The concept of limited liability partnership was first introduced via Limited Liability Partnership Act, 2008 in India. But the history of Limited Liability Partnership is quite interesting as the concept first originated in the United States. During the financial crisis of the late 1980s and early 1990s, hundreds of US saving and loan firms were declared insolvent. As a result of the collapse, many accountancy and legal firms faced legal claims instigated by the US government. Successful claims could have resulted in all partners, including those who were not responsible for the failure of the savings and loan firms, being liable to repay millions of dollars in compensation. In 1991 Texas introduced the concept of a limited liability partnership (LLP). The concept was popular and the majority of US states eventually passed LLP legislation.
Among all form of businesses, Company form of business is the most popular form of business which is preferred in the industry but for the professionals who render accountancy, secretarial, legal and doctorate services, who not only are regulated by the legal entity structure but are also governed by their governing statues of which they are members, Company form of business was not possible to start with as they are not allowed to operate as corporate body. On the other hand, only a partnership firm was not enough as it does not provide limited liability and the personal property of all the partners was always at risk. Thus there was a need for a hybrid form of entity which can have the characteristics of both, a partnership firm and a Company. As it is always said that necessity is the mother of invention, hence India adopted this concept of Limited Liability Partnership which was already popular in countries like UK, US, China etc.
A limited liability partnership is a partnership form of business which has a separate legal entity from its partners having a perpetual succession. In India, it is governed by Limited Liability Partnership Act, 2008 as amended from time to time.
Advantages of LLP
LLP is a form of a business model which:
is organized and operates on the basis of an agreement.
provides flexibility without imposing detailed legal and procedural requirements.
enables professional/technical expertise and initiative to combine with financial risk-taking capacity in an innovative and efficient manner.
Characteristics of LLP
Every LLP shall have at least 2 partners and there is no limit for the maximum numbers of partners. The partners to LLP can be an individual as well as the body corporate.
- Every LLP shall have at least 2 Designated Partners and at least one of them shall be a Resident in India.
- No limit on the number of LLP of which a person can become a partner.
- Incorporation document acts as like the Memorandum of Association and LLP agreement acts as an Articles of Association and should be subscribed by at least two partners and to be e-filed on LLP portal.
- Within six months of the end of its financial year, LLP must prepare a “ Statement Of Accounts “ and “ Solvency Statement“ to report to the Ministry of Corporate Affairs.
- Every LLP must file an annual return with the Registrar within 60 days of the end of the financial year.
FDI in LLP
FDI policy on Limited Liability Partnerships (LLP) has been amended in November 2015 to provide that investments in LLPs will not require Government approval. (Click here to read the related post) 100% FDI is now permitted under the automatic route in LLPs operating in sectors/activities where 100% FDI is allowed, through the automatic route and there are no FDI-linked performance conditions. Further, the terms ‘ownership and ‘control’ with reference to LLPs have also been defined.
Downstream Investment LLP Annual Filing
It has been decided that in line with companies, an LLP having foreign investment will be permitted to make downstream investment in another company or LLP in sectors in which 100% FDI is allowed under the automatic route and there are no FDI-linked performance conditions. Further, for the purposes of FDI policy, the term ‘internal accruals’ has also been defined.