Things to be kept in mind before starting an LLP

Last Updated at: July 17, 2020
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What are teh things to be kept in mind before starting an LLP?

What is an LLP?

As per the Ministry of Corporate Affairs (“MCA”), the structure of a Limited Liability Partnership (“LLP”) model is an alternative to the traditional partnership. It is to be noted that, traditional partnership entails the concept of unlimited personal liability of the partners if things go south.

As per MCA (Ministry of Corporate Affairs), a Limited Liability Partnership is an alternative to the conventional partnership followed in the business industry. LLP refers to a corporate body formed and incorporated under the LLP Act. If you want to form a LLP, then here we provide you with insights into the same to help you get started.

Let us see, how is it defined as per the provisions of the Limited Liability Partnership Act, 2008 (“LLP Act”)?

As per the provisions of the LLP Act, an LLP refers to a body corporate which is formed and incorporated under the provisions of the LLP Act.

In essence, an LLP is a legal entity that is separate from its partners. It shall have perpetual succession. This means that, if there is any change in the partners of an LLP, it shall not affect the existence, rights, or liabilities of the LLP.

What kind of businesses are most suitable for LLP? Are there any restrictions on the type of activity?

Section 2 (1) (e) of the LLP Act defines “business” as an activity including trade, profession, service or occupation.

Let us take a look at the recent notification to understand what all businesses an LLP can be in, as per the provisions of the LLP Act!

Last month, the MCA had issued an Office Memorandum (“OM”) stating that LLP’s cannot perform business in manufacturing and allied activities since the object of an LLP is mainly for professional services and not manufacturing activity.

This OM also clarified that the main reason behind such exclusion was because as per the MCA, LLP’s structure & objective is primarily suited for the purpose of carrying out business activities related to the service sector, rather than manufacturing activities.

Further, this OM also mentioned, a company engaged in manufacturing activity should not be allowed to convert its structure into an LLP.

While this OM was widely criticised by experts in the industry, the MCA declared that this OM, which invoked the restriction regarding manufacturing & allied activities has been withdrawn with immediate effect.

In effect, as of date, there is no restriction in relation to the business type that an LLP can operate in.

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What are things that you need to get done before starting an LLP?

As per the provisions of the LLP Act, an LLP agreement refers to any written agreement between the partners of the LLP, or between the LLP and its partners. This agreement shall essentially determine the mutual rights and duties of the partners & their rights and duties in relation to the LLP.

The next phase of this article discusses the requirement of having designated partners as per the LLP Act.

Every LLP shall mandatorily have at least two designated partners. One of the designated partners has to be a resident in India, which means, that such a person should have stayed in India for a period of not less than 182 days during the immediately preceding year.

Every designated partner shall also obtain a Designated Partner Identification Number (“DPIN”), which shall be equivalent to a Directors Identification Number (“DIN”) akin to the directors of a company.

Such designated partners are accountable for regulatory and legal compliances of the LLP as prescribed under the LLP Act. Please note that this shall be in addition to the liability that these partners have as being a partner in the concerned LLP per se, as stipulated in the LLP agreement.

The LLP Act gives flexibility to a body corporate as well to be a partner in the LLP as per the provisions of the LLP Act. In such a scenario, the nominee of such body corporate shall act as a designated partner.

Are there any specific things to keep in mind prior to considering, who to choose as a designated partner?

Yes.

Prior to an individual being considered as a partner, it may be ensured that such an individual is capable of becoming a partner of LLP or not. For instance, an individual shall not be capable of becoming a partner of an LLP, if he/she has been found to be of unsound mind by a court of competent jurisdiction and the court’s finding is still in force.

When we talk about the aspects that should be included in an LLP agreement, do we need to have clarity about the designated partners right when we start drafting the LLP agreement?

Yes.

The LLP agreement can clearly state the name of the partner who shall be the designated partner once the concerned LLP gets incorporated.

Prior to that, consent must be sought from such a partner to act in the capacity of a designated partner.

It may be noted that this is an important step since the LLP would have to file the particulars of every person who has consented to act as a designated partner with the concerned authority within 30 days after he/she has been appointed to be a designated partner.

Similarly, an LLP agreement can also list the conditions when a partner may cease to be a designated partner.

