A Limited Liability Partnership is the most preferred choice of Partnership Business among entrepreneurs and business owners in India. This is primarily because it offers several advantages over traditional forms of partnership businesses. In this blog, we will discuss the detailed concept, legal meaning, and the key features of Limited Liability Partnerships responsible for their distinct popularity. Whether you’re an entrepreneur or the owner of an established business, this blog will give you immense confidence to open your LLP and run it seamlessly in India.
The concept of a Limited Liability Partnership was first introduced in India through the LLP Act of 2008, as an incorporated form of partnership business, with an added advantage of restricted liability for the owners. Prior to this, partnership businesses could only be established as a Partnership Firm, which is one of the oldest forms of business structures in India. All the flaws of this archaic organizational structure like optional registration and unrestricted liability for owners, were overcome by the LLP. Hence, combining the best features of a Limited Company and a Partnership Firm, LLP features were incredibly quick in gaining popularity in the Indian Startup ecosystem.
Legal Definition of a Limited Liability Partnership
Section 3 of the LLP Act, defines a Limited Liability Partnership as a “body corporate incorporated under the act” and as a result of such incorporation, “is a legal entity separate from its owners”. It goes on to state that “A Limited Liability Partnership shall have perpetual succession”, and that “any change in the partners shall not affect the existence, rights, or liabilities of the Limited Liability Partnership”. We shall decipher each of these statements one by one.
Separate Legal Entity
A business acquires a distinct legal identity only after it gets incorporated or registered. This means that unincorporated or unregistered business entities cannot acquire a legal identity of their own and thus operate with the identity of their owners, the best examples being sole proprietorships or unregistered partnership firms. However, as far as limited liability partnerships are concerned, incorporating them is mandatory under the LLP Act. So, as an incorporated entity, an LLP acquires a distinct legal identity and operates with its own name. This has several advantages, a few of which have been mentioned below.
- An incorporated entity can sell, purchase and acquire property in its own name.
- An incorporated entity can sue third parties in the event of a conflict.
- An incorporated entity has the right to enter into contract with third parties under the Contracts Act.
- An incorporated entity is more credible and reliable for credit and investment, compared to unincorporated entities As most of its records are recorded in publicly accessible government databases.
- An unregistered or unincorporated partnership cannot recover more than Rs.100 in the event of debt recovery from third parties.
Perpetual Succession
Succession or inheritance is a concept that determines the continuation of a business entity after the permanent departure of the owner, due to death, retirement, resignation, or removal. Incorporated entities, including LLP, can usually be continued beyond the lives of its partners, meaning that the existence of the LLP will not be affected by the death or departure of any of its partners. Therefore, an LLP can be indefinitely or perpetually succeeded, and can only cease to exist if it is struck-off or wound up voluntarily or otherwise.
Rights and Liabilities of Partners
The constitution of an LLP is based on the terms and conditions mutually agreed by the partners and documented in the LLP Agreement. These terms and conditions are mostly related to the rights and responsibilities of the partners. The agreement is signed by all the partners in the presence of a public notary. The LLP Act states that the rights and responsibilities of the other partners shall remain unaffected by the departure of any one partner, for reasons including, death, retirement, or expulsion.
What are the Features of Limited Liability Partnership?
The understanding of an LLP is incomplete unless you’ve grasped all its basic features. These include the minimum number of partners it must have, its maximum limit, its duration of existence, and how it is owned or managed. You can refer to the table below to learn all about the basic Limited Liability Partnership features in a nutshell. For detailed consultation, you can always reach out to our experts.
| S.No | Parameters | Main Features of a Limited Liability Partnership |
|---|---|---|
|
1. |
Number of Partners |
To start an LLP, a minimum of 2 partners are required, with no maximum limit |
|
2. |
Number of Designated Partners |
An LLP must have a minimum of 2 designated partners, with a maximum limit of LLP |
|
3. |
Need for incorporation |
Incorporating an LLP is mandatory under the LLP Act, 2008 |
|
4. |
Liability of Partners |
Liability is shared among partners in the ratio mentioned in the LLP Agreement |
|
5. |
Constitution Document |
LLP Agreement signed by all the partners in the presence of a public notary |
|
6. |
Internal Management |
Flexible: based on the rules mentioned in the LLP Agreement |
|
7. |
Existence |
The LLP Agreement ceases to exist with the permanent departure of a partner |
As we conclude this blog, we hope that you now have clarity on the concept and features of Limited Liability Partnership in its truest sense. If you still have any questions, you can contact our startup advisors without any hesitation, and they will resolve all your doubts and queries in no time. We also provide services of incorporating Limited Liability Partnerships in India, and you can avail our services, if need be, by subscribing to our wholesome and reasonably priced packages.
FAQs
Q1: What are the key features of a Limited Liability Partnership?
The key Limited Liability Partnership features include
- Flexible internal management based on the LLP Agreement,
- Shared liability among partners as per the agreement terms, and
- The requirement of incorporation under the LLP Act, 2008.
These features make LLPs a preferred choice for entrepreneurs seeking the benefits of a partnership structure with limited liability.
Q2: Can you explain the significance of the Limited Liability Partnerships features?
The features of LLP, such as the requirement for incorporation, flexibility in internal management, and shared liability among partners, contribute to their distinctiveness and appeal. These features ensure legal compliance, provide operational flexibility, and mitigate risks for partners, making LLPs an attractive business structure for startups and established businesses alike.
Q3: How does the LLP Agreement govern the features of LLP?
The LLP Agreement, signed by all partners in the presence of a public notary, plays a pivotal role in defining and governing the features of a Limited Liability Partnership. It specifies crucial aspects such as the rights and responsibilities of partners, internal management rules, and the distribution of profits and losses, ensuring clarity and transparency in LLP operations.
Q4: What distinguishes the features of LLP from other business structures?
The features of Limited Liability Partnerships, including shared liability among partners, flexible internal management, and mandatory incorporation under the LLP Act, set them apart from traditional partnership firms and sole proprietorships. These features offer entrepreneurs a balance between operational autonomy and limited liability protection, fostering a conducive environment for business growth.
Q5: How many partners and designated partners can an LLP have?
To establish an LLP, a minimum of 2 partners is required, with no maximum limit. Additionally, an LLP must have a minimum of 2 designated partners, as stipulated by LLP regulations, whose maximum number is capped at 15. These requirements ensure the presence of adequate management oversight and accountability within the LLP structure, one of the most important LLP features under the LLP Act.