CCS- LLP Model Report - 1011015,1011048

Understanding the LLP Model

SUBMITTED BY

ASHISH VERMA (1011015)RAVEESH SHARMA (1011048)

April 7, 2023

SUBMITTED TO

PROF. S KRISHNAMURTHY

FINANCE AND CONTROL

INDIAN INSTITUTE OF MANAGEMENT, BANGALORE

2

CONTEMPORARY CONCERNS STUDY Understanding The LLP Model: Impact of LLP Act 2008 on Indian Business

TABLE OF CONTENTS

Introduction...........................................................................................3

Evolution of LLPs....................................................................................4

Need for Limited Liability Partnership Model..........................................5

Features of Limited Liability Partnership Model.....................................5

Advantages............................................................................................6

Disadvantages.......................................................................................9

Issues.....................................................................................................9

Partnership at Will..............................................................................9

Death of a Partner............................................................................10

Treatment of Minors.........................................................................10

Comparison between a LLP and Partnership,.......................................11

References...........................................................................................16

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INTRODUCTION

There are multiple forms of doing business ranging from Individual

Proprietorship to Business Enterprise. Generally, the endeavors smaller

in size and requiring more personal involvement are carried out in

individual capacity, while for those requiring effort of multiple

personnel, partnership or enterprise form is more suited. So the choice

of the form for the business endeavor depends upon multiple factors

like nature and duration of business, scale of operation, level of control

required, and capital structure, apart from the legal and regulatory

requirements. The forms of business entities also varies from country

to country according to jurisdiction, however the most common are

listed as under:

- Sole Proprietorship: It is a For-profit business owned by one

person. The proprietor has complete 100% ownership of the

business and unlimited liability for the debts incurred by the

business. The businesses are generally small in size and

unregulated.

- Partnership: In a partnership, two or more people have the

ownership of the business. The partners share the risk, capital

investment and the returns in a mutually agreed ratio. The

distinctive features of the partnership firms are listed as under:

Multiple Partners (more than 2)

Written Agreement

Sharing of Risks/Returns

Joint Ownership and Control

Unlimited, Joint and Several Liability of Partnership

Partnerships are further classified as under:

General Partnership

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Limited Partnerships

Limited Liability Partnerships

- Corporation: A corporation is a limited liability form of business

that is treated as a separate legal entity separate from its

members. The corporation has a separate identity distinct from

its shareholders. A Corporation can sue and be sued by others.

The extent of the liability of the members (shareholders) is

limited to the extent of the investments they made. Corporations

can be either owned by the government or privately owned.

Privately owned corporations are generally run by a shareholder

appointed Board of Directors. The corporations can be either

owned privately or listed on the stock market and owned publicly.

Although Corporations are separate entities from individuals but

they do not have fundamental rights like other citizens. However

Corporations can own property etc. Corporate entities have some

salient features. One is that of perpetual succession. The life span

of a company is not decided by the life span of its founders or

promoters. The members may cease to exist but the

corporation’s existence remains unaffected. Another feature is

that of transfer of ownership. The shares of the listed company

are tradable and with the transfer of shares, the ownership

pattern changes.

- Cooperative: Cooperatives are associations of people having

shared goals or interests. Cooperatives differ from corporations in

their management control. In a cooperative, members take all

the important decisions as opposed to the corporations where

Board of Directors takes decisions on behalf of shareholders.

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Fig 1: Various Forms of Business Entities

EVOLUTION OF LLPS1

Limited Liability Partnerships (LLP) first emerged in the United States

(in the state of Texas) in the early 1990s. A large number of law firms

in the United States became bankrupt due to US $ 980 bn Loan and

Savings Scam as a result of suits decreed in malpractice litigation. The

firms’ assets were liquidated. The partners of the insolvent firms were

held jointly and severally responsible for all the liabilities of the

partnerships and the assets were recovered from them. (Most of these

firms were owned by lawyers and accountants). This made being a

partner in the firm an unattractive prospect. The LLP model gained

widespread adoption after the revision of the Uniform Partnership Act2

in 1996. And by the year 1997 nearly all the states in United States had

passed legislation related to limited liability partnership. Taking a cue

from the United States, the discussion about the LLPs in India had

1 LLP: Law and Practice – Sanjiv Agarwal2 Uniform Partnership Act, 1914 is a state law drafted by US Uniform Law Commission for the governance of business partnerships in the US.

