Limited Liability Partnership Act, 2008 – CA Foundation Law Study Material

This Limited Liability Partnership Act, 2008 – CA Foundation Law Study Material is designed strictly as per the latest syllabus and exam pattern.

Limited Liability Partnership Act, 2008 – CA Foundation Business Law Study Material

Question 1.
What is meant by Limited Liability Partnership? What are its salient features/characteristics?
Answer:
An LLP is a new form of legal business entity with limited liability. It is a separate legal entity where LLP itself is liable to the third parties up to the assets it owns but the liability of the partners is limited. It gives the benefits of limited liability of a company and the flexibility of a partnership.
Since LLP contains elements of both ‘a corporate structure’ as well as a partnership firm structure’ LLP is called a hybrid between a company and a partnership.

1. A body corporate
An LLP is a body of corporate formed and incorporated under LLP Act and is a legal entity separate from the partners constituting it. [Sec. 3]

2. Separate Legal Entity
The LLP is a separate legal entity. It is liable to the full extent of its assets but the liability of the partners is limited to their agreed contribution in the LLP. In other words, creditors of LLP shall be the creditors of LLP alone and not of the partners.

3. Perpetual Succession
Death, insanity, retirement, or insolvency of partners has no impact on the existence of LLP. The LLP can continue its existence irrespective of changes in partners. It can enter into contracts in its own name. It can also hold properties in its own name. It is created by law and law alone can dissolve it.

4. Absence of Mutual Agency
The cardinal principle of mutual agency of partners in a partnership is missing in LLP. In the case of LLP, the partners of LLP are agents of LLP alone and not of the other partners. Hence, no partner can be held li¬able on account of the independent or unauthorized actions of other partners.

5. LLP Agreement
The partners are free to make rules related to the mutual rights and duties of the partners as per their choice. This is done through an agreement. In the absence of any such agreement, the mutual rights and duties shall be governed by the provisions of the LLP Act, 2008.

6. Artificial Person
An LLP is an Artificial legal person created by law capable of enjoying all the rights of an individual. It can do everything which a natural person can do, except the contracts of a very personal nature. An LLP is invisible, intangible, immortal but not fictitious because it really exists.

7. Common Seal
Being an artificial person, an LLP work on its own but it has to act through its partners. Hence, it may have a common seal which can be considered as its official signature. [Section 14(c)]. It should be noted that it is not mandatory for an LLP to have a common seal. If it decides to have one, then it shall remain under the custody of some responsible official and it shall be fixed in the presence of at least 2 designated partners of the LLP.

8. Limited Liability
Every partner of an LLP is, for the purpose of the business of LLP, the agent of the LLP, but not of other partners (Section 26). The liability of the partners will be limited to their agreed contribution in the LLP.

9. Management of Business
The partners in the LLP are entitled to manage the business of LLP. However, only the designated partners are responsible for legal com¬pliances.

10. Minimum and Maximum number of Partners
Every LLP shall have at least two partners and shall also have at least 2 individuals as designated partners. It is mandatory that at least one of the designated partners shall be residents in India. Further, there is no maximum limit of partners in LLP.

11. Business for profit Only
LLP can be formed only for carrying on any lawful business with a view to earning profit. Thus LLP cannot be formed for charitable or not-for-profit purposes.

Question 2.
What are the advantages of forming LLP for doing business?
Answer:
Advantages of LLP form
The following are the advantages of LLP form of business organization:

1. It is easier to form an LLP as compared to a company.
2. The partners of an LLP enjoy limited liability.
3. It operates on the basis of an agreement.
4. It is not rigid as far as the capital structure is concerned.
5. It provides flexibility without imposing detailed legal and procedural requirements.
6. It is easy to dissolve an LLP as compared to a Company.

Question 3.
What are the essential elements to form an LLP under the LLP Act, 2008?
Answer:
Under the LLP Act, 2008, the following elements are very essential to form an LLP in India:
1. Persons intending to incorporate an LLP shall decide a name for the LLP.

