Updated : June 14, 2024Difference between Partner and Designated Partner of an LLP
This blog provides a detailed guide on the difference between partner and designated partner in terms of their requirement, roles and responsibilities. Both these authorities have their own significance in the administration and management of an LLP.
While setting up a Limited Liability Partnership, understanding the difference between a Partner and a Designated Partner is crucial. While a Partner to LLP is akin to a business owner, a Designated partner to LLP is akin to its apex management authority. Moreover, their roles and responsibilities are extremely different as are their requirements in this form of business structure.
In today’s business landscape, LLPs have become a preferred choice due to the added layer of limited liability protection they offer. The role of a partner and a Designated Partner is at the core of an LLP’s operations. While a partner is responsible for investing capital and appointing designated partners from among themselves, the designated partners are themselves responsible for controlling business management and ensuring compliance with the provisions of the LLP Agreement.
Who is a Partner in an LLP?
In the context of a Limited Liability Partnership (LLP), a Partner plays a foundational role that serves as the backbone of the organization. Partners in an LLP are individuals who have decided to collaborate in a business venture on mutually agreed upon terms and conditions. They share the investment, profits and liabilities of the business in a predetermined fixed ratio mentioned in the LLP Agreement. LLP Agreement is the document signed by all partners affirming the terms they’ve agreed upon mutually. Partners can either be individuals or corporate entities. They play a crucial role in decision-making processes of the business, yet enjoy a certain degree of operational freedom when compared to designated partners. Given below a list of their wholesome roles and responsibilities.
- Decision-Making: Partners are central to the decision-making processes of the LLP. They actively participate in determining the business’s goals, making major financial decisions, and charting the course for growth and development. Partners collectively make decisions through meetings, discussions, and voting, with each Partner having a say in important matters. Effective decision-making is crucial for the success and sustainability of the LLP.
- Profit and Loss Sharing: Partners share in the profits and losses of the LLP as per the terms outlined in the LLP Agreement. Profit-sharing reflects the financial benefit that each Partner receives from the business’s earnings, while loss-sharing involves bearing a portion of any financial losses incurred by the LLP. The terms of profit and loss sharing are typically agreed upon in advance and documented in the LLP agreement.
- Bringing in Investment: Partners contribute capital to the LLP, and they often play a key role in raising funds for the business. Their financial contributions are essential for the growth and operations of the LLP, and the level of investment can vary based on each Partner’s commitment.
- Appointing Designated Partners: Partners have the authority to appoint Designated Partners, who play specific roles within the LLP. The appointment of Designated Partners is a pivotal decision, as they assume additional responsibilities, including legal compliance and obligations.
- Signing LLP Agreement: Partners are responsible for participating in the development and signing of the LLP agreement. This document outlines the rights, responsibilities, profit-sharing arrangements, and other key terms that govern the LLP’s operations. The LLP agreement serves as a foundational document that helps establish the structure of the partnership.
- Limited Liability: Partners in an LLP enjoy limited liability, which means their personal assets are protected in case of business debts or legal issues. Limited liability is a fundamental advantage of the LLP structure. It ensures that a Partner’s personal wealth and assets are not at risk in the event of the LLP’s financial troubles or legal disputes.
Who is a Designated Partner to LLP?
Designated Partners are appointed by the partners of LLP, from among themselves. Since there is a separation between the ownership and management structures in an LLP, designated partners are appointed specifically to control the business’s apex management. A Designated Partner to LLP is what a director is to company. However, they have other crucial responsibilities as well. Here’s a complete list:
- Ensuring Compliances: Designated Partners bear the primary responsibility for ensuring the LLP complies with all legal and regulatory requirements. This includes the timely filing of annual returns, financial statements, and other documents with the Registrar of Companies. Failure to fulfill these legal obligations can result in penalties and adverse consequences for the LLP.
- Controlling Day-to-Day Business Operations: Designated Partners may actively participate in the management of the LLP’s daily operations. They oversee various functions, make strategic decisions, and manage financial matters to ensure the smooth functioning of the business.
- Ensuring Adherence to LLP Agreement: Designated Partners are responsible for ensuring that the LLP agreement, which outlines the rights and responsibilities of the Partners and the operation of the LLP, is consistently followed and updated as needed. Any necessary amendments to the agreement may also be overseen by them.