Types

Sole Proprietors

hipPartnership

General Limited Limited Liability

Co-Operatives

Limited Companies

Private Limited

Public Limited

Public Enterprise

(PSUs)

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started as early as 1997 (Abid Hussain Committee). But the long

overdue act was passed only in 2008 after recommendations from two

committees (Naresh Chandra Committee, 2003 and JJ Irani Committee,

2005).

NEED FOR LIMITED LIABILITY PARTNERSHIP MODEL3

As already described above LLPs came into being to address the

concern of professionals (who were generally involved in legal,

accounting, consulting services etc.) from the consequences they faced

in case the firms, in which they were partners, became insolvent. And

in an increasingly competitive and litigious business environment, it

was becoming a major disincentive for two or more skilled and like

minded people sharing common vision to come together and start a

partnership. Thus a new kind of business entity was needed that would

not only make it possible but incentivize the entrepreneurs and

professionals engaged in multiple disciplines to come together and

form commercially efficient vehicles that suited their requirements.

Thus Limited Liability Partnership came into existence as an alternative

to the other existing models combining the benefits of limited liability

at the same time providing the benefits of partnership in organizing the

structure of the firm. As a consequence of the flexibility offered, LLP

model is an ideal choice for the professionals seeking to provide

services in multiple disciplines like legal services, chartered

accountancy etc. Apart from that LLP form is also suitable for small

manufacturing enterprises.

FEATURES OF LIMITED LIABILITY PARTNERSHIP MODEL

3 http://www.llp.gov.in/aboutllp.htm

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Limited Liability Partnerships (LLPs) are commercial vehicles which

combine the features of Partnership and Corporate form of business. In

an LLP one partner is not responsible for other partner's misconduct or

negligence. In an LLP, all partners have limited liability for each

individual's protection within the partnership, similar to that of the

shareholders of a limited company. However, unlike the company

shareholders, the partners have the right to manage the business

directly. Limited liability does not imply, in any sense, limited liability of

the firm. The LLP, as a separate entity, is liable to complete extent for

the assets it has. Only the members of the LLP have limited liability to

the extent of their agreed contribution. This is possible because, LLP by

law, like corporations, is a body separate from its founding members

and partners. It has perpetual succession. And there is no upper limit

on the maximum number of partners that a LLP can have (unlike in

Partnerships where the range of number of partners is 2 to 20). As a

consequence of the limited liability, the LLPs are required to maintain

their accounts, just like the corporate, to keep a check on the reckless

behavior. The Indian LLP Act 2008 has elaborate provisions for the

actions like Mergers and dissolutions of the LLP which are discussed in

detail later in this report.

ADVANTAGES4

LIABILITY AND ASSET PROTECTION

In sole proprietorship, the promoter and the business are considered

legally inseparable. Expressed differently, the firm’s debts are legally

the debts of the proprietor i.e. any legal action against the business is

also a legal action against the proprietor. The implication is that all the

personal assets of the proprietor could be taken away should the

business be liquidated. On the other hand the general partnerships are

4 http://www.legalzoom.com/pdf/llc_070112_003.pdf

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comparatively more risky. The decision of each partner affects the firm

and one bad decision by one of the partners can make all the other

partners liable to cover for the consequent damage claims. In contrast

to this, an LLP is a legally distinct entity and the partners are not

personally held responsible. The debts and claims on the LLP can’t be

construed as a personal liability on the partners. And the partners don’t

have to carry the firm’s debt to their next venture. Thus the LLP model

saves the partners from potentially damaging situations. However

there is a caveat here, the partners can be held liable in case they

make personal commitment to the debt of the firm.

TAX SAVINGS & FLEXIBILITY

LLP model also offers flexibility in taxation. In the UK and the US, all the

activities are assumed to be carried out by the partners and not the

LLP. So the income is taxed at the personal Income marginal rate and

not at the corporate tax rate (and hence taxed at a lower rate). Thus

LLPs enjoy the pass-through status of for Income tax purpose.

Additionally, an LLP need not pay the Dividend Distribution Tax unlike a

registered company. In India, the LLP Act 2008 does not contain any

separate provision for taxes. The provisions of Income Tax 1961 are

applicable.

EASE OF FORMATION AND TRANSFER

The LLP formation process is very simple as compared to forming a

Company and the formation procedures are relatively easier.

