and Tax Deduction Account Number (TAN) from the Income Tax Department.
Effect of Registration
Section 14 of the Act provides that on registration, a limited liability partnership shall, by its name, be capable of
- Filing and responding to legal cases.
- Buying, owning, managing, or selling property—whether movable, immovable, tangible, or intangible.
- Using a common seal, if the LLP decides to have one.
- Carrying out other lawful activities like a corporate body.
Relationship of Partners
According to Section 23, the LLP Agreement will decide the rights and duties of partners among themselves and with the LLP, unless the Act states otherwise.
Cessation of Partnership Interest
Under Section 24 of the Act, a person can leave an LLP if there is an agreement with the other partners. If there is no agreement, they can resign by giving 30 days’ written notice.
A person shall cease to be a partner of a limited liability partnership:
- on his death or dissolution of the limited liability partnership; or
- If a competent court declares him to be of unsound mind, he loses eligibility. Likewise, applying for insolvency or being declared insolvent also disqualifies him.
If a person ceases to be a partner of a limited liability partnership (LLP), others must continue recognizing them as a partner in dealings with the LLP unless:
- The person has been notified that the former partner has stopped being a partner of the limited liability partnership.
- The Registrar has been notified that the former partner is no longer a partner of the limited liability partnership.
A partner leaving the LLP does not free them from their past responsibilities to the LLP, other partners, or anyone else.
Unless the LLP agreement says otherwise, the LLP must give the former partner or their legal heir (if the partner dies or becomes insolvent):
- When a partner leaves the LLP, they are still responsible for past obligations to the LLP, other partners, or any other person.
- If the LLP agreement does not state otherwise, the LLP must provide the former partner or their legal heir (in case of death or insolvency) with:
A former partner or their legal heir (due to death or insolvency) cannot interfere in the LLP’s management.
Registration of Changes in Partners
Section 25 requires every partner to inform the LLP of any change in their name or address within fifteen days of the change.
A limited liability partnership shall follow the below points in LLP incorporation process:
- When a person joins or leaves a partnership, they must file a notice with the Registrar within thirty days of the change.
- If a partner changes their name or address, they must file a notice with the Registrar within thirty days of the change.
A notice filed with the Registrar:
- It must be in the prescribed form and accompanied by the applicable fees.
- The designated partner of the limited liability partnership must sign and authenticate it in the prescribed manner.
- If it relates to an incoming partner, the partner must provide a signed statement consenting to become a partner. They must also authenticate it in the prescribed manner.
A person who stops being a partner in an LLP can file a notice with the Registrar. They must do this themselves.
If they believe the LLP may not file the notice, they can submit it directly. The Registrar will then seek confirmation from the LLP unless the notice is already filed.
If the LLP does not confirm within 15 days, the Registrar will register the notice. The former partner must submit this notice under this section.
CONTRIBUTIONS
Form of Contribution
Section 32 of the Act says that a partner can contribute tangible, movable, immovable, or intangible property to the LLP. A partner can also offer other benefits to the LLP.
Partners can contribute money, promissory notes, agreements to provide cash or property, and contracts to provide or promise to provide services.
The LLP must record the value of each partner’s contribution and disclose it as required by law.
ANNUAL RETURN
Section 35(1) of the LLP Act requires for LLP incorporation process every LLP to authenticate and file its annual return with the Registrar. You must complete this within sixty days of the financial year’s closure in the prescribed form and manner. The filing must also include the applicable fee.
Every limited liability partnership shall file an annual return with the Registrar in Form 11.
An LLP must follow the rules for incorporation and compliance. If its turnover is up to ₹5 crore or its contribution is up to ₹50 lakh, it must get a certificate. This certificate must be included in the annual return.
A designated partner (not the signatory) must provide the certificate and confirm that the return is true and correct. In other cases, a Company Secretary in Practice must certify the return. They must check the LLP’s records and confirm the details are accurate.
Under Section 35(2), the LLP Incorporation Process requires an LLP to file its annual return on time. Failure to do so results in a penalty of ₹100 per day, with a maximum fine of ₹1,00,000 for the LLP and ₹50,000 for each designated partner. Timely filing is essential to avoid these penalties and ensure compliance with legal regulations. Staying updated on deadlines and fulfilling compliance requirements is a crucial aspect of the LLP Incorporation Process.
