Blog

You may also read How to Convert Partnership Firm to LLP ? Process and Benefits. 

The Limited Liability Partnership Act, 2008 governs the formation and operation of LLPs in India. In order to form an LLP, a minimum of two partners must be present. An LLP, on the other hand, has no upper restriction on the number of partners that can be formed.

There should be a minimum of two designated partners among the partners, both of whom should be people, with at least one of them being a resident of India. The LLP agreement governs the rights and responsibilities of designated partners and their designated partners. They are directly responsible for ensuring that the provisions of the Limited Liability Partnership Act, 2008, as well as any provisions stipulated in the LLP agreement, are adhered to.

Who are Designated Partners?

Every limited liability partnership (LLP) must have at least two designated partners. At least one of the designated partners needs to be a  resident of India (resident of India is a person who stays in India for a minimum of 182 days in an year). A body corporate may nominate an individual to act as a designated partner on behalf of the body corporate. In some cases, the incorporation deed may indicate which individuals will serve as designated partners. In line with the LLP Agreement, any partner may be designated as a partner or may be designated as a partner who is no longer designated. Every designated partner is required to have a DPIN. Limited Liability Partnership Rules, 2009 were changed by the Ministry of Commerce and Industry (MCA) on July 5, 2011 (with effect from July 9, 2011). Instead of applying for a Designated Partner Identification Number (DPIN), each partner who will be nominated as a Designated Partner will now need to apply for a DIN rather than a DPIN. In the case of individuals who hold both a DPIN and a DIN, their DPIN will be cancelled. In order to receive a DPIN, an individual must submit an application in Form DIN-1 in accordance with the Companies (Director Identification Number) Rules, 2006. LLP Forms 7 and 10 are no longer valid as a result of this decision. An individual must offer prior consent before becoming a designated partner, and the LLP must file consent in Form 4 with the Registrar before becoming a designated partner. If there is a change in the information included in the formerly used Form 7 or DIN-1 for the purpose of allocating a DPIN, the modifications must be reported in Form DIN-4 within 30 days of the change. A limited liability partnership (LLP) may select a designated partner within 30 days of a vacancy occurring for any cause. If there is no designated partner, or if there is only one designated partner at any point in time, each partner is deemed to be a designated partner under the circumstances. Designated partners are responsible for performing all acts, matters, and things that are needed to be fulfilled in order to comply with the conditions of the Limited Liability Partnership Act (LLP Act). They are accountable for any and all penalties levied against the LLP.

Also read Advantages of LLP Registration. 

An LLP can have as many partners as it wants. A body corporate can contain an Indian company, a company formed outside of India, an LLP registered in India, and an LLP incorporated outside of India. A body corporate, on the other hand, cannot be a designated partner. Every limited liability partnership (LLP) must have at least two authorised partners, with at least one of them being a resident of India. As long as all of the partners in an LLP are body corporates, at least two individual nominees of those body corporates should serve as designated partners.

Registration of LLP:

Step 1: Obtain a Certificate of Digital Signature Authority (DSC)

One must first get the digital signatures of the selected members of the prospective limited liability partnership (LLP) before proceeding with the registration system.

Costs associated with earning a DSC vary from one certifying agency to another. One should receive DSC in the Class 3 category.

Step 2: DIN Application 

Next, one must apply for a Director Identification Number (DIN) (DIN)

One must apply for the DINs of all of the designated partners, or those who want to become designated partners, of the proposed limited liability partnership. Form DIR-3 must be used to submit an application for the assignment of a DIN number.

One must include a softcopy of your identification documents (often one’s Aadhaar and PAN) to the application form.

Step 3: Obtaining Approval for the Name

In order to reserve the name of the proposed LLP, a form LLP-RUN (Limited Liability Partnership-Reserve Unique Name) must be filed with the Central Registration Centre, which will be handled by the Central Registration Centre under the Non-STP procedure. However, it is recommended that you use the free name search facility available on the MCA portal before entering the name in the form.

