The word LLP has immense significance in the corporate world, and LLP refers to a Limited Liability Partnership. An LLP is an alternative business structure that offers various benefits, and one of the major benefits of LLP is limited liability for the firm's partners. In comparison with companies, LLPs have less compliance, disclosures, and the process is less complex.
Overview of Limited Liability Partnership
A Limited Liability Partnership is a corporate body and legal entity incorporated and formed under the Limited Liability Partnership Act of 2008. The word LLP has immense significance in the corporate world. An LLP is an alternative business structure that offers various benefits, and one of the major benefits of LLP is limited liability for the firm's partners. In comparison with companies, LLPs have less compliance, disclosures, and the process is less complex. The concept of a Limited Liability Partnership has emerged after the enactment of the Companies Act of 2013.
Entrepreneurs in India generally prefer LLPs more than other business structures as there are several benefits offered under the Limited Liability Partnership Act of 2008. The Limited Liability Partnership gives partners the freedom to form a partnership firm while having the benefits of a company such as limited liability where each partner's liability is limited to the amount they have invested in the business.
Key Features of Limited Liability Partnership
The following are the key characteristics of LLPs:
Separate Legal Entity
A Limited Liability Partnership firm is a separate legal entity from its partners. The LLP partners have a limited liability, which means the liability of partners is limited to the capital they have invested in the LLP. An individual partner is not responsible for another partner's negligence or misconduct. The banks or any other creditor does not have the right to snatch personal property or assets of the partners in case of unpaid debt, but of the partners are involved in fraud or any other illegal activity, then the court can order for selling personal assets or property of the partners.
The following are the circumstances where the personal liability of a partner may be extended:
If a partner is negligent and a third party suffers a loss, then the third party can take action against that individual partner and the Limited Liability Partnership. Though the third party's action would undermine the principles of limited liability and in cases of negligence, the courts generally find individual partners guilty for their own negligence.
Fraudulent and wrongful trading provisions apply to Limited Liability Partnerships in substantially the same way that they are applied to private and public limited companies. Suppose the partners of a Limited Liability Partnership allow the LLP to carry on trading after they have the knowledge that the insolvency cannot be avoided or the partners allowed LLP to carry on trading with an intention to defrauding creditors. In that case, the partners will be personally liable.
Any individual lending money to Limited Liability Partnership may still need personal guarantees from the partners, as loan institutions do it with a company's shareholders and directors. The LLP partners must check the provisions of their partner’s agreement to check if the LLP offers an indemnity to the partners for such a guarantee or the liability of such a loan will be shared with other partners.
Taxation
Even though an LLP is treated as a separate legal entity from its partners, the Limited Liability Partnership is treated for tax purposes as a partnership, and the partners are taxed on the share of the income or gains of the Limited Liability Partnership.
Organizational Flexibility
A Limited Liability Partnership has the organizational flexibility of a partnership, and the requirements dealing with the daily running of the Limited Liability Partnership will normally be contained in an LLP agreement. A Limited Liability Partnership agreement deals with the following matters:
Profit and Losses
Ownership of property
Drawings
Admissions of new partners
Decision making and meetings
Expulsion of members and Retirement
Insurance and Indemnities
Restrictive Covenants
A Written Limited Liability Partnership agreement is a private document that is confidential for the partners.
Disclosure Requirements
Every LLP must affix or display its name on the premises where the business activities are performed even if the premise is a partner home. The name must be affixed in legible letters and in a conspicuous position. The name of the LLP must appear in a legible form, on a number of business documents including:
Notices and other official publications
Business letters and order forms
Cheques, receipts, and invoices
Websites
In addition to LLP's business letters and order forms, and all the websites of LLP should specify the following in legible letters:
The registered office address
The place of registration
Registered Number
In the case of a Limited Liability Partnership whose name starts ends with ‘LLP’ or ‘LLP,' it indicates the fact that it is a Limited Liability Partnership.
If the LLP fails to comply with any of the statutory requirements, it may result in a penalty on the LLP members.
Accounting and Filing Requirements
LLPs must give financial information. Following are the examples of the documents that must be included by the Limited Liability Partnership:
Annual account details
Annual return details
Notification on to the LLP partners regarding any changes such as adding a new partner or removing a partner.
Notification regarding the changes in the registered address of the LLP's office
Detailed information regarding any charge created by the LLP or any mortgage.
If the LLP fails to file annual account details before or on the due date, it can result in imposing a fine as per guidelines of the Companies Act of 2013.
Conclusion
Entrepreneurs in India generally prefer LLPs more than other business structures as there are several benefits offered under the Limited Liability Partnership Act of 2008. The Limited Liability Partnership gives partners the freedom to form a partnership firm while having the benefits of a company such as limited liability where each partner's liability is limited to the amount they have invested in the business.