How To Form A Limited Liability Partnership

By Team YS|18th Oct 2011
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Lawyers from VakilSearch tell you how

The Limited Liability Partnership Act 2008 was published in the official Gazette of India on January 9, 2009. After the rules were notified on April 1st, 2009, the first LLP inIndiawas incorporated in the first week of April, 2009.

Some Advantages of an LLP

One advantage of a Limited Liability Partnership is that it offers a combination: the flexibility of a partnership along with the limited liability protection of a company. The Indian LLP Act can be used by any commercial venture unlike some other LLP legislations.

Secondly, the Partners in an LLP are protected from the actions of other partners. The liability of a Partner is limited to the extent of his/her contribution in the LLP.

Please note: The LLP itself is liable to the full extent of the assets of the enterprise, but like a Company, it is a distinct entity from its partners.

Concept of a Designated Partner

An LLP is not in any way controlled or affected by the Indian Partnership Act. In fact, an LLP is registered and the legal process is controlled by the Registrar of Companies (RoC). The only exception is that as regards taxation, an LLP is treated like a Partnership firm. So while it does bring the best of both worlds, it also creates an element of risk for third parties dealing with the firm. For that reason, the concept of “the designated partner” has been introduced. It was felt by our law makers that there should be two special partners among the partners in the LLP for these reasons:

a.    To be responsible for all actions and things which the LLP has to do to comply with the provisions of this Act. This will include filing the necessary documents, statements, returns and reports required to be filed under the Act.

b.   To be liable for all penalties imposed for the contravention of the provisions of the Act.

The Partner who performs this function is called the “Designated partner” of the Limited Liability Partnership. In order to become a designated Partner, an individual has to give his consent to the LLP and has to obtain what is called a DPIN (Designated Partner Identification Number)

The LLP Act requires that at least two designated partners be present in every LLP. Additionally, these two designated partners have to be individuals (as opposed to a company) and at least one of the designated partners has to be resident in India.

Section 10 of the Limited Liability Partnership Act states that any LLP not appointing two designated partners can be punished, along with every partner in the firm, with a fine of no less than Rs. 2000 and going upto Rs. 5 lakh. The law also requires that any vacancy arising in the office should be communicated to the RoC within a maximum of 30 days. If at any given point there cannot be two designated partners for any reason or if no Designated Partner is appointed when a vacancy arises, every partner becomes a designated partner. Therefore, in an LLP not filling a vacancy in the position of a Designated Partner, each partner will automatically become a Designated Partner till the vacancy is filled. This is as per Section 9 of the LLP Act, 2008.

The best way to understand the role and functions of a Designated Partner is to compare him to the Directors of a Company. However, unlike a Director, a Designated Partner is not entitled to any special remuneration or compensation as per the LLP Act unless this is specifically provided under the LLP Agreement.

For the sake of clarity, the major duties of a Designated Partner are:

  • To notify any changes in the LLP (including changes in the Partners, their residential addresses, the registered office of the LLP, filing annual returns and accounts statements) to the Registrar of Companies.
  • To produce for inspection all the books (of account and otherwise) and papers of the LLP
  • Finally, to sign all the e-forms filed with RoC.

How do I Register an LLP?

Following the trend we seen in the Company Law with Digital Signatures and DIN Numbers, the Ministry of Corporate Affairs has made the process of registering an LLP mostly possible online. A Step-by-Step process to incorporate an LLP is available on the LLP portal of the Government of India. Even an existing partnership firm, company or unlisted public company can be converted into an LLP by following the procedure laid down under the LLP Act. Like a Company, an LLP can be “wound up” and dissolved. Detailed provisions regarding winding up are found in the LLP Rules.

Should I Go the LLP Way?

This is a difficult question to answer without considering the circumstances of your case, but the LLP law is not very evolved unlike the Company law, so the safer bet is still to form a Company. If you have explored that option and would not like to form a Company, go ahead and form an LLP, but draft the founding documents with care.

This article is brought to you by VakilSearch

VakilSearch is India’s leading online legal services provider for businesses and individuals. As the official partner of the Confederation of Indian Industry (CII) and knowledge contributor to Sulekha.com, the Hindu Business Line, Entrepreneur Magazine and the All India Rubber Association, VakilSearch reaches out to thousands of businesses, entrepreneurs and individuals on a regular basis. So when you visit vakilsearch.com, you can be assured of quality legal guidance and comprehensive documentation for your business and personal needs, at affordable prices.

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