Limited Liability Partnerships (LLP): Full Form, Meaning, Benefits, Structure & Differences

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Imagine a business where you work with trusted partners and share the profits, but your savings stay safe even if things go wrong. That's what a Limited Liability Partnership (LLP) is!

LLP is like a team built for professionals, providing both the benefits of teamwork and protection against personal liability.

This article will help you learn what LLP is, how it works and why it might be perfect for your professional pursuit.

LLP: Meaning and Full Form

The LLP full form is a Limited Liability Partnership. It has become a popular business structure for entrepreneurs in India. It combines the benefits of a partnership firm and a company, offering the flexibility of a partnership with the limited liability protection of a company. The concept of a limited liability partnership was introduced in India in 2008 under the Limited Liability Partnership Act 2008. The partners in the LLP are directly responsible for compliance with all the provisions of the Limited Liability Partnership Act and the provisions specified in the LLP agreement. Now that you know the LLP definition and meaning, let's check its features.

Features of a Limited Liability Partnership

LLPs empower Indian entrepreneurs with a dynamic and secure business structure. Let us learn more about the features of LLP:

Separate Legal Entity: Like companies, LLPs enjoy a separate legal identity, ensuring members' assets remain protected.
Minimum Two Partners: LLP formation requires a minimum of two individuals to join as partners, fostering collaboration in business endeavours.
Unlimited Partners: Unlike some business structures, LLP places no upper limit on the number of partners, promoting scalability.
Designated Partners: At least two partners must be designated, and one must be an Indian resident, enhancing governance and accountability.
Limited Liability: Partner liability is confined to their contributed capital, minimising personal risk in the case of business obligations.

Benefits of a Limited Liability Partnership (LLP)

LLP offers a balance of liability protection, operational flexibility, and corporate advantages, providing the following benefits to all involved parties:

Distinct Legal Entity: An LLP functions as a distinct legal entity, similar to a company. It can enter into contracts and legal proceedings in its name.
Limited Liability of Partners: Partners enjoy limited liability, restricting their financial exposure to their contributed capital. In insolvency cases, only LLP assets are used to settle debts, shielding partners from personal financial obligations.
Cost-Effective and Low Compliance: Forming an LLP is cost-effective compared to public or private limited companies. You only need to file two statements annually: the Annual Return and the Statement of Accounts and Solvency for the compliance requirements.
No Minimum Capital Requirement: LLP formation doesn't demand a minimum capital contribution, offering flexibility to partners.

Disadvantages of an LLP

While LLPs offer numerous advantages, it is crucial to understand the following potential disadvantages of LLPs for informed decision-making:

Compliance Costs and Penalties: LLPs must navigate several compliances, including annual filings and maintenance of records. Even with minor requirements, failure to comply can attract hefty penalties from the Ministry of Corporate Affairs.
Dissolution Risks: Unlike companies, LLPs lack perpetual succession. If the number of partners falls below two for six months or the LLP faces severe financial difficulties, dissolution becomes highly likely, disrupting ongoing operations and posing stakeholder challenges.
Limited Access to Capital: LLPs have a fundamental disadvantage when raising capital. Their structure lacks a formal equity or shareholding system that attracts investors and venture capitalists.

What is the difference between a partnership and a limited liability partnership?

Traditional and limited liability partnerships offer different levels of protection, flexibility, and legal recognition. Let us understand the key differences between a partnership and LLP:

Liability Protection: In a partnership, personal assets are at risk, while in an LLP, partners' liability is limited to their investments in business debts.
Legal Entity: Partnerships lack legal recognition, but LLPs are distinct legal entities that can own property and sue or be sued.
Flexibility: Partnerships follow traditional structures, while LLPs allow flexible operations and profit distribution through written agreements.
Public Disclosure: Partnerships maintain privacy, whereas LLPs disclose financial accounts to the public.
Taxation: Partnership income is taxed as partners' personal income, while LLPs may offer tax advantages.
H2 Nature of a Limited Liability Partnership

Several key features of LLP are as follows:

Distinct Legal Entity: LLP is a distinct legal entity independent of its members. It can own property, enter into contracts, and be subject to legal obligations.
Limited Liability: Members of an LLP enjoy limited liability, meaning their assets are protected from the business's debts and liabilities. This provides a crucial financial safeguard.
Flexibility in Management: LLPs operate with flexibility in management. The specifics of business operations and profit distribution are determined through a customisable, written agreement among the members.

Who can be a partner in an LLP?

LLP accommodates various professionals and ensures personal liability protection with clear income structures:

Indian Citizens and Residents: An LLP requires at least two designated partners, open to any Indian citizen or resident.
Foreign Nationals and Companies: Foreign partners need Reserve Bank of India (RBI) and Foreign Investment Promotion Board (FIPB) approval, along with a digital signature and Director Identification Number (DIN).
Non-Resident Indians (NRIs): NRIs can participate, following guidelines similar to those of Indian citizens.
LLPs and Companies: Except for LLP partnerships, any entity can join.
Designated Partners: Two partners are needed, one of whom is an Indian citizen with DIN and Digital Signature Certificates (DSC) for filings.

Documents required for LLP Incorporation

For a smooth LLP incorporation process, you must have the following documents:

Identity Proof: Members' PAN cards and address proofs.
Address proof: Utility bills or rental agreement for the registered office.
Designated Partners Details: PAN card, address proofs, and photographs.
Subscription Sheet: Signed by partners, confirming LLP contribution.
Consent to Act: Confirming appointment as Designated Partners.

FAQ’s About LLP

What do you mean by Limited Liability Partnership (LLP)?

LLP is a business structure offering members limited liability protection. It combines a partnership's flexibility with a corporation's liability protection, safeguarding personal assets.

What is the main purpose of a Limited Partnership?

The primary aim of a limited partnership is to provide partners with limited liability, protecting their assets while allowing them to actively participate in business operations and management.

What is an example of an LLP?

An example of an LLP could be a legal firm operating as "Smith & Associates LLP." This structure is common among professionals like lawyers, accountants, and consultants.

Can an LLP member be considered an Employee?

No, an LLP member is not considered an employee. Members are partners in the business, and their earnings are treated as personal income, distinct from traditional employee-employer relationships.

This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.