Formation of LLP – Setting Up of Business Entities and Closure Important Questions
State the advantages of limited liability partnership form of business organization.
Advantages of LLP are as follows:
1. Easy to form: Forming LLP is an easy process. It is less complicated and time-consuming unlike the process of formation of a company.
2. Liability: The partners of the LLP have limited liability which means partners are not liable to pay the debts of the LLP from their personal assets. No partner is responsible for any other partner’s misconduct.
3. Perpetual Succession: The life of the Limited Liability Partnership is not affected by the death, retirement, or insolvency of the partner. The 2, LLP will get wound up only as per provisions of the LLP Act.
4. Management of the company: LLP has two or more partners, who own and manage the business. This is different from a private limited company, whose directors may be different from shareholders.
5. Easy transferability of ownership: There is no restriction upon joining and leaving the LLP. It is easy to admit as a partner and to leave the firm or to easily transfer the ownership to others.
6. Taxation: LLP is not subject to Dividend Distribution Tax (DDT).
A distributed profit in the hands of the partners is not taxable. For Income Tax purposes, LLP is treated on par with partnership firms.
7. No compulsory audit required: Every business has to appoint an auditor for checking the internal management of the company and its accounts. However, in the case of LLP, there is no mandatory audit required. The audit is required only in those cases where the turnover of the LLP exceeds ₹ 40 lakhs and where the contribution exceeds ₹ 25 lakhs.
8. Fewer compliance requirements: LLP is much easier and cheaper to run than a private limited company as there are just three compliances per year. On the other hand, a private limited company has a lot of compliances to fulfill and has to compulsorily conduct an audit of its books of account.
9. Flexible agreement: The partners are free to draft the agreement as they please, with regard to their rights and duties,
10. Easy to wind up: Not only is it easy to start, but it is also easier to wind up an LLP, as compared to a private limited company.
Distinguish between: Limited Liability Partnership (LLP) and Company
Following are the main points of distinction between LLP and Partnership:
|Limited Liability Partnership||
|Meaning||Limited liability partnership means a partnership formed and registered under the LLP Act, 2008.||Company means a company incorporated under the Companies Act, 2013 or under any previous company law.|
|Governing Law||Limited liability partnerships are governed by the Limited Liability Partnership Act, 2008.||Companies are governed by the Companies Act, 2013 and various Rules made thereunder.|
|Internal rules & regulation||Internal rules and regulations of LLP’s are governed by the LLP agreement.||Internal rules and regulations of the companies are governed by the MOA & AO A.|
|Meetings||In the LLP Act, there is no stipulation for a meeting of partners either periodically or compulsory at the year-end.||Every company must hold AGM every year. Every company must hold 4 board meetings and the gap between two meetings should not be more than 3 months.|
|Business||In LLP, each partner has the authority to do business unless expressly prohibited by the partnership terms.||In the case of a company no individual director can conduct the business of the company|
|Remuneration||There are no provisions in the LLP Act, 2008 regulating the remuneration payable to designated partners.||The Companies Act, 2013 regulates the remuneration payable to directors.|
|Borrowing power||There are no restrictions on the borrowing powers of the LLP.||There are restrictions on borrowings power on the companies.|
What are the salient features of the Limited Liability Partnership (LLP)? [June 2009 (8 Marks)], [Dec. 2009 (6 Marks)]
The salient features of the Limited Liability Partnership (LLP) are as follows:
- The LLP is a body corporate and a legal entity separate from its partners.
- Any 2 or more persons, associated for carrying on a lawful business with a view to profit, may by subscribing their names to an incorporation document and filing the same with the ROC, form an LLP
- The LLP has a perpetual succession.
- The mutual rights and duties of partners of an LLP inter .se and those of the LLP and its partners shall be governed by an agreement between partners or between the LLP.
- An LLP is a separate legal entity, liable to the full extent of its assets, with the liability of the partners being limited to their agreed contribution in the LLP which may be tangible or intangible in nature or both tangible and intangible in nature.
- No partner would be liable on account of the independent or unauthorized acts of other partners or their misconduct.
- Every LLP shall have at least 2 partners and shall also have at least 2 individuals as Designated Partners, of whom at least one shall be | resident in India.
- An LLP shall maintain annual accounts reflecting the true and fair view of its state of affairs.
- A statement of accounts and solvency shall be filed by every LLP with the ROC every year.
- Accounts of LLPs shall also be audited.