Ownership interests in an LLP can be sold to the third parties without

disrupting the continued operation of the business. In contrast, the sale

of interests in a sole proprietorship or general partnership is an

intensive process requiring much effort and time. An owner has to

individually transfer the assets, permits and licenses, accounts, and

other legal documentation. If a sole proprietor has a plan to one day

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pass the family business down to the next generation, converting the

sole proprietorship to an LLP can help smooth the transition.

OWNING OF PROPERTY

A LLP as a legal entity is capable of owning its funds and other

properties. The property of LLP is distinct from the property of its

partners. Therefore in case of a dispute among the partners, the

property of the LLP is insulated from the claims by the partners.

PERPETUAL SUCCESSION

As mentioned earlier, an incorporated LLP has perpetual succession.

An LLP remains the same entity with same property rights, privileges

and possessions despite any change in the partner(s). And it shall

continue to exist in the similar state till it is terminated in accordance

with the statutes of the relevant law.

CAPACITY TO SUE

As a legal entity, a LLP can sue in its name and be sued by others. The

partners can’t be sued for dues against the LLP.

NO OWNERSHIP RESTRICTIONS

There is no upper limit on the number of partners a LLP firm can have.

On the other hand the limited partnerships can have only 20 partners

at most.

FLEXIBILITY TO MANAGE

LLP Act 2008 gives the LLPs the freedom to manage their own affairs.

Partners can decide the way they want to operate and manage the

venture, in form of an LLP Agreement and the professionals would be

able to form multidisciplinary partnerships.

RAISING CAPITAL

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Making arrangements for financing a small unregulated business can

be difficult most of the times. On the other hand an LLP is a regulated

entity like company and a lot of financing options exist including

investment form Private Equity firms and other financial institutions.

New members can be admitted by selling membership interests. New

classes of membership interests with different voting or profit

characteristics can be created.

AUDIT REQUIREMENT

The audit by a practicing Chartered Accountant is required only if the

annual turnover exceed Rs 2500000. This is of great convenience to

small businessmen.

DISADVANTAGES

NUMBER OF PARTNERS

The minimum number of partners required to form a LLP is two. A

person alone can’t form a LLP. The exit of one partner in case of a two

person LLP will force the closure unless a new partner is admitted†.

†† However Companies Act is being amended to allow for One Man Company.

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LLP AGREEMENT

A LLP agreement is needed to avoid default provisions from being

applicable and to cover the situations not addressed by the default

provisions in the LLP Act 2008.

INFORMATION DISCLOSURE

Some risk-averse businessmen and family businesses may not prefer

LLP model due to certain information required to be made available in

the public domain and the legal processes and documentation required

in the formation process.

ISSUES

PARTNERSHIP AT WILL

Article 7 of Indian Partnership Act 1932 states that when there is no

provision in the contract for the duration of the partnership, the

partnership is treated as ‘Partnership At Will’. The implication is that

any partner can dissolve the firm by giving notice to other partners.

Partnership contract usually provides information regarding the

duration of the partnership or how the partnership will be brought to an

end.

The provisions have also been provided in the Act that if after a

partner's death the business is continued in the same name as before,

the continued use of that name if it contains the deceased partner's

name shall not by itself make his legal representative or his estate

liable for any act of the LLP done after his death.

DEATH OF A PARTNER

As a partnership is not a legal entity, it does not has perpetual

existence unlike a company or an LLP. As a result the death (or

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insolvency) can lead to the dissolution of the partnership firm. A

partnership firm can continue only if specific provisions have been

provided in the partnership deed regarding the continuation of the firm

despite the death of a partner.

LLP Act 2008 states that in the event of death of a partner, the

business can be conducted in the same LLP name even if contains

deceased partner’s name. The continued use of the name of the

deceased partner’s name does not make his legal heirs/representatives

or his estate liable for any business transaction of the LLP done after

the partner’s death. However, according to the Act of 2008, an LLP

must have at least two members. If the number of partners falls below

two, and the business is carried for more than six months, the person

carrying on the business (being aware of the fact) will be personally

liable (i.e. jointly and severally liable along with the LLP) for the

obligations of the LLP during that period. In addition the Tribunal may

wind up the affairs of the LLP, if the number of partners remains less

than two for more than six months. In a way the partner has less than

six months to find a new partner to continue with the entity. Thus the

death of a partner may lead to winding up of the LLP only if it is an

entity with only two partners and the other partner is not able to find a

new partner within six months of the death of the deceased partner.