The form RUN-LLP must be accompanied by the fees listed in Annexure 'A, which may be allowed or denied by the registrar depending on the circumstances. A re-submission of the form will be permitted within 15 days of the initial submission in order to correct any errors. There is a provision in the agreement that allows for the provision of two recommended names for the LLP.

Step 4: Establishing a Limited Liability Partnership (LLP).

The FiLLiP (Form for Incorporation of Limited Liability Partnership) is the form that must be completed and filed with the Registrar of the state in where the LLP's registered office is located in order for the partnership to be formed. The form will be a single piece of software.

Fees in accordance with Annexure 'A' must be paid. If the individual who is to be nominated as a designated partner does not already have a DPIN or DIN, this form allows them to apply for one through the Department of Homeland Security.

One or two individuals will be permitted to submit an application for an allocation of land at any given time.A reservation request can also be submitted using FiLLiP, if that is preferred. As soon as the approved and reserved name of the LLP is established, this approved and reserved name will be used as the proposed name of the limited liability partnership. Formalize the Limited Liability Partnership (LLP) agreement in Step 5.

The LLP agreement controls the reciprocal rights and responsibilities of the partners, as well as the relationship between the LLP and its partners. The LLP Agreement must be printed on Stamp Paper in order to be valid. The stamp duty varies from state to state.

Also read Limited Liability Partnership (LLP). 

You may also like to read MSME Registration in India. 

About the entities

Partnerships- Partnerships are registered under the Indian Partnership Act, 1932. The main aspect of a partnership is the unlimited personal liability of the partners for the partnership liabilities. This essentially means that Partnerships and partners don’t have independent legal presence. Partnerships are not perpetual in existence.

LLPs are registered and governed under the Limited Liability Partnership Act, 2008. The most important facet of LLPs is that Partners of an LLP are not personally liable for LLP liabilities, the liability of the partner is according to his capital contribution in it. Meaning whereby that LLPs and its partners are separate legal entities. LLPs are perpetual in existence unless dissolved by the promoters.Partner Requirement

Partnership- An Indian Citizen residing in India can be a partner of a Partnership(including minors).The minimum partner threshold is 2 and maximum is 20. The management of the partnership is defined in the partnership deed where one or more partners can be designated as managers.

LLP- An Indian Citizen residing in India can be a partner of a LLP(excluding minors). Foreign Direct Investment with prior RBI approval is allowed. The minimum threshold of partners is 2 and maximum threshold is unlimited. The managerial aspects of a LLP are governed by an LLP agreement and designated partner/s for the management.

Transferability and Convertibility

Partnership- To transfer the share a partner has to obtain the consent of all the partners.  Also, to convert a partnership into a Pvt. Ltd. Company or LLP is a lengthy and cumbersome process.

LLP- The share in an LLP can be transferred easily, but it is not necessary that the transferee automatically attains a partner's status. The conversion process of LLP into a Pvt. Ltd. company is very easy.

Also, read Limited Liability Partnership v. Private Limited Company. 

Taxation

Partnership- The tax slab on profits of a Partnership is 30% + educational cess but there is no annual return filing requirement for a partnership firm.

LLP- The tax slab on profits of an LLP is 30% + educational cess. An LLP has to file annual return with the ministry of corporate affairs.

Registration procedure

Partnerships

Most important in the registration of partnerships is that registration is not compulsory but voluntary as under the Partnership Act, 1932. So, it can be registered at the time of its incorporation or a later stage. But it is highly recommended that the partners get the firm registered. The procedure is as follows-

1. Partnerships are registered with the registrar of firms
2. Submission of application to the registrar of firms
3. Name Selection
4. Drafting of Partnership Deed
5. Obtaining the certificate of Registration

Processing Time- 10 days (Approx.)

