A limited liability partnership (“LLP”) is generally viewed as an alternative corporate business vehicle that offers limited liability benefits, but allows its members the flexibility of organising their internal structure as a partnership based on a mutually agreed upon arrangement. LLPs are one of the ways in which investors invest in India or start businesses here. Our primer covers frequently asked questions about limited liability partnership in india.
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How does a limited liability company work?
LLPs are governed by what laws? LLPs are separate legal entities from their partners, and they operate as corporations. The succession of an LLP is perpetual. A Limited Liability Partnership in India is governed by the Limited Liability Partnership Act, 2008 (“LLP Act”) and its regulations.
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Incorporating a LLP: what are the steps?
2.1. LLPs must reserve their names before they can be incorporated. You can reserve a name by contacting the Ministry of Corporate Affairs (“MCA”) through their web service, Reserve Unique Name LLP.
2.2. A company can be incorporated by making an application to the Registrar of Companies (“RoC”) having jurisdiction over the state in which it has its registered office through the MCA’s online portal.
2.3. LLPs must execute and file their limited liability partnership agreements within 30 days of incorporation. Limited liability partnership agreements define the rights, obligations, and responsibilities of partners.
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A limited liability partnership agreement typically includes what terms?
3.1. A limited liability partnership agreement generally describes the mutual rights and duties of partners of an LLP, as well as those of the LLP and its partners.
3.2. Among the terms covered by a limited liability partnership agreement are:
Registered office of the LLP;
Nature of business of the LLP;
Rights of the partners;
Contribution and profit share of the partners;
Voting rights;
Process for change in partner;
Transfer/ assignment of rights; and
Dispute resolution
3.3. If there is no limited liability partnership agreement, the First Schedule of the LLP Act determines the rights and duties of the partners inter-se as well as those of the LLP and the partners. In the First Schedule, there are provisions such as:
Equal shares of the LLP’s capital, profits, and losses;
In the event that a partner fraudulently conducts the business of the LLP, he shall indemnify the LLP for any losses sustained;
A partner is not remunerated for acting in the business or management of the LLP;
New partners must have the consent of all existing partners;
All matters pertaining to the LLP must be decided by a majority vote of the partners;
In 30 days after a decision has been made, LLP minutes must be recorded;
A full disclosure of all matters affecting the LLP should be provided by each partner;
As per the Arbitration and Conciliation Act, 1996, all disputes between partners should be arbitrated.
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What are the requirements for becoming a partner in an LLP? LLP Act compliance requirements for partner appointment?
4.1. There must be a minimum of two partners in an LLP. The sole partner of an LLP who has less than 2 partners for at least 6 months shall be personally liable for the obligations of the LLP during the period when the LLP has fewer than 2 partners.
4.2. A Limited Liability Partnership can have both individuals and corporations as partners. It is also possible for an LLP to be a partner in another LLP. An individual who is a partner in an LLP must also refrain from:
be declared to be of unsound mind by court;
be an undischarged insolvent; or
have applied to be adjudicated as an insolvent.
4.3. Under the limited liability partnership agreement, a person may be appointed as a partner. Capital contributions can be made into an LLP or profit shares can be acquired in an LLP. In case the partner is a foreign partner, then the consideration for acquisition of capital contribution or profit share must be made through normal banking channels and at a price not less than the fair market value as determined by a chartered accountant following internationally accepted valuation methods. A foreign partner who wishes to become a partner in an LLP must obtain prior Reserve Bank of India approval if the capital contribution or profit share is non-cash or below fair market value. FDI is required to be reported to the Reserve Bank of India by a foreign partner in an LLP.
4.4. When a new partner is appointed, the LLP is required to amend its limited liability partnership agreement. Additionally, Form 3 must be filed with the RoC within 30 days of the amendment to the limited liability partnership agreement. Additionally, the Form 4 must be filed with the RoC within 30 days of the appointment of the partner, along with their consent.
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How does an LLP handle FDI?
5.1. Persons residing outside India, or entities incorporated outside India (other than citizens of Pakistan or Bangladesh, or entities incorporated outside India), who are not Foreign Portfolio Investors or Foreign Venture Capital Investors, may contribute to the capital of an LLP operating in sectors or activities where foreign investment up to 100 per cent is permitted under the automatic route without FDI-linked performance requirements.
5.2. If an LLP is not owned and controlled by a resident Indian citizen or owned and controlled by a person located outside India, it can invest in an Indian company downstream when foreign investment is permitted up to 100% under the automatic route and performance conditions are not linked to foreign investment.
5.3. The LLP Act requires compliance with certain conditions before investing in an LLP.
5.4. Foreign-invested LLPs can convert into companies under the automatic route without any FDI-linked performance criteria, and vice versa, in a sector where foreign investment is allowed up to 100%.
5.5. A LLP can be invested in either through capital contributions or by acquiring or transferring profit shares. A chartered accountant should determine the fair market value using internationally accepted valuation methods, and this price should not be less.
5.6. Transfers of capital contributions or profits from individuals outside India must be made for a consideration not less than fair market value. Transfers of capital contributions or profit shares from a person living outside India to a person living in India are subject to a fair market value consideration.
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