2. A LLP shall execute a limited liability partnership agreement between the partners inter se or between the LLP and its partners. In the absence of any agreement the provisions as set out in the First Schedule of LLP Act, 2008 will be applied.

3. Then they shall complete and submit the incorporation document in the form prescribed with the Registrar electronically, along with the prescribed fees.

4. There must be at least two partners for incorporation of LLP [Individual or body corporate].

5. A LLP shall have a registered office in India so as to send and receive communications.

6. It should appoint at least two individuals as designated partners who will be responsible for a number of duties including doing all acts, matters, and things as are required to be done by the LLP. At least one of them should be residents in India. Each designated partner shall hold a Designated Partner Identification Number (DPIN) which is allotted by MCA.

7. As soon as the process is completed, a certificate of registration shall be issued which shall contain a Limited Liability Partnership Identification Number (LLPIN)

Question 4.
What are the steps for incorporating LLP under the LLP Act, 2008?
Answer:
Steps or processes for incorporating an LLP:
Step 1: Reservation of name

• The first step while incorporating an LLP is the reservation of the name of the LLP.
• The name of an LLP shall not be similar to that of an existing LLP, Company, or Partnership Firm.
• The applicant has to file e-form 1, for ascertaining the availability and reservation of name. 6 names in order of preference can be indicated.
• The name should contain the suffix “Limited Liability Partnership” or “LLP”.

Step 2: Incorporation

• In the second step, the applicant has to file e-form 2 for incorporating a new LLP.
• This form contains the details of the proposed LLP and the Partners and Designated Partners along with their consent to act as such.

Step 3: Execute an LLP Agreement

• It is mandatory to execute LLP Agreement. [Sec. 23]
• LLP agreement shall be filed with the Registrar in e-form 3 within 30 days of incorporation of LLP.
• The contents of the LLP Agreement are enumerated below:

1. Name of LLP
2. Name and address of partners and designated partners
3. Form of contribution & interest on contribution
4. Profit sharing ratio
5. Remuneration of Partners
6. Rights & Duties of Partners
7. Proposed Business
8. Rules for governing LLP.

Question 5.
Differentiate between:

1. LLP & Partnership
2. LLP & Company

Answer:
(1) Distinction between LLP and Partnership Firm: The points of distinction between a limited liability partnership and partnership firm are tabulated as follows:

Basis	LLP	Partnership
Regulating Act	The Limited Liability Partnership Act, 2008.	The Indian Partnership Act, 1932.
Body corporate	It is a body corporate.	It is not a body corporate.
Separate legal entity	It is a legal entity separate from its members.	It is a group of persons with no separate legal entity.
Creation	It is created by a legal process called registration under the LIP Act. 2008.	It is created by an agreement between the partners.
Registration	Registration is mandatory LI.P can sue and be sued in its own name.	Registration is voluntary. Only the registered partnership firm can sue the third parties.
Perpetual succession	The death, insanity, retirement, or insolvency of the partner(s) does not affect its existence of LLP Members may join or leave hut its existence continues forever.	The death, insanity, retirement, or insolvency of the partner(s) may affect its existence. It has no perpetual succession.
Name	Name of the LIP to contain the word limited liability partners (LLP) as the suffix.	No guidelines. The partners can have any name as per their choice.
Liability	The liability of each partner is limited to the extent of agreed contribution except in the case of wilful fraud.	The liability of each partner is unlimited. It can be extended up to the personal assets of the partners.
Mutual agency	Each partner can hind the LLP b his own acts but not the other partners.	Each partner can bind the firm as well as other partners by his own acts.
Designated partners	At least two designated partners and at least one of them shall be residents in India.	There is no provision for such partners under the Indian Partnership Act, 1932.
Common seal	It may have its common seal as its official signature.	There is no such concept in partnership.
Legal compliances	Only designated partners are responsible for all the compliances and penalties under this Act.	All partners are responsible for all the compliances and penalties under the Act.
Annual filing of documents	LLP is required to file: (i) Annual statement of accounts (ii) Statement of solvency (iii) Annual return with the registration of LLP every sear.	A partnership firm is not required to file an annual document with the Registrar of Firms.
Foreign partnership	Foreign nationals can become a partner in an LLP.	Foreign nationals cannot become a partner in a partnership firm.
Minor as partner	Minor cannot be admitted to the benefits of LLP.	Minor can be admitted to the benefits of the partnership with the prior. consent of the existing partners.