LLP

The process of registration of LLPs is very similar to that of a Pvt. Ltd. Company and is given in the steps below-

1. Obtaining Digital Signature Certificate for the Proposed Partners

2. Obtaining Director Identification Number for the proposed Partners

3. Name Approval from Ministry of Corporate Affairs(MCA)

4. Filing Incorporation

5. Filing Limited Liability Partnership Agreement (within 30 days from the date of

incorporation of the LLP)

Processing Time- 20 days (Approx.)

Which is better for a small sized business?

The talk about something being ‘better’ totally depends on personal requirements of business owners. For example, there are far less compliances in partnerships as compared to the LLP, there is no requirement of filing annual returns in partnerships.

If minors are also involved in the activity, certainly partnership will be better. In traditional partnerships, minors can also be made the partners, which is not the case in LLPs.

On the other hand, LLP is a mix of a partnership and company, it saves partners form unlimited liability as it has its legal presence which makes it easy for the partners as they can hold property and take loans and enter into contracts for the business in the name of the business only, LLP certainly has less legal compliances but higher penalties in case they are missed.

If seen generally, the concept of LLPs has rapidly gained traction and more and more people are incorporating their businesses as LLPs. It is cheap and easy in its formation and management due to which it has been the popular choice of the small business owners. In Traditional partnerships, a Partnership agreement is not required and partners can work on consensus which can lead to disputes proving it to be a big detriment to the business owners. So, an LLP is good for a small business because it provides limited liability like a private company and flexibility like a partnership that gives synergized output to the business.

Also read Limited Liability Partnership (LLP). 

Also read LLP Registration Procedure in India. 

1. There is no restriction on the number of partners.
2. When comparing a Limited Liability Partnership to a partnership firm, the liabilities of partners is restricted to the extent of capital invested. This is the major advantage of a Limited Liability Partnership over a partnership firm.
3. The limited liability partnership (LLP) is a legal entity with a more defined company structure and continuous succession.
4. Limited liability partnerships (LLPs) have greater creditworthiness than partnerships because their accounts and financial records are available for public examination on the MCA site.
5. It provides complete autonomy in the management of the company.
6. Foreign Direct Investment (FDI) in limited liability partnerships (LLPs) is relatively easy to get, although this is not the case in partnerships.
7. Limited liability partnerships (LLPs) can use the different Start-up India Schemes sponsored by the state and profit from taxation rebates, and other incentives.
8. Because the Rule of Agency concept does not apply to LLPs, the partners are not accountable for the actions of their fellow partners, making LLPs a more secure option for conducting business operations.

REGULATORY FRAMEWORK FOR CONVERSION OF FIRM INTO LLP:-

1. Section 55 of the LLP Act, 2008 read with Rule 38 of LLP Rules, 2009
2. Schedule 2 of LLP Act, 2008

ELIGIBILITY FOR CONVERSION: – An existing partnership firm may apply to transform into an LLP provided all of the partners of the LLP into which the partnership is to be transformed are also partners of the existing partnership firm.

Also read Advantages of LLP Registration. 

OTHER IMPORTANT POINTS TO KEEP IN MIND BEFORE COMPLETING THE APPLICATION INCLUDE:

1. To convert a partnership, all partners must agree in writing to the conversion.
2. In addition, each partner should contribute to the LLP in the same ratio as their capital accounts were recorded in the books of the company.
3. The partnership firm is required to file Income Tax Returns that are up to date;
4. There must be at least one designated partner who is a resident of India.
5. Before submitting a conversion application, it is necessary to gain the permission of all secured creditors.
6. It is necessary to get the Digital Signature of at least one Designated Partners to complete the transaction.
7. If previous approval or NOC is required from the relevant department, the firm shall obtain it.

PROCEDURE FOR TRANSFORMING A PARTNERSHIP FIRM INTO A LIMITED LIABILITY COMPANY

STEP 1: – Reservation of Name Complete the web-based RUN LLP form to reserve the name of the prospective limited liability partnership. As an additional element to include, the terms LLP  should be included after the name of the partnership firm. The approved name is only valid for 90 days from its approval unless otherwise specified.

