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Limited Liability Partnerships

The limited liability partnership (LLP) is a standard business structure recognized internationally, such as in the United Kingdom, US, Australia, etc. In India, the Limited Liability Partnership Act, 2008 was notified on 31 March 2009. This business form seeks to incorporate the operational flexibility of partnership with the benefits of limited liability and separate legal identity of a company. While compliance requirements are higher for an LLP as opposed to a partnership, it is much lesser than that of a limited liability company.

This structure has become quite popular since its introduction for SMEs, professional service companies and any small business that seeks to reduce its tax and compliance liabilities. At the same time, many investors and lenders still wary about this business structure and prefer to deal with private or public limited companies– which makes it difficult for an LLP to raise significant capital. In this context, it is important to remember that partnerships and companies can be converted into an LLP and vice versa, without any significant tax liability.
The salient features of an LLP are:

  • It can continue its existence irrespective of changes in partners, that is, it has perpetual succession just like a company. If shareholders change in a company, it makes no difference to its existence and legal status. Similarly, change of partners does not result in any change in the legal status of the LLP.
  • It is capable of entering into contracts and holding property in its own name.
  • The LLP is a separate legal entity, is liable to the full extent of its assets but liability of the partners is limited to their agreed contribution in the LLP. This is similar to a company, where a shareholder is liable to the debts of the Company only to the extent that the share capital he/she contributed can be used to pay creditors. Creditors of the LLP have no claim in normal circumstances to the personal assets of the partners of LLP on account of the LLP being unable to pay its debt

Example: X  LLP (which has 2 partners A and B) takes a loan of INR 20 lakhs and is unable to repay the loan when it is due. Its capital is INR 10 lakhs (A is supposed to contribute INR 6 lakhs and B is to contribute INR 4 lakhs), but its partners have only contributed 5 lakhs (A – INR 3 lakhs and B – INR 2 lakhs). In such a case, the LLP will be liable only up to the amount of its capital, i.e. INR 10 lakhs. A and B will be liable for an aggregate amount of 5 lakhs only, as they have agreed to contribute such amount towards the capital of the LLP, in the ratio in which they had agreed to contribute the amount towards capital. Therefore, out of the INR 5 lakhs that A and B are liable to pay, A will only be required to contribute his share of INR 3 lakhs that is unpaid, and B will have to contribute his unpaid balance of INR 2 lakhs. If this is not sufficient to meet unpaid debts of the LLP, creditors cannot recover any further amounts from partners of X LLP.

  • No partner is liable on account of the independent or un-authorized actions of other partners. Thus, individual partners are shielded from joint liability created by another partner’s wrongful business decisions or misconduct. However, a partner of an LLP is personally liable to pay with his own assets any liability arising out of his own wrongdoing in course of the business of the LLP.

Example: If partner A of X LLP borrows money from anyone in an unauthorized or fraudulent manner, A will be personally liable for all damages and liability arising out of this. While B’s contribution to the LLP can be used to meet this liability, his personal assets will not be liable in any circumstances, whereas in case of a partner in a traditional partnership firm the personal assets can be utilized by creditors to recover any dues including unpaid compensation of the partnership firm.

  • Flexibility of operations
i) Registered office and address for communication
It has been given in the Act that a document can be served on an LLP or a partner or designated partner by sending it by post or by any other mode (to be prescribed under Rules) at the registered office and any other address, specifically declared by the LLP for the purpose in such form and manner as may be prescribed (in the Rules).
Thus, an LLP shall have option to declare one more address (other than the registered office) for getting statutory notices/letters etc. from Registrar while submitting Form 2.

ii) LLPs for a particular venture
Since LLPs are governed by the LLP Agreement it is possible for LLPs to provide suitable clauses in such agreement to fix time limits for the duration of the LLP in the LLP Agreement. In such cases, after realization of the objectives of the venture, the LLP could either be wound up, or the provisions for 'striking-off' of the name of the LLPs can be used, instead of the winding up provisions (see the file on Winding Up and Conversion into LLPs for more details).


ABC LLP is established only to conduct four batches of a management course (of 3 months per batch) over a one year period. After the four batches are completed, the LLP can either be (i) wound up, or (ii) its name could be struck off from the register of LLPs, bringing its existence to an end if the LLP agreement states that the existence of the LLP is to come to an end after one year of operation.


iii) Audit
Rule 24 of the LLP Rules, 2009 provides that:
(i) any LLP whose turnover does not exceed forty lakh rupees in any financial year, or
(ii) whose contribution does not exceed twenty five lakh rupees
is not mandatorily required to get its accounts audited. If these limits are crossed for an LLP, it must get its accounts mandatorily audited.


Note: Even where mandatory audit of the accounts of an LLP is not required, the partners optionally choose to get the accounts of the LLP.


Responsibility of partners for the books of accounts where no audit is undertaken
Where no mandatory audit is required for an LLP, the LLP must include in its Statement of Account and Solvency (which is an annual filing) (for more details, read under the heading “Annual Compliance” below), a certificate by a designated partner or his authorized representative stating that he has verified the particulars in the statement of accounts and solvency and the statement of assets and liabilities, and has found them to be true and fair. The format of the certificate is laid down in Form 8. If a designated partner or his authorized representative knowingly makes a false statement or fails to disclose something which he knows is material, he can be punished with imprisonment of up to two years and a fine ranging between INR 1 lakh to INR 5 lakhs.

Procedure for audit
The LLP Rules prescribe certain provisions for audit of the accounts of an LLP. These provisions must be followed in case the accounts of an LLP are audited, whether the audit is mandatory or optional. The essential rules are summarized below:
  • An audit can only be undertaken by a practicing Chartered Accountant under Indian law.
  • An auditor must be appointed for each financial year. Auditors are eligible for reappointment for subsequent financial years.
  • The auditor must be appointed by the designated partners:
    • At any time before the end of the first financial year,
    • For the other financial years, at least 30 days before the end of the financial year.
Where the designated partners fail to appoint an auditor, the ordinary partners can appoint an auditor for each financial year of the LLP for auditing its accounts.
iv) Relaxation in filing and applicability of penalties
The provisions of the Act require LLPs to file the documents like Statement of Account and Solvency (SAS) and Annual Return (AR) and notices in respect of changes among partners etc. within the time specifically indicated in relevant provisions. The Act contains provisions for allowing LLPs to file such documents after their due dates on payment of additional fees.
It has been provided that in case LLPs file relevant documents after their due dates with additional fees up to 300 days, no action for prosecution will be taken against them. In case there is delay of 300 days or more, the LLPs will be required to pay normal filing fees, additional fee and shall also be liable to be prosecuted. 

The Act also contains provisions for compounding (settlement between the accused and the department without any contest) of offences which are punishable with fine only.

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