TREATMENT OF MINORS

Minors can be admitted to the benefits of a partnership (as per

Partnership Act 1932) but the LLP Act 2008 is silent on this issue. LLP

Act 2008 states that any individual or Body corporate can be a partner

of limited liability partnership, an individual is not eligible only when:

- The person has been found to be mentally unsound by a court of

competent jurisdiction and that finding is still applicable.

- the person is an undischarged insolvent

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- the person has applied to be adjudicated as an insolvent and his

application is pending

The act has defined the eligibility of an individual to become a partner

in an LLP in a negative manner by listing only the conditions in which a

person is ineligible to become a partner rather than the other way by

laying down the conditions to be eligible to be a partner.

Thus every person who is competent can become a partner. There is

no separate provision has been provided on the treatment of a minor.

To become a partner a person has to sign the LLP Agreement. Thus

each person who is competent to a contract can become a partner.

However Indian Contract Act 1872 states that a minor is not eligible to

enter into a contract. Thus a minor can’t be bound by the partnership

agreement in an LLP; however, partnership of a minor may not render

the partnership agreement void.

COMPARISON BETWEEN A LLP AND PARTNERSHIP5,6

S.N

o.

Particulars Partnership LLP

1. Registration It is not a

mandatory

requirement under

the Indian

Partnership Act,

1932. If a

partnership firm is

not registered,

partners will not

Registration is

mandatory and the

incorporation document

is filed as prescribed by

the Registrar of the state

in which the registered

office of the LLP is to be

situated

5 Indian Partnership Act, 19326 The Limited Liability Partnership Act, 2008

14


have the right to file

a suit to enforce a

right arising from a

contract. An

unregistered firm

cannot sue a third

party.

2. Firm Name

Partners are free to

choose to any name

for their business

Every LLP name has to

be approved (should not

be undesirable, identical

or too closely resembles

partnership firm) and

firm name is suffixed by

the either the words

“limited liability

partnership” or acronym

“LLP”

3. Legal Entity

A partnership firm is

not a legal entity. It

has limited identity

for the purpose of a

tax law. It is a

relationship

between persons

who have agreed to

share the profits of

a business carried

on by all or any of

them acting for all.

LLP is a body corporate

formed and incorporated

under the LLP Act, 2008.

It is a separate legal

entity, separate from its

partners.

4. Number of

Partners

A partnership has

minimum of 2

LLP must have minimum

of 2 partners and no

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partners,

partnership act puts

no limit on

maximum number

of partners but the

section 11 of

company act limits

the maximum

number of partners

to 20.

limit on the maximum

number of partners.

5.Time

Duration

Partnership can

have a specified

duration as

mentioned in the

contract; also

partnership is

“Partnership-At-

Will”. It is not a body

corporate.

LLP is a body corporate

has a perpetual

succession unless legally

wound up by

partners/creditors.

6. Liability Every partner is

liable jointly liable

with all the other

partners and also

severally for all acts

of the firm done

while he is a partner

Limited liability, i.e. a

partner is liable only to

the extent of his

contribution in LLP (as

specified in agreement).

An obligation of the LLP

arising in contract or

otherwise shall be

obligation of LLP only

and a partner is not

personally liable, directly

or indirectly for any such

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obligation.

7.Foreigners

as Partners

Only NRI’s and PIO’s

(persons of Indian

origin) can set up a

partnership.

At least 1 member of LLP

has to be RoI(resident of

India), foreign nationals

other than PIO’s and

NRI’s can also be

partners in LLP

8. Financial

Disclosures

The partnership act

is silent on financial

disclosures, it’s not

mandatory to file

financial disclosures

A LLP has to maintain

proper account books on

cash basis or accrual

basis according to

double entry system.

Within a period of 6

months from end of a

financial year it has to

prepare a “Statement of

Account and Solvency”

for the said financial

year. Its accounts are

audited as per the rules

prescribed by GoI in the

Official Gazette. LLP has

to file an annual return

duly authenticated with

the Registrar within 60

days of closure of its

financial year

9. Whistle

Blowing

Indian Partnership

Act, 1932 says

nothing about

whistle blowing.

Court or Tribunal may

reduce or waive any

penalty levied against

partner or employee if

he has provided useful

17


information during

investigation of such LLP

or the information given

by him/her leads to

conviction of LLP

10. Agreement

Partnership

agreement can be

‘written’ or ‘Oral’.