STEP 2:- Filing of the Articles of Incorporation, i.e. eForm FILLIP After the proposed LLP's name has been approved, the eForm FILLIP must be filed with the following attachments, in addition to the requisite documents: -

• A utility bill from the registered office (not older than two months), as well as the NOC,
• Signed Subscribers Sheet is required.
• Consent of all the partners is required.
• All subscribers must provide proof of their identity and address.
• A copy of the letter of intent from an existing partnership Information about the LLP/company in which the partner/DP is a Director/Partner

STEP-3:- Submitting eForm 17. The partners must apply conversion in eForm 17 along with the following attachments: –

• Statement of Assets and Liabilities of the firm duly certified by a CA in Practice;
•  List of Creditors with their consent for conversion;
• Consent of all partners for conversion;
• Approval from any other body/authority as may be required;
• Statement of Partners in the format as mentioned in Schedule II;
• Copy of Acknowledgement of Latest Income Tax Refund;
• Copy of Acknowledgement

STEP-4: Approval/Sent for Re-submission of the document in case of rejection by the Triunal. Upon approval, the Registrar will issue a Certificate of Incorporation to the business entity concerned. In the event of a denial by the Registrar, an appeal may be filed with the Tribunal, which has jurisdiction over the matter.

STEP-5: The Registrar of Firms receives notice of completing Step 4. The LLP must notify the registrar of firms of the conversion within 15 (fifteen) days of the date of conversion by filing Form-14 with the registrar of firms and attaching the necessary documents:

• A copy of the LLP's Certificate of Incorporation;
•  A copy of the LLP's Incorporation paperwork has been submitted.

It should be emphasised that Form 14 is a physical form that must be submitted to the Registrar of Firms by completing it physically, signing it, and mailing it to the address listed on the form.

STEP-6:- Submittal of Form LLP-3 (Limited Liability Partnership Agreement): Final step is to file eForm LLP 3 with the Registrar within 30 days of the date of conversion of the firm into a limited liability partnership, i.e., the date on which the certificate of incorporation is issued with the LLP Agreement attached. Once the LLP is formed following the conversion of the Partnership Firm, the Partnership Firm will be regarded to have been dissolved by the courts. The firm's properties, assets, interests, rights, privileges, responsibilities, and duties are all transferred to the LLP upon the conversion of the partnership into a limited liability partnership (LLP). Or, to put it another way, the LLP assumes full responsibility for the entire firm's project.

Also read Limited Liability Partnership (LLP). 

You may also read How to Convert Partnership Firm to LLP ? Process and Benefits. 

Differences between LLP and Partnership firm

In India, partnerships established and governed under the Partnership Act, of 1932 was once a very prominent type of business organization given the ease with which they could be formed and maintained. The establishment of the Limited Liability Partnership (LLP) in India by the Limited Liability Partnership Act, 2008, has resulted in the LLPs gaining popularity and displacing partnerships as the dominant business structure. Limited Liability Partnerships (LLPs) are simple to establish, provide a variety of advantages to their owners, and are simple to manage, making them an excellent choice for many small and medium-sized businesses that might otherwise choose to form as a sole proprietorship or a private limited company.

Also read Which Is Better For A Small Sized Company: LLP Or Partnership?

The difference is as follows:

What should you choose: LLP or Partnership?

A LLP does not make you personally liable and limits the extent of your contributions to the extent of the capital contributed. A partnership on the other hand exposes you to unlimited liability including personal liability. Having said that, a partnership requires lesser compliances and low setting up costs than a LLP. Consider your long term goals prior to choosing the entity you wish to incorporate.

Also read Limited Liability Partnership (LLP). 

You may also read How to Convert Partnership Firm to LLP ? Process and Benefits. 