- The Central Government has the power to investigate the affairs of an LLP by appointment of a competent inspector for the purpose.
- The Indian Partnership Act, 1932 shall not be applicable to LLPs.
- A partnership firm, a private company, and an unlisted public company may convert themselves to LLP in accordance with provisions of the proposed legislation.
- The Central Government has made rules for carrying out the provisions of the LLP Act.
A Limited Liability Partnership can become a member of a company incorporated under the provisions of the Companies Act, 2013. A Limited Liability Partnership can become a member of a company incorporated under the provisions of the Companies Act, 2013. [June 2017 (5 Marks)]
Subject to the MOA & AOA, any sui juris (a person who is competent to contract on its own behalf) except the company itself can become a member of a company. Being an incorporated body under the statute, LLP can become a member of a company.
Eg: Value Rating Advisors LLP can become a shareholder in Reliance Industries Limited
Who can become a partner in LLP? Also, state the disqualification of partners in LLP.
Partners [Section 5]: Any individual or body corporate may be a partner in an LLP.
Disqualification of partners in LLP: An individual shall not be capable of becoming a partner of a limited liability partnership, if
- He has been found to be of unsound mind by a Court of competent jurisdiction.
- He is an undischarged insolvent.
- He has applied to be adjudicated as insolvent and his application is pending.
Anurag & Shailesh are interested to start a new business in real estate under the LLP form of business organization. As a Practicing Company Secretary advise them regarding the procedure to be followed for incorporation of LLP.
Following is the procedure for incorporation of LLP in India:
Step 1: Application for DIN or DPIN:
All designated partners of the proposed LLP shall obtain “Designated Partner Identification Number (DPIN)”. File Form DIR-3 in order to obtain DIN or DPIN. A person who has already had a DIN (Director Identification Number) can use the same as a DPIN
Step 2: Acquire/Register DSC:
All filings done by the LLP(s) are required to be filed with the use of Digital Signatures by the person authorized to sign the documents.
Acquire Digital Signature from licensed Certifying Authority.
Step 3: Name reservation: The first step in the incorporation of an LLP is the reservation of the name of the proposed LLP. There are two ways of reserving the name of the proposed LLP.
- File an application under LLP-RUN for ascertaining availability and reservation of the name of an LLP
- Name can be proposed in form FiLLiP, an application for incorporation of LLP
Step 4: Incorporate an LLP
Apply for the name of the LLP to be registered by filing Form RUN-LLP. After that depending upon the proposed LLP, the file required incorporation document in Form FiLLip.
Once the form has been approved by the concerned official of the Ministry, an email will be received by the applicant regarding the same and the status of the form will get changed to Approved.
Step 5: File LLP Agreement
After incorporation of LLP, an initial LLP agreement is to be filed within 30 days of incorporation of LLP. The user has to file the information in Form No. 3 (Information with regard to Limited Liability Partnership Agreement and changes, if any, made therein).
Write a short note on the Annual Return of LLP
Annual Return [Section 35]: Every LLP shall file an annual return duly authenticated with the ROC within 60 days of closure of its financial year i.e., by 30th May every year
Description of Form: Annual return is the summary of the Statement of Management Affairs
Form of Annual Return: Annual return will be filed in Form 11
Certificate from Designated Partner: Annual return of an LLP having turnover up to ₹ 5 Crore during the corresponding financial year or contribution up to ₹ 50 lakh shall be accompanied with a certificate from a designated partner, other than the signatory to the annual return, to the effect that annual return contains the true and correct information.
Certificate from Company Secretary: In all other cases, the annual return shall be accompanied with a certificate from a Company Secretary in practice to the effect that he has verified the particulars from the books j and records of the limited liability partnership and found them to be true and correct.
There are no shareholders in limited liability partnership, instead, there 1 are partners. Comment. [June 2010 (5 Marks)]
A minimum number of partners [Section 6]: Every LLP shall have at J least 2 partners.
If at any time the number of partners of an LLP is reduced below 2 and the S business of the LLP is carried by the remaining one partner even after 6 £ months from the reduction of the number below 2, he shall be liable personally for the obligations of the LLP incurred after 6 months.
Maximum number of partner: There is no upper limit on the number of partners in an LLR
Conclusion: There are no shareholders in limited liability partnership, instead there are partners.