(2) Distinction between LLP and Limited Liability Company (LLC)

Basis	LLP	Limited Liability Company
Regulating Act	The LLP Act, 2008.	The Companies Act, 2013.
Members/Partners	The persons who contribute to LLP are known as partners of the LLP.	The persons who invest the money in the shares are known as members of the company.
Internal governance structure	The internal governance structure of an LLP is governed by the agreement between the partners.	The internal governance structure of a company is regulated by statute (Le., Companies Act, 2013).
Name	Name of the LLP to contain the word ‘Limited Liability Partnership or LLP as a suffix.	Name of the public company to contain the word limited and Private company to contain the word “Private Limited as a suffix.
Number of members/partners	(i) Minimum -2 members (ii) Maximum – No such limit on the members in the Act. (iii) The members of the LLP can be individuals/ or body corporate through the nominees.	(i) Private company: Minimum – 2 members Maximum -200 members (ii) Public company: Minimum – 7 members Maximum. No such limit on the members. (iii) Members can be organizations, trusts, another business form, or individuals.
liability of members/partners	The liability of a partner is limited to the extent of agreed contribution except in the case of wilful fraud.	The liability of a member is limited to the amount unpaid on the shares held by them.
Management	The business of the company is managed by the partners including the designated partners authorized in the agreement.	The affairs of the company are managed by a Board of Directors elected by the shareholders.
Minimum number of directors/designated partners	Minimum 2 designated partners.	Private Co. – 2 directors Public Co. 3 directors

Question 6.
LLP is an alternative corporate business form that gives the benefits of limited liability of a company and the flexibility of a partnership’. Explain.
Answer:
Limited Liability Partnership is a new form of business entity that is viewed as an alternative corporate business vehicle. It provides the benefits of limited liability of a corporate entity but permits its members the flexibility of organizing their internal management structure as a partnership on the basis. of mutual agreement. The following salient features of LLP indicate that it is a hybrid between a company & a partnership:

1. Separate legal entity – Since LLP is a body corporate incorporated under LLP Act, 2008, it enjoys a separate legal entity. As a consequence, the assets & liabilities of LLP, shall be of LLP alone & not treated as the joint properties or liabilities of the partners.

2. Limited Liability – The liability of the partners in LLP, shall be limited up to the amount of their agreed capital contribution in the LLP.

3. Perpetual Succession – LLP, as a body corporate, enjoys a separate legal entity and as a consequence has perpetual succession. Like a company, its existence remains unaffected by the death or insolvency of the partners.

4. LLP Agreement – Similar to a partnership, the mutual rights & duties of the partners within LLP are governed by an agreement between the partners. This provides flexibility to the partners to draft the terms of the agreement as per their choice.

5. Management of Business – Just like a partnership, the partners in LLP are entitled to manage the business of LLP. Thus it is evident that LLP is an alternative corporate business form that gives the benefits of limited liability of a company & the flexibility of a partnership.

Question 7.
What are the documents that are required to be filed for the purpose of incorporation of LLP?
Answer:
The following documents are required for the incorporation of LLP—
(i) The incorporation document:
An incorporation document in a prescribed form (e-Form 2) shall be filed in such manner & with such fees as may be prescribed, with the Registrar of the State in which the registered office of the LLP is proposed to be situated. The document shall state the name of the LLP (the name approved and reserved by Registrar after due application); the proposed business of the LLP; the address of registered office of LLP; name & address of each of the persons who are to be partners of LLP; names & addresses of the persons who are to be designated partners of LLP on its incorporation. It should contain such other information concerning the proposed LLP as may be prescribed. It must be subscribed by two or more qualified persons.