Registration Process

1. Obtaining Digital Signature Certificate for the Proposed Partners
2. Obtaining Director Identification Number for the proposed Partners
3. Name Approval from Ministry of Corporate Affairs(MCA)
4. Filing Incorporation
5. Filing Limited Liability Partnership Agreement (within 30 days from the date of incorporation of the LLP)

Processing Time- 20 days (Approx.)

Responsibilities of a Designated Partner

One of the basic requirements that arise from a person being a designated partner are filing documents, returns, statements etc. Further important duties of a designated partner are mentioned below-

• The Designated Partner is the authorized person to affix his signature on the statement of account and solvency, which the LLP files.
• Designated Partner on the behalf of LLP has to file annual returns within 60 days from the date of the closure of financial year to the registrar, failure of which will result in a fine exceeding Rs 10,000 being imposed on the designated Partner.
• If needed the Designated Partner has to file the returns of the documents.
• It is the duty of the partner to help the investigating officer on inquiry or inspection, by supporting the authority with necessary documents, information, signing the notes for examination etc.
• A designated partner also has to reimburse any expenses incurred on an investigation conducted by the investigating officer.

You may also like reading Service Agreement Vs Contract - How They Compare & Differ?

Key clauses in an LLP agreement

An LLP agreement defines the rights and duties of the partners. The LLP agreement helps in clarifying the relationship between the partners and the LLP.

Business of LLP Clause

The LLP agreement should have a clause that determines the business's type and object to be incorporated. This clause also contains information on the business's main office, which may be different from the registered office.

Governing Body clause

The clause mentions the governing body under which the LLP is governed and established.

Capital Contribution by Partners Clause

Capital contribution refers to the money contributed by each partner at the time of the incorporation of LLP. The LLP agreement clarifies that no interest will be paid to the members on their capital contribution.

Profit/ losses sharing ratio clause

This clause determines the ratio of sharing of the profits and losses. Generally, the profit and losses are divided according to the capital contribution by the partners but not always. Hence, it is necessary to add this clause in the agreement too.

Drawings and Expenses Clause

Every member is entitled to use a certain amount from the LLP fund every month. This is a payment on each member’s annual profit share and recognition that a member has personal requirements which they will not be able to meet if the profit share is determined at the end of each year.

Also read Advantages of LLP Registration. 

Indemnity clause

This clause casts an obligation on the members of the LLP to act in good faith and perform their duties to the fullest. Each member is indemnified by the LLP against any claim arising from the performance of duties by the member about the LLP. This clause gives individual members of the LLP protection against third party claim made against them rather against the LLP.

Duties of Partners clause

The partners are required to obligate certain duties towards the LLPs. The duties to be performed by the partners are to be specified in the agreement.

Rights and liabilities of Partners clause

The agreement also has to define the rights and duties possessed by the members and partners while conducting business. Certain liabilities on the partners should be incorporated in the agreement only.

LLP Banks Clause

This clause names with address the banks related to LLP and its transactions.

Accounts Clause

Maintenance of accounts is a statutory requirement in the LLPs under the LLP act, 2008. This clause clarifies which accounts are to be maintained and which books are kept.

Termination clause

This clause determines the termination of any member. When any member ceases to carry business of LLP s/he is entitled to receive his/her share in the LLP, undrawn profits and share of goodwill depending on terms of LLP.

Dispute Resolution Clause

It is a necessary clause in the LLP agreement. A natural output of working together is dispute, the disputes must be amicably solved.

Dissolution Clause

The members may define in the agreement what would happen to the LLP after the death or retirement of member.

Expulsion Clause

Members can be expelled from the LLP, the LLP agreement defines the grounds on which a member may expelled and the procedure thereof.

Insurance Clause

It is normal to have insurance of the premises or assets in a business, this clause defines it in the LLP.

Holidays Clause

The entitlement of holidays and other maternity/paternity leaves is determined in this LLP agreement clause.

