Limit Your Liabilities in Partnership

When Kavita Das wanted to start a consultancy business, she felt the need for a partner rather than starting a venture all alone in a sole proprietorship model. But the idea of bearing the consequences of a partner’s misconduct made her uneasy. She had almost given up the idea of bringing, one of her previous colleagues, onboard to start the venture, when her legal advisor told her about the limited liability partnership (LLP).

It is not just Kavita who has had such fears. Many Indian entrepreneurs have similar fears. To address this fear and enable professional expertise and entrepreneurial initiative to combine and operate in flexible, innovative and efficient manner the government of India introduced the Limited Liability Partnership Act 2008, which came to effect from April 1, 2009.

What is LLP?

The LLP is a body corporate and a legal entity separate from its partners. Any two or more persons, associated for carrying on a lawful business with the aim to profit, may by subscribing their names to an incorporation document and filing the same with the Registrar, form a Limited Liability Partnership.

LLP combines the advantages of both the Company and Partnership into a single form of organisation. In an LLP, one partner is not responsible or liable for another partner’s misconduct or negligence; this is an important difference from that of an unlimited partnership.

Advantages of LLP

• LLP is cost effective. If a partnership model of Rs 1 lakh will incur a cost of Rs 7 lakh to execute it, a LLP model will incur only Rs 2 lakh.

• LLP is a separate legal entity, separate from its partners, can own assets in its name, sue and be sued. This limits the liability of partners as individuals.  

• One partner is not liable for another partner’s misconduct or negligence. Say in case of a fraud by one partner the other partner will be liable only for what they committed in the agreement and not for the one who did fraud.

• The duties, liabilities and rights of the partners are governed by the LLP agreement. Hence, there is the freedom to define your share of all the above.

• Liability of the partners is limited to the extent of their contribution in the LLP. No exposure of personal assets of the partner, except in cases of fraud.

• In an LLP the maximum number of partners is not fixed. The minimum of course is two.

• Easy to dissolve and wind up

Here are some rough steps that you will need to follow once you have decided on having LLP as your business mode:

• Choose your partners and decide their designation
• Look for a name for your LLP which is available
• Obtain Designated Partner Identification Number (DPIN)
• Draft the LLP agreement
• File the LLP Agreement

For those who are in a partnership model and want to convert to LLP, here is the good news, on conversion of partnership firm to Limited Liability Partnership (LLP) there would be no tax implications. Also, the process is simple. So why wait?

(With inputs from Ankit Singhi, Manager Corporate Affairs and Compliance, llponline)