A Limited Liability Partnership, which is also known as LLP in its abbreviated form is an incorporated entity under the LLP Act 2008. In general, people think that there are not enough differences between a partnership as defined under the partnership act with the LLP. Which is not correct understanding as many significant differences are starting with its very formation, the relationship between partners and the manner in which a partner can be changed, admitted and the handling of liabilities per se partners of LLP are few areas where we see significant differences between a partnership of an LLP. In this article, we are attempting to explain the meaning of a partner vs. designated partner of an LLP.
A Partnership can be started at the will of two or more person subject to maximum being 20 and similarly can also be closed either at the expiry of the partnership or on the will of the partners. With the death, insanity or in case a partner becomes incapacitated the subsequent changes results in the creation of a new understanding between the resulting team of partners. Whereas for an LLP, there are well-prescribed rules through which it gets incorporated and to close or wound up an LLP another set of rules to be followed, in both situation, whether it is incorporation or closure of LLP the consent or approval of the registrar of LLP is mandatory. In case of an LLP, the minimum number of partners are two, and there is no limit to its maximum number of partners as such, in another word an LLP can be formed with any number of partners who contributes to its capital. That is the reason the act prescribes at least two designated partners every time for an LLP. The number of partners of LLP should never reduce below two, and in case it does come down to below two, the same must be restored to at least two within six months. Any failure in increasing the number of partners to two shall make the remaining partner personally liable for the acts of the LLP.
Another significant difference between the partnership and LLP is concerning its PARTNERS. In traditional partnership form, we often come across terms such as a major partner, managing partner, active partner, sleeping partner, dormant partner, etc. However, when it comes to the responsibility of compliance or payment of liabilities all the partners, who have signed the partnership agreement at the time of formation of the partner, the persons who have gets introduced as the partner and those who are describing themselves as the partner are equally liable. One of the essential concepts of the partnership is Doctrine of Holding Out, according to section 28 of the Act, if a person has represented himself to be a partner he cannot be allowed to deny it. And in case dues to such representation a liability comes to the firm, then he cannot escape debts even if he was not a partner, and he lied. This provision in the law is to protect honest deals which are entered based on the reliance on such representation. We have so far understood that in a partnership all partners are equally responsible for the liabilities of the partnership firm and as such, no protection is conferred to a sleeping partner when it comes to civil liabilities. However, for criminal liability individual roles of partners are seen.
Now coming to the LLP, The new act of 2008 for the first time introduced the concept of “Designated Partner” which is akin to the position of director in a company, whereas the partner of an LLP is similar to shareholders of a company. Section 8 of the LLP Act provides explicitly that responsibility of doing every all acts, things and matters as are required under the LLP Act vests with the designated partner of the LLP. For example responsibility of preparation of financial statement and filing of the returns of LLP or any other documents or reporting to the ROC is with the designated partner only and not with every partner of the LLP. Similarly, he alone is responsible for the penal consequences.
To put it simply a partner in an LLP is a person who invests capital in the LLP, whereas the responsibility of legal compliance vests with the designated partners of the LLP. The designated partners are also known as “DP” have been given powers to run the LLP under the Act, and made responsible for the compliance of the legal provisions concerning the administration of LLP, The reporting to the registrar of LLP and in seeking appropriate approvals from the central government. A designated partner is a serious position which is correctly identified as the person in charge of the LLP and obligated to meet the requirements of the LLP Act. Akin to the LLP Act, in all other legislation only designated partners are required to ensure compliance. For a designated partners some of the common compliance checkpoints are as under, However, in a given situation you must check with your legal team on the specific compliance requirement.
- After incorporation of the LLP, carefully go through the documents filed with the registrar of companies during the setup process, these are
- e-forms for allotment of director identification number (DIN) of the partners,
- Copy of application for name approval in Form No-1,
- Copy of application for incorporation of LLP in Form No-2,
- Consent of the partners, proof of the premises where the registered office of the LLP is situated,
- The No Objection Certificate (NOC) of the owner of the premises.
- The object for which LLP is incorporated,
- The capital of the LLP.
- Always maintain a legal file with all copies of all above documents. In case you need a certified copy of the incorporation documents, the same can be obtained from the ROC after paying requisite fee.
- The partners of the LLP Within 30 Days of incorporation need to enter into a written agreement, known as LLP Agreement. This deed has to be executed on appropriate non-judicial stamp paper of appropriate value. The ministry of corporate affairs has clarified that the for the purpose of Stamp Duty the rates as applicable to a partnership firm shall apply.
- The LLP Agreement as explained in preceding paragraph need to be filed with the registrar of companies within 30 days of its incorporation in prescribed form No-3 with a fee of Rs. 50/-. However in case, the LLP did not file the Form-3 along with the scan copy of LLP agreement then, still it can be filed within 300 days, however with an additional fee of Rs. 100 for each day of delay and such filing shall make the non-compliance right. In case the form 3 is not filing within its due date and also within the extended period of 300 days as explained, the LLP and the designated partners are liable for penalty please note that any delay in filing the same
- The LLP is required to file its annual return within before 30th may for the financial year just preceding. The financial statement is also expected to be filed before 30th Octoberfor the preceding fiscal year. The designated partner must ensure that the filings are done.
- In case of any changes in the understanding of the partners, the same must also result in the amendment of the LLP Agreement, if required. all amended agreement or the new agreement needs to be reported to the LLP
- at the end we have to say that the designated partners must remain vigilant and mindful of the compliance, it should always be an endeavor to comply with the law.