- Decision Making: Designated Partners play a crucial role in decision-making processes within the LLP. They actively participate in determining the business’s goals, making significant financial decisions, and charting the course for growth and development. Their involvement is key to the success and direction of the LLP.
- Ensuring Maintenance of Financial Records: Designated Partners are responsible for overseeing the maintenance of accurate financial records within the LLP. This includes managing financial statements, accounts, and other financial documentation, ensuring transparency and compliance.
Difference between Partner and Designated Partner in LLP
There are a number of factors which draw a sharp difference between a partner and a designated partner. These include their requirements to set up an LLP, roles and responsibilities towards the LLP’s operations, and the procedure for their appointment / admission. Follow the table below for an elaborate list of difference between partner and designated partner in LLP.
| Features | Designated Partner | Partner |
|---|---|---|
| Minimum number | 2 | 2 |
| Maximum number | 15 | No maximum limit |
| Nationality | At least 1 must be an Indian resident | At least 1 must be an Indian Resident |
| Roles & Responsibilities | Controls the management of the LLP | Invests capital into the LLP |
| Appointment | As prescribed in the LLP agreement or the LLP Act | As prescribed in the LLP agreement or the LLP Act |
Their Responsibilities
The primary difference between the two is in the manner that they are obligated towards the LLP. While the LLP Agreement defines and governs the rights and obligations of partners and designated partners, the LLP Act of 2008 fixes higher accountability of both these authorities.
The statute stipulates that, unless otherwise stated in the LLP Agreement, the rights and obligations of both types of partners are equivalent, with the following exceptions:
- While the Partner’s are accountable for their own actions or inactions, the Designated Partners are accountable for the obligations outlined in the LLP Agreement, as well as for any fines imposed on Limited Liability Partners for resulting from the breach of the duty.
- It can be stated that a Designated Partner of an LLP is obligated for meeting compliances mandated for the LLP under law. These may include the filing of applications, returns, and statements with the appropriate authorities when necessary. The designated partner of the LLP may be held personally and jointly accountable for fines and penalties assessed under the LLP Act (or any other applicable Act) for failing to comply with the aforementioned requirements, i.e., in case of non-compliance or disobedience of the aforementioned compliances.
- Additionally, after the formation of the LLP, designated partners become increasingly accountable for controlling the regular activities and operations of the LLP, as the apex authority of management
Minimum Requirements
The Limited Liability Partnership Act of 2008 mentions provisions that detail the minimum qualifications and requirements for the Partners and Designated Partners of an LLP. As discussed earlier, the Act states that at least 2 Designated Partners must be appointed in order for a Limited Liability Partnership to be formed and incorporated The designated partners must be individuals, and at least one among all of them shall be a resident Indian. There are no requirements set forth for the minimum number of Partners to be appointed by the LLP Act. Nevertheless, it is obvious that at least two partners shall be required to set up an LLP in India
Appointment of Designated Partner in LLP
The process of appointment of Designated Partner in LLP is quite similar to that of a partner. The procedures outlined in the LLP Agreement and in the LLP Act are followed for both. However, for the appointment of a Designated Partner in LLP, a further need for a DPIN is prescribed. The DPIN is a unique number allotted to designated partners by the MCA for their unique identification while completing the compliances of the LLP.
Is it possible to change your designation once your LLP has been registered?
After the formation and incorporation of an LLP, the Partners may change their designation to a designated partner, and the vice versa is also possible. For this, modifications must be made in the LLP Agreement and a Supplementary Deed in cases where the Designated Partners wish to become partners. The modifications must be done for all the appropriate clauses.
Following the modification of the LLP Agreement, a request for a change in the designation of the Partner(s) must be submitted to the Registrar of Companies in the manner prescribed under law. If the intended change of designation is from Partner to Designated Partner, an additional form DIR 3, must also be filed for obtaining the DPIN from the Ministry of Corporate Affairs.
Conclusion
While operating a Limited Liability Partnerships (LLPs), knowing the difference between Partner and Designated Partner is crucial. Designated Partners hold specific responsibilities, including ensuring compliance with regulations, overseeing daily operations, and actively participating in decision-making. This difference is not merely semantic, as it profoundly impacts an LLP’s operational framework. By comprehending these distinctions, stakeholders can effectively leverage the unique advantages and structure of LLPs to achieve both compliance and operational success.