Confidentiality Clause

Members mustn’t disclose the matters of the LLP while they are in employment or out of the employment. Hence, this clause defines the various conditions.

You may also read How to Convert Partnership Firm to LLP? Process and Benefits. 

Registration Process

Private Limited Company

The steps for incorporation of private limited company are-

1. Obtaining Digital Signature Certificate(ODSC) for the Proposed directors of the company
2. Obtaining Director Identification Number(DIN) for the proposed directors
3. Name Approval from Ministry of Corporate Affairs(MCA)
4. Filing Incorporation

Limited Liability Partnerships

1. Obtaining Digital Signature Certificate for the Proposed Partners
2. Obtaining Director Identification Number for the proposed Partners
3. Name Approval from Ministry of Corporate Affairs(MCA)
4. Filing Incorporation

Processing Time- 20 days (Approx.) for both LLP and Pvt. Ltd.

Also, read Advantages of LLP Registration.

Registration Cost

The sole purpose of the creation of LLPs was to foster incorporation of small businesses. The Cost of incorporation of LLPs is very less than the fees for the incorporation of Pvt. Ltd. company. Moreover, the documents to be printed on Non-judicial stamp paper as well as Notarized are less for LLP.

Features

Ownership and Management

Private Limited Company

A Pvt. Ltd. company is very flexible for the promoters when it comes to ownership and ownership sharing. A Pvt. Ltd. company can have at max 200 shareholders and is determined by this shareholding. In a Pvt. Ltd. company the shareholders don’t directly participate in the management. The shareholders need not necessarily be the managers.

Limited Liability Partnerships

In LLP, there is no clear distinction between management and ownership. In LLP, holders of the LLP are also the Holders of the power of management of the LLP.

Transferability of Ownership

Private Limited Company

The ownership of a Pvt. Ltd. company can be transferred by way of a share transfer.

Limited Liability Partnerships

A limited liability partnership being a partnership does not have share capital, however, addition of new partners may be done.

Tax

Tax compliance is more or less similar in both the LLP and Pvt. Ltd. Company. In the Compliance Requirements of MCA LLP has few benefits, an LLP does not need an audit done if its annual turnover falls below 40 Lakhs and capital contribution falls below 25 lakhs. However, a LLP has to file two forms namely LLP form 8 and LLP form 11.

On the other hand, the Pvt. Ltd. company would have to file income tax return as well as audit report to the MCA.

Both Pvt. Ltd. Company and LLPs are taxed at the rate of 30% plus cess and surcharge as applicable.

Fines and Penalties

Non-Compliance penalty or late filing penalty of documents with the Ministry of Corporate Affairs is higher for LLPs as there is a flat fee of Rs 100 on non-compliance which is uncapped. Hence, it could result in a LLP getting a lot of fines from MCA, which could be a problem if promoters are not aware of the deadlines for filing the documents with the registrar.

Other Factors

LLPs are in a very nascent stage in India, it is a newly introduced concept, with people having very less knowledge about it. Being new in their establishment the procedure, rules and regulations of LLP continue to evolve due to which the clarity further diminishes.

On the other hand, Pvt. Ltd. companies enjoy a very widespread recognition in India and around the world. Thus, the processes and procedures established for Pvt. Ltd. companies are very certain.

When it comes to FDI and Funding from banks the Pvt. Ltd. companies enjoy better access as compared to the LLPs.

Foreign Ownership

LLP- Prior approval of Reserve bank of India and Foreign Investment Promotion board is required.

Pvt. Ltd. – Foreigners can invest in companies through the normal automatic approval route in most sectors.

Existence or survivability

LLP- Existence of LLP is not dependent on the partners. It is to be dissolved only voluntarily or by the order of company law board.

Pvt. Ltd. company- Existence of a private Limited company is not dependent upon the Directors or shareholders, can be dissolved only voluntarily or by regulatory authorities.

You may like reading Limited Liability Partnership (LLP). 

Differences between LLP and Private Limited Company