Limited Liability Partnership (LLP) is a new corporate vehicle which enables professional expertise to combine a company with the flexibility of a partnership and allows a company to operate in a flexible way having a low management cost.
It gives the benefits of limited liability providing flexibility to its members to organize their internal structure as a partnership.
Limited Liability Partnerships are now recognized worldwide and has been introduced in India through the Limited Liability Partnership Act, 2008. A Limited Liability Partnership combines the benefits of both the Company and Partnership into a single entity.
LLP is governed by the provisions of the Limited Liability Partnership Act, 2008. However, the Indian Partnership Act, 1932 is not applicable to Limited Liability Partnerships. The Limited Liability Partnership Act, 2008 came into effect though an official notification on and from 31st March, 2009.
The Limited Liability Partnership Act, 2008 confers powers on the Central Government to apply provisions of the Companies Act, 1956 to partnership firms by official notification as necessary. However, such notifications should be approved by both Houses of Parliament and shall be subject to any modification proposed by both Houses.
Nature of LLP:
Limited Liability Partnership is an alternative corporate tool that provides the benefits of limited liability to the members of the company on the basis of an agreement executed mutually between them as in a partnership firm.
Limited Liability Partnership has a separate entity in the eye of law. It is liable to the total extent of its assets. However, the liability of the partners of a LLP could be limited to their contribution in the partnership business. Moreover, no partner shall be liable on account of the independent acts of other partners which protects the partners from the joint liability created by other partners’ wrongful conduct.
Differences between general partnership business and LLP:
In a LLP a partner is not responsible for the acts of its other partners. This is an important difference from that of a normal partnership firm. In an LLP the partners have limited liability for each to protect each other within the partnership like that of the shareholders of a company. But in a LLP unlike corporate shareholders, the partners can operate the business directly. A LLP restricts the personal liability of a partner for the mistakes or negligence of the other partners or agents.
A Limited Liability partnership is similar to a general partnership except that the general partners have total management and control of the partnership business. Limited partners have no personal liability except their contributions in the partnership business. Limited partners cannot participate in the management and regular operations of the business without acting like general partners.
Advantages of forming a LLP:
1. Accepted worldwide.
2. Low cost of constitution.
3. Easy to form.
4. Easy to run.
5. No minimum capital contribution.
6. No restrictions upon the maximum number of partners.
7. Business and its partners are distinct from one another.
8. Individual partners are not liable for the acts of other partners.
9. No liability in connection with personal assets of the partners.
10. Less maintenance of statutory records.
11. Less intervention of the Government.
12. Easy to wind-up.
13. Audit required only if contributions exceed Rs. 25 lakh or turnover exceeds Rs. 40 lakh.
Disadvantages of forming a LLP:
1. Any act of the partner may make the LLP liable.
2. In some cases as in case of fraud, liability may extend to personal assets of partners.
3. Cannot raise contribution from public.