Mohan has been appointed as a passive partner in the Limited Liability Partnership (LLP). He seeks your advice on the responsibilities of the designated partner where the LLP has contravened the provisions of the LLP Act, 2008. Referring to the provisions of the LLP Act, 2008 advise him in the matter. [June 2018 (4 Marks)]
Liabilities of designated partners [Section 8]: A designated partner shall be:
(a) Responsible for the doing of all acts, matters, and things as are required to be done by the LLP in respect of compliance of the provisions of the Act including filing of any document, return, statement, and the reports and
(b) Liable to all penalties imposed on the limited liability partnership for any contravention of those provisions.
Responsibilities of Designated Partner: Where the LLP has contravened the provisions of the LLP Act: They would be required to pay all the monetary fines imposed on the LLP. There is no provision in the Act providing for the | reimbursement of such monetary penalties to him by the LLP.
Further in the following instances apart from the LLP, the designated partner would also be imposed monetary penalties under the Act
- For non-compliance with the directions of the Central Government for change of name.
- For non-maintenance of books of account, non-filing of accounts, duly audited where such an audit is mandatory.
- For non-filing of the annual return of the LLP.
A limited liability partnership registered in Singapore is proposing to establish a place of business in Mumbai. Comment. [June 2013 (5 Marks)]
Foreign limited liability partnership [Section 59]: The Central Government may make rules for provisions in relation to the establishment of a place of business by foreign LLPs within India and carrying on their business.
As per Rule 18(4), a foreign LLP or firm or company may apply in Form No. 27 to the Registrar for reserving its existing name by which it is registered in the country of its regulation or incorporation and not allotted to any 2 LLP in India. Such reservation shall be valid for 3 years but may renew on a fresh application along with payment of a fee.
A foreign LLP shall, within 30 days of establishing a place of business in India, file with the ROC:
- A copy of the certificate of incorporation or registration of the LLP;
- The full address of the registered or principal office of the LLP in the country of its incorporation;
- The full address of the office of the LLP in India which is to be deemed as its principal place of business in India; and
- List of partners and designated partners, if any, and the names and addresses of two or more persons resident in India authorized to accept on behalf of the LLP, service of process, and any notices or other documents required to be served on the LLP.
State any ten essential clauses to be included while drafting the LLP Agreement.
LLP agreement means any written agreement between the partners of the LLP or between the LLP and its partners which determines the mutual rights and duties of the partners and their rights and duties in relation to that LLP.
LLP agreement defines the roles, responsibilities, rights, and powers of the partners to LLP and to each other. Hence, it creates the foundation for the smooth running of LLP. LLP agreement clarifies the managerial, operational as well administrative responsibilities and sets clear methodologies for decision making, adding a new partner, and disassociation of existing partner.
Essential clauses to be included in the LLP Agreement:
1. Interpretation/Definitions: This clause is the essence of any LLP agreement. An LLP Agreement must provide for various definitions such as the definition of designated partners, the accounting period, the business of LLP, and the name with which the LLP will be known. The agreement must also provide with full address of the registered office of the LLP as well as the address of all the partners.
2. Designated Partners: LLP agreement shall clearly mention the name, age, and address of each of the Designated Partners correctly.
3. Name of the LLP and changes to it: This clause shall state that business of the LLP shall be carried on in the name and style of [Name of LLP], Any change in the name of the LLP shall be notified to the Registrar by the Designated Partner.
4. Registered Office of the LLP: LLP agreement shall state that partnership business shall be carried on at the under mentioned address, which shall also be its registered office. The business shall also be carried from such other places as may be mutually decided by the partners from time to time.
5. Business of the LLP: This clause must clearly specify the nature of the business that the LLP will be carrying on. The LLP may engage in any and all activities necessary, desirable, or incidental to the accomplishment of the conduct of such business of the LLP including but not limited to such ancillary business. It may also include any other business conducted in such a manner as may be decided by the majority of partners from time to time.
6. Capital Contribution: Total contribution of the LLP and the contribution by each partner along with the percentage of contribution to be mentioned in this clause. The manner in which contribution can be withdrawn by the partners shall also be stated in this clause.
7. Profit-Sharing Ratio: An ideal LLP Agreement must also mention the ratio in which the profits and the losses of the business will be shared among the partners. The partners must clearly state the amount of profit that each member receives, or the amount of the loss that they’re | liable for will be set out in the agreement.
