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Things to Keep in Mind Before Starting an LLP

A traditional partnership suffers from the defect of unlimited personal liability, this means that if things go south, partners can even face bankruptcy. So what is the alternative? Keep reading to find out.

A Limited Liability Partnership refers to a corporate body formed and incorporated under the LLP Act, 2008. As per MCA (Ministry of Corporate Affairs), an LLP is an alternative to the conventional partnership model followed in the business industry. If you are starting an LLP, read this article to know the basics. 

What is the essence of an LLP?

An LLP, according to the requirements of the LLP Act, is a body corporate created and incorporated under the provisions of the LLP Act. In essence, an LLP is a separate legal entity from its partners. It shall have perpetual succession. This means that if the partners of an LLP change/retire, it will not impact the LLP’s existence, rights, or obligations.

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

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

In 2019, 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, the OM also mentioned that a company engaged in manufacturing activity should not be allowed to convert its structure into an LLP.

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As this was widely criticized by experts in the industry, the MCA declared that this restriction on LLPs regarding manufacturing & allied activities has been withdrawn with immediate effect.

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

So, this is one import thing to know  when you are about Starting an LLP.

Do you aware of the Must read Topic: How Much Does It Cost to Register an LLP in India?

Forms Required

  • RUN – LLP (reserve unique name-limited liability partnership) – This works as a substitute for Form 1 to set up a name for the LLP
  • FiLLiP – This is a substitute for Form 3 to incorporate the LLP
  • Form 5 – To change the name of an LLP
  • DIR 3 – To register yourself as a new user on the MCA portal
  • Form 17 – For conversion of an existing partnership firm into a Limited Liability Partnership
  • Form 18 – For conversion of a private company into an LLP.

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

Things to know before Starting an LLP.

  • LLP Agreement

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.

  • Designated partners in LLP

Every LLP should mandatorily have at least two designated partners. One of the designated partners has to be a resident in India. 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.

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.

The LLP Act also gives flexibility to a body corporate as well, to become 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 when starting an LLP?

Yes. Prior to an individual being chosen as a designated partner, it must be determined whether 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 they have been found to be of unsound mind by a court of competent jurisdiction and the court’s finding is still in force.

To know more about the prerequisites to becoming a designated partner of an LLP, get in touch with the experts at Vakilsearch.

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

Yes. The LLP agreement must 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 appoint him in the capacity of a designated partner.

It must 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 they have been appointed to be a designated partner. Similarly, an LLP agreement may also list the conditions when a partner may cease to be a designated partner.

The Takeaway

The limited liability partnership model is a suitable business structure for small-medium sized businesses. If you’re looking to incorporate your start-up idea or new business, you can do so as an LLP. Experts at Vakilsearch can help you in starting an LLP in a smooth and hassle-free incorporation experience.

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