Written agreement

is compulsory for

partnership to be

registered

Mandatory written

agreement,

incorporation documents

are compulsory.

11.Minor

Partner

A minor can be a

partner in

partnership, if other

partners agree to it.

The act is silent on

position of minor in LLP.

A minor cannot be

appointed as a

designated partner of a

LLP. There are no

provisions to provide

excuse or immunity to

minor from any penal

provision

12.Asset

Ownership

Shares, property

and any others

assets cannot be

held in the name of

partnership firm.

They are generally

jointly owned by

partners

Shares, property or any

other assets can be held

in the name of LLP as it

is a body corporate and

a separate legal identity.

13. Partner’s A partnership may LLP continuous to exist

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Death

be dissolved with

the death of a

partner unless there

are other provisions

in the contract

as a legal entity even if

partner dies and it will

continue to do so until it

is legally wound up.

14.

Business

Transactions

with Partner

A partnership does

not provide

provisions to partner

to have any

business

transactions with

the it’s partnership

firm

A partner may lend

money to and transact

other business with LLP

and has the same rights

and obligations with

respect to loan or other

transactions as a person

who is not a partner

15.

Winding up

and

Dissolution

There are no

provisions for

compromise,

arrangement,

winding up,

reconstruction etc.

in partnership act

Specific provisions for

compromise,

arrangements, winding

up, amalgamation etc.,

which are regulated by

Tribunal /Courts

16. Taxation7

For the purpose of

Taxation,

partnership is

considered as a

separate legal entity

and taxed as a firm

LLP are treated in the

same manner as

partnership for taxation.

There are no differences.

Conversion from

partnership to LLP will

have no tax implications

17. Foreign

Investments8

Only NRI’s and PIO’s

can invest in

Foreign investments are

allowed in LLP

7 http://jurisonline.in/2010/05/limited-liability-partnership-vs-partnership

8 http://www.investindia.gov.in/faqs.htm

http://www.investindia.gov.in/faqs.htm

http://jurisonline.in/2010/05/limited-liability-partnership-vs-partnership

19


partnership firm. No

person other than

NRI’s/PIO’s shall

make any

investment by the

way of contribution

to capital of a

proprietary/

partnership firm

18.Statutory

Compliance

According to

partnership act, all

partners are liable

for statutory

compliance

The designated partners

in LLP are liable for

statutory compliance

19.Identification

Number

Partners are not

required to obtain

any identification

number by central

government

Designated partners

have to obtain a

Designated Partner

Identification Number

(DPIN) from the Central

Government.

20.Partner’s as

an agent.

A partner in general

partnership is an

agent to the firm as

well as to other

partners, thus can

bind them legally by

its actions.

A partner in LLP is an

agent of LLP alone and

not other partners, thus

his actions will legally

bind only LLP and not

other partners.

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REFERENCES

LLP: Law and Practice – Sanjiv Agarwal

http://www.llp.gov.in/aboutllp.htm

http://www.legalzoom.com/pdf/llc_070112_003.pdf

Indian Partnership Act, 1932

The Limited Liability Partnership Act, 2008


http://jurisonline.in/2010/05/limited-liability-partnership-vs-

partnership

http://www.companyformationsindia.org/distinction-between-llp-vs-

partnership-vs-company.html

http://www.pluggd.in/limited-liability-partnership-llp-company-

comparison-297/

http://www.taxmanagementindia.com/visitor/detail_article.asp?

ArticleID=383

Limited Liability Partnership, Dewan PN Chopra Consultants Pvt. Ltd.

rbidocs.rbi.org.in/rdocs/notification/PDFs/40493.pdf

http://www.llphelpline.com/llp-vs-partnership.htm

http://www.llphelpline.com/llp-vs-partnership.htm

http://www.taxmanagementindia.com/visitor/detail_article.asp?ArticleID=383

http://www.taxmanagementindia.com/visitor/detail_article.asp?ArticleID=383

http://www.pluggd.in/limited-liability-partnership-llp-company-comparison-297/

http://www.pluggd.in/limited-liability-partnership-llp-company-comparison-297/

http://www.companyformationsindia.org/distinction-between-llp-vs-partnership-vs-company.html

http://www.companyformationsindia.org/distinction-between-llp-vs-partnership-vs-company.html




http://www.legalzoom.com/pdf/llc_070112_003.pdf

http://www.llp.gov.in/aboutllp.htm

Documents

CCS- LLP Model Report - 1011015,1011048