(it) Statement of compliance:
There shall be filed along with the incorporation document a statement in the prescribed form with Registrar, made either by an advocate or a Company Secretary or a Chartered Accountant or a Cost Accountant who is engaged in the formation of LLP and by anyone who subscribed his name to the incorporation document, that all the requirements of this Act and the Rules made thereunder have been duly complied with, in respect of incorporation and matters precedent and incidental thereto.

The Registrar on being duly satisfied with respect to the completion of all •legal formalities for incorporation of LLP shall within 14 days register the incorporation document & give a certificate to that effect. The certificate of incorporation is conclusive evidence that LLP is incorporated by the name specified therein. LLP agreement is required to be filed with the Registrar in the prescribed form (e-Form 3) within 30 days of incorporation of LLP.

Question 8.
What is the procedure for application of name and change of name of LLP?
Answer:
Every Limited Liability Partnership ‘shall have either the words Limited Liability Partnership’ or the acronym ‘LLP’ as the last words of its name. Further, no LLP shall be registered by a name which in the opinion of the Central Government is undesirable or identical to or too nearly resembles that of any other partnership firm or LLP or body corporate or a registered trademark or a trademark which is subject of an application for registration of any other person under the Trade Marks Act, 1999. [Section 15]

Application for reservation of name – A person may apply in the prescribed form & with the prescribed fees to the Registrar for reservation of name. The application should be made after due consideration of requirements of section 15 and must state the name of the proposed LLP or the name to which the existing LLP proposes to change its name in the application. Upon satisfaction, the Registrar may subject to the rules prescribed by the Central Government in the matter, reserve the name for a period of 3 months from the date of intimation by the Registrar.

Change of name: Where the Central Government is satisfied that an LLP has been registered (where through inadvertence or otherwise and whether originally or by a change of name) under a name which is in violation of the provisions of section 15 as mentioned above, the Central Government may direct such LLP to change its name. The LLP shall comply with the said direction within 3 months after the date of the direction or such a longer period as the Central Government may allow.

Question 9.
When does a person cease to be a partner in LLP? What are the effects of cessation of partnership interest?
Answer:
A person may cease to be a partner of LLP in the following instances

1. in accordance with an agreement with the other partners or
2. in the absence of an agreement with the other partners as to the cessation of being a partner, by giving a notice in writing of not less than 30 days to the other partners of his intention to resign as partner or
3. on his death or dissolution of LLP or
4. if he is declared to be of unsound mind by a competent court or
5. if he has applied to be adjudged as an insolvent or has been declared as an insolvent. Where a person has ceased to be a partner of an LLP, then such a person shall -be regarded as still being a partner of the LLP, in relation to any other person dealing with the LLP unless – such a person has noticed that the said partner has ceased to be a partner of LLP or a notice that former partner has ceased to be a partner of the LLP has been delivered to the Registrar.

The cessation of a partner from LLP does not by itself discharge the partner from any obligation to the LLP or to the other partners or to any other person which he incurred while being a partner. Where a partner of an LLP ceases to be a partner, the former partner or his legal representatives shall be entitled to receive from the LLP – an amount equal to capital contribution by the former partner and his share in the accumulated net profits of the LLP.

Question 10.
Discuss the conditions under which LLP will be liable & not liable for the acts of the partner.
Answer:
Every partner of an LLP is for the purpose of the business of LLP the agent of LLP but not of other partners.

1. Further an LLP is not bound by anything done by a partner in dealing with a third person if

• the partner in fact has no authority to act for the LLP in doing that particular act and
• the third person has knowledge that the partner has in fact no authority.

