What is a Limited Liability Partnership?

What is a Limited Liability Partnership?

 

The classic form of a partnership usually experiences difficulty in raising capital since all of its partners have unlimited liability. An LLP usually helps resolve this problem. As is evident from the name, an LLP is simply a type of partnership in which some or all of the partners have limited liabilities.  An LLP and partnership exhibits the same features other than unlimited liability and the fact that in an LLP, each partner is not responsible for another partner’s misconduct or negligence.

LLP Agreement and its essential elements:

If you wish to commence business with a Limited Liability Partnership , it becomes important for all the partners in the company to enter into an agreement which must cover all the essential elements of the LLP: partners and  their   capital contribution, profit sharing ratio, means of dispute resolution, winding up of the firm and so on.

The LLP Agreements in India are governed by the Limited Liability Partnership Act,2008 whereas the Schedule I of LLP ACT,2008 talks about the registration of LLP in India. When it comes to the drafting of an LLP Agreement, a few things have to be kept in mind: the nature of business, and the contribution of each partner in terms of investment as these things differ from business to business. The clauses which are essential while drafting an LLP Agreement are as follows:

1. Name and Nature of the Business:

The LLP agreement should state the full name of the business and  its partners along with the nature of the business. The nature of business should be clearly mentioned to avoid deviation from the main purpose of the business.

2. Capital Contribution of the members:

 While constituting an LLP, the partners are required to specify the amount of capital they have contributed. The capital can be invested in ways of cash, assets or in any other kind (e.g. different skills of a member, connections or reputation).

3. Term of the business:

While drafting the LLP Agreement, it is important to mention the official starting date of the partnership and the expected duration of the same. In case of multiple partners, a provision shall be included in the agreement to address such a scenario.

4. Profit Distribution:

The LLP Agreement must include the ratio in which profits and losses will be distributed among the partners. The profit of the LLP depends upon the structure of the LLP and therefore the partners must clearly state the amount of profit and loss and how it shall be distributed among the members. In the absence of any such clause, the profits will be distributed equally.

5. Rights and Duties of the partners:

The LLP Agreement must also include the various rights and duties of the members which is mutually agreed upon by them. In the absence of any such provision, Schedule I of the Limited Liability Act, 2008 will apply as per the Section 23(4) of the said act.

Why an LLP?

  • In case of any matter related to litigation, each partner’s personal assets will be protected.
  • The LLP structure management is decided upon by the partners themselves and therefore, there is flexibility in management as each partner chooses their own set of responsibilities and works accordingly.
  • LLP is treated as a legal entity separate from its members that can enter into contract with, own or lease property.
  • In case of any business taxes, they are passed to the individual partners which prevents them from paying double taxes.

 

Example of Limited Liability Partnerships:

Businesses which adapt the LLP structure are usually law firms, accounting firms and private clinics of doctors as multiple partners are involved in such a business. The guidelines for starting an LLP and the amount of its limitation will vary from state to state.

Conclusion:

The basic knowledge of the structure of the LLP will be of help to those professional partnerships which are anxious about their exposure to liability and will help service industries to grow in accordance with the present times. An LLP is a safe platform which provides an environment for fresh entrepreneurs to rise to the challenge of global competition.  

Team Delfyle wishes you the very best of luck for your amazing journey ahead. In case of any further queries, feel free to get in touch with us at info@delfyle.com for a chat, absolutely free of cost!

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