To know more about LLP Registration: Click here

You should also read:

0

Things to be kept in mind before starting an LLP

2828

What is an LLP?

As per the Ministry of Corporate Affairs (“MCA”), the structure of a Limited Liability Partnership (“LLP”) model is an alternative to the traditional partnership. It is to be noted that, traditional partnership entails the concept of unlimited personal liability of the partners if things go south.

As per MCA (Ministry of Corporate Affairs), a Limited Liability Partnership is an alternative to the conventional partnership followed in the business industry. LLP refers to a corporate body formed and incorporated under the LLP Act. If you want to form a LLP, then here we provide you with insights into the same to help you get started.

Let us see, how is it defined as per the provisions of the Limited Liability Partnership Act, 2008 (“LLP Act”)?

As per the provisions of the LLP Act, an LLP refers to a body corporate which is formed and incorporated under the provisions of the LLP Act.

In essence, an LLP is a legal entity that is separate from its partners. It shall have perpetual succession. This means that, if there is any change in the partners of an LLP, it shall not affect the existence, rights, or liabilities of the LLP.

What kind of businesses are most suitable for LLP? Are there any restrictions on the type of activity?

Section 2 (1) (e) of the LLP Act defines “business” as an activity including trade, profession, service or occupation.

Let us take a look at the recent notification to understand what all businesses an LLP can be in, as per the provisions of the LLP Act!

Last month, the MCA had issued an Office Memorandum (“OM”) stating that LLP’s cannot perform business in manufacturing and allied activities since the object of an LLP is mainly for professional services and not manufacturing activity.

This OM also clarified that the main reason behind such exclusion was because as per the MCA, LLP’s structure & objective is primarily suited for the purpose of carrying out business activities related to the service sector, rather than manufacturing activities.

Further, this OM also mentioned, a company engaged in manufacturing activity should not be allowed to convert its structure into an LLP.

While this OM was widely criticised by experts in the industry, the MCA declared that this OM, which invoked the restriction regarding manufacturing & allied activities has been withdrawn with immediate effect.

In effect, as of date, there is no restriction in relation to the business type that an LLP can operate in.

Register Your Business Now

What are things that you need to get done before starting an LLP?

As per the provisions of the LLP Act, an LLP agreement refers to any written agreement between the partners of the LLP, or between the LLP and its partners. This agreement shall essentially determine the mutual rights and duties of the partners & their rights and duties in relation to the LLP.

The next phase of this article discusses the requirement of having designated partners as per the LLP Act.

Every LLP shall mandatorily have at least two designated partners. One of the designated partners has to be a resident in India, which means, that such a person should have stayed in India for a period of not less than 182 days during the immediately preceding year.

Every designated partner shall also obtain a Designated Partner Identification Number (“DPIN”), which shall be equivalent to a Directors Identification Number (“DIN”) akin to the directors of a company.

Such designated partners are accountable for regulatory and legal compliances of the LLP as prescribed under the LLP Act. Please note that this shall be in addition to the liability that these partners have as being a partner in the concerned LLP per se, as stipulated in the LLP agreement.

The LLP Act gives flexibility to a body corporate as well to be a partner in the LLP as per the provisions of the LLP Act. In such a scenario, the nominee of such body corporate shall act as a designated partner.

Are there any specific things to keep in mind prior to considering, who to choose as a designated partner?

Yes.

Prior to an individual being considered as a partner, it may be ensured that such an individual is capable of becoming a partner of LLP or not. For instance, an individual shall not be capable of becoming a partner of an LLP, if he/she has been found to be of unsound mind by a court of competent jurisdiction and the court’s finding is still in force.

When we talk about the aspects that should be included in an LLP agreement, do we need to have clarity about the designated partners right when we start drafting the LLP agreement?

Yes.

The LLP agreement can clearly state the name of the partner who shall be the designated partner once the concerned LLP gets incorporated.

Prior to that, consent must be sought from such a partner to act in the capacity of a designated partner.

It may be noted that this is an important step since the LLP would have to file the particulars of every person who has consented to act as a designated partner with the concerned authority within 30 days after he/she has been appointed to be a designated partner.

Similarly, an LLP agreement can also list the conditions when a partner may cease to be a designated partner.

To know more about LLP Registration: Click here

You should also read:

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Saswati - Content writer