8. Rights & Duties of Designated Partners: The LLP Agreement must specify the various rights and duties of the Designated Partners as may be mutually agreed by them. In the absence of such separate agreement between the partners about such rights and duties, etc., the provisions of Schedule I of the Limited Liability Act, 2008 will apply as given in Section 23(4) of the said act.
9. Admission, Retirement, Resignation & Expulsion of Partners: LLP agreement must include the provisions regarding admission of new 1 partners, retirement as well as the death of a partner, etc. The agreement must provide guidelines for the expulsion of partners as well.
10. Remuneration & interest to be paid to partners: The LLP agreement I shall contain a clause regarding the amount of remuneration to the j Designated Partner(s), for rendering the services as such. This clause shall contain the rate of interest to be paid to the partners on their capital contribution.
11. Bank Account: This clause shall set out the modus operandi of the bank account transactions of the LLP.
12. Books of account and accounting year: The LLP agreement shall contain a clause relating to maintenance of books of account and other documents, method of accounting, and the details relating to the Accounting year of the LLP.
As a Practicing Company Secretary, advise your client regarding the annual compliance requirement to be followed by the LLP. [Dec. 2018 (5 Marks)]
All LLPs registered under the LLP Act, 2008 need to file Annual Returns and Statement of Accounts for every Financial Year. It is mandatory for an LLP to file a return irrespective of whether it has done any business or not.
There are three mandatory compliance requirements to be followed by LLPs which are given below:
1. Filing of Statement of Account and Solvency: Every LLP shall, within a period of 6 months from the end of each financial year, prepare a Statement of Account and Solvency in Form No. 8 and such statement shall be signed by the designated partners of the LLP. Every LLP shall file the Statement of Account and Solvency with the ROC every year on or before 31 st October.
2. Audit of accounts: Every LLP whose turnover exceeds, in any financial year, ₹ 40,00,000 or its contribution exceeds ₹ 25,00,000 has to get accounts audited from a Chartered Accountant.
3. Filing of Annual Return: Every LLP shall file an annual return duly authenticated with the ROC within 60 days of closure of its financial year in the prescribed form. Annual return has to be filed in Form No. 11.
The annual return of an LLP having turnover up to ₹ 5 Crore during the corresponding financial year or contribution up to ₹ 50 lakh shall be accompanied with a certificate from a designated partner, other than the signatory to the annual return, to the effect that annual return contains the true and correct information. In all other cases, the annual return shall be accompanied with a certificate from a Company Secretary in practice to the effect that he has verified the particulars from the books and records of the limited liability partnership and found them to be true and correct.
4. Filing of Income Tax Return: Every LLP has to file an Income Tax Return every within the due date prescribed in Income-tax Act, 1961.
Financial Statements of the Limited Liability Partnership are not mandatorily required to be audited by a Chartered Accountant. Comment. [June 2019 (5 Marks)]
In the case of LLP, there is no mandatory audit required. But as per Rule 24 of LLP Rules, The audit is required only in those cases where the turnover of the LLP exceeds ₹ 40 lakhs and where the contribution exceeds ₹ 25 lakhs.
Also voluntarily if partners decided to get auditing done they may appoint Chartered Accountant and then the financial statement will be audited by Chartered Accountant
Therefore the statement that financial Statements of LLP are not mandatorily required to be audited by a Chartered Accountant is incorrect.
Aryan & Aarav, an LLP has a turnover of ₹ 45 lakh and contribution of the partners exceeding ₹ 30 lakh in F.Y. 2018-19 is seeking your advice in the following matters:
(i) Is dividend distribution tax applicable on LLP?
LLP is not subject to Dividend Distribution Tax (DDT).
(ii) Is LLP subjected to audit? State the reason.
Every LLP whose turnover exceeds, in any financial year, ₹ 40,00,000 or its contribution exceeds ₹ 25,00,000 has to get accounts audited from a Chartered Accountant.
(iii) Is LLP eligible to raise a loan from ABC Ltd., a foreign bank?
Limited Liability Partnerships are not allowed to raise ECB. Therefore, LLP cannot avail commercial loans from its foreign partners, Fils, Foreign Banks, and any financial institution located outside India.
(iv) State Offences & Penalties for non-filing of financial statements under the LLP Act, 2008. [Dec. 2019(4 Marks)]
All LLPs are required to have their books of account in regards to business, and submit it in Form No. 8, every year. Failing to file, the statement of accounts within the specified due date will lead to a fine of ₹ 100 per day
Setting Up of Business Entities and Closure Questions and Answers