Thus the LLP shall be bound by its partner’s act if the partner acts within the scope of his authority and the third person is acting in a bona fide manner.
2. The LLP shall also be liable to any person who suffers damages on account of any wrongful act/omission of the partner performed by him or with his authority in the course of the business of the LLP.
3. In the event of an act carried out by an LLP or any of its partners with an intent to defraud creditors of the LLP or any other person or for any fraudulent purpose, the liability of the LLP and partners who acted in such a manner shall be unlimited.

However in case, any such act is carried out by a partner, the LLP is liable to the same extent as the partner unless it is established by the LLP that such act was done without the knowledge or the authority of the LLP.

Question 11.
What are the requirements with respect to Books of Account, Statement of Solvency & Annual return for LLP?
Answer:
Books of Account – The LLP shall maintain such proper books of accounts as may be prescribed, relating to its affairs for each year of its existence on a cash basis or accrual basis and according to the double-entry system of accounting. Such books of accounts shall be maintained at the registered office of LLP for such period as may be prescribed. The accounts of LLP shall be audited as per the rules prescribed.

Statement of solvency – Every LLP shall within a period of 6 months from the end of each financial year, prepare a Statement of Account & Solvency for the said financial year as at the last day of the said financial year. The statement shall be in such form as may be prescribed and shall be signed by the designated partners of the LLP. Every LLP shall file the Statement of Account & Solvency with the Registrar within the prescribed time, every year in such form and manner & accompanied by such fees as may be prescribed.

If any LLP fails to comply with the requirements with respect to Books of Accounts or Statement of Account & Solvency, then LLP shall be punishable with a fine of a minimum of ₹ 25,000 but which may extend to ₹ 5 lakhs & every designated partner shall be punishable with fine of minimum t 10,000 but which may extend to ₹ 1 lakh. Annual Return – Every LLP shall be required to file an annual return duly authenticated with the Registrar within 60 days of closure of its financial year in such form and manner and accompanied by such fees as may be prescribed. In the event of non-compliance, LLP shall be punishable with a fine of a minimum of ₹ 25,000 but which may extend to ? 5 lakhs and designated partner shall be punishable with a fine of a minimum of ₹ 10,000 but which may extend to ₹ 1 lakh.

Question 12.
What is the procedure for conversion of a firm/private company/ unlisted company into LLP?
Answer:
A firm may convert into LLP by complying with the provision of the Second Schedule of the Limited Liability Partnership Act, 2008. Whereas a private company and an unlisted public company can be converted into LLP after complying with the provisions of the Third Schedule & Fourth Schedule respectively.

1. The Registrar may on being duly satisfied that a firm, a private company or an unlisted public company, as the case may be, has complied with the requirements of the respectively applicable Schedules and rules made thereunder, register the documents submitted for registration of such conversion. The Registrar shall issue a certificate of registration in such form as the Registrar may determine, stating that the LLP is on and from the date specified in the certificate, registered under this Act.

2. The LLP shall within 15 days of the date of registration, inform the con¬cerned Registrar of Firms or Registrar of Companies, as the case may be, with which it was registered about the fact of conversion.

3. On the registration of conversion of firm/private company/unlisted public company into LLP, the partners or members of the erstwhile firm/ private company/unlisted public company, as the case may be, shall be regarded as the partners of LLP. Further, all the assets & liabilities of the erstwhile entity shall be transferred to and vest in the LLP.

The former firm or company as the case may be shall be deemed to be dissolved and removed from the records of the Registrar of Firms or Registrar of Companies, as may be applicable.

Question 13.
What are the circumstances when LLP can be wound up?
Answer:
The winding of LLP can be initiated either voluntarily or by the Tribunal.
An LLP may be wound up by the Tribunal in any of the following instances:

1. The LLP decides that it be wound up by Tribunal
2. There are less than 2 partners in the LLP for a period of more than 6 months
3. The LLP is not in a position to repay its debts
4. The LLP has acted against the interests of the sovereignty and integrity of India
5. The LLP has defaulted in filing with the Registrar, the Statement of Ac¬count & Solvency or the Annual Return for any 5 consecutive financial years or
6. The tribunal is of the opinion that winding up LLP is just and equitable.