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
1. What are the benefits of LLP to corporations?
The most advantageous return that LLPs provide is the promise of good profits without involving legal and procedural risks. There can be as many partners as someone wants, although it is important to take all partners’ consent before adding more people. Creditors cannot attack the personal assets of the partners involved, which gives them a safety net. The whole structure of LLPs is flexible and not difficult to comprehend, meaning that anyone can venture into this and make considerable returns.
2. What is the difference between LLC and LLP?
LLC stands for Limited Liability Company. This exists to protect partners involved from getting dragged into liabilities that can be restricted to the company directly. The system offers tax benefits that a partnership brings but protects from the liabilities that can be incurred by the body. While a lot of the formal structure is not required for LLC, it is still a legal body. In comparison, LLP stands for Limited Liability Partnership. It is not a separate legal body for all purposes and it offers enough guarantee for the partners involved.
3. What are the disadvantages of LLPs?
Every financial venture will always have a set of disadvantages irrespective of how good the idea may sound in theory. This is because there is a considerable difference between the way economics works in theory and in real life. Some of the disadvantages of LLPs can be no tax benefits for partners, a minimum number of partners, no equity investment options, public disclosure of all money-related documents and statements, high-income tax rates, a certain penalty in cases of non-compliance.
4. Can LLPs borrow from banks?
Yes, LLPs can always borrow from financial institutions as long as their paperwork is done properly. This is because LLPs are considered to be artificial legal persons by the law, who have all rights and duties that any other individual will have. In the eyes of the law, it is not a corporate entity that is borrowing the money, it is a person, who may not be tangible but who exists. So yes, LLPs can borrow from banks easily but in case they are unable to pay the money back, the bank also cannot go after any partner’s private assets.
5. How can an LLP be incorporated?
The partner would need to file eForm 1 which would require basic details like the name of the LLP. This will reserve and block that particular name for this LLP alone. After this, the person would need to fill out partner details and incorporate an LLP in an eForm2. This would also require the names of designated partners and their consent to this venture. These steps are absolutely mandatory to be followed to preserve the legal nature of the LLP.
6. What Do you Mean by Liability of Partners in LLP?
A limited Liability Partnership, or LLP is a kind of partnership wherein some or all the partners possess limited liabilities depending on the type of jurisdiction. Hence, it possesses elements of both corporations and partnerships. In the Limited Liability Partnership, every partner is not liable or responsible for the other partner’s negligence or misconduct. This is an essential difference from the conventional partnership firms in which every partner has a joint liability. In the LLP, the partners possess a kind of a limited liability which is similar to the ones of the shareholders of a firm. However, unlike the corporate shareholders the partners of an LLP have the right for managing the business directly.
7. What are the Benefits of Liability of Partnership?
The Benefits of a Limited Liability Partnership are Mentioned Below.
It is Comparatively Flexible for Organizing the LLP’s Internal Structure than for organizing a company’s internal structure.
The Partners of an LLP do not have a limit but in a private limited Company, the Maximum number of shareholders can be limited.
The Utilizing and raising of the funds depend on the will of the partners. Funds are utilized and bought only according to the norms listed under the respective Acts.
There is no Compulsory audit as well. All the companies, be it public or private, irrespective of their capital shares need their accounts to be audited. However, in the case of an LLP, audits are not mandatory.
