Advantages of a Limited Liability Partnership

What is a Limited Liability Partnership?

The Limited Liability Partnership Act of 2008 defines a limited liability partnership (LLP) as a corporate business vehicle that enables professional expertise and entrepreneurial initiative to combine and operate in flexible, innovative and efficient manner. LLP provides benefits of limited liability to its members while allowing its members the flexibility for organizing their internal structure as a partnership.

Benefits of LLP for Knowledge-Based Professionals

LLP is preferred mode for professionals like architects, engineers, consultants, design studios, fashion designers, event planner who want to operate in India as they are increasingly transacting with or representing multinationals in international transactions, the extent of the liability they could potentially be exposed to is extremely high. Hence, in order to encourage professionals to participate in the international business community without apprehension of being subject to excessive liability, the need for having an LLP structure is evident.

Before the introduction of limited liability partnerships, people had options of sole proprietorship, partnerships (in case of not doing business alone) or incorporate a company. All these forms of business were viable but had certain limitations and inherent risks which created barriers for the owners/partners/businesses. Some of these barriers were high risks like unlimited liability of owners, high cost of incorporation of companies and much more.

With introduction of LLP structure, the benefits of an LLP vis a vis company are:

• Easy to form (as cost of incorporation is less)
• Body corporate
• Liability of LLP and partners is different as LLP is a separate legal entity
• Perpetual succession which enables LLP to continue irrespective of changes in the partners
• Flexible to manage its own affairs
• Ownership can be transferred
• Capable of owning Separate Property from its partners
• Relief in taxation is available
• Raising money is easier
• No mandatory audit requirements for small businesses
• Partners are not agent of other partners and fewer compliances (lesser requirements to maintain account records and mandatory annual meetings)
• Less government interference
• Provisions for acquisitions and mergers are available

Ministry of Commerce and industry, Government of India permits 100% foreign direct investment (FDI) in LLPs, subject to the following conditions:

• FDI is permitted under the automatic route in LLPs only in sectors where 100% FDI is allowed
• An Indian LLP having foreign investment will be permitted to make downstream investment in another company or LLP in sectors where 100% FDI is allowed under automatic route
• FDI is subject to compliance with conditions of the LLP Act, 2008

On 3^rd March 2017 the Reserve Bank of India (RBI) has amended the FEMA Act to incorporate these liberalizations in its regulations dealing with FDI in an LLP.

The key highlights are:

• A company that has received foreign investment can now be converted into an LLP under the automatic route
• Allowing body corporates (including foreign companies) to appoint a Designated Partner (DP).
• The condition for an individual, appointed as a DP in an LLP that has received FDI, to satisfy the requirement of residency test under FEMA (in addition to the residency test given under Explanation to Section 7 of the LLP Act) has now been withdrawn.
• Earlier, there was an explicit prohibition on LLPs availing ECB. The present amendment does not explicitly mention the permissibility or prohibition on LLPs availing ECB. This can be construed to mean that the restriction on LLPs to avail ECB has been removed, subject to amendment in overall ECB policy framework.

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Disclaimer

The information is published for the assistance of the recipient but is not to be relied upon as authoritative or taken in substitution for the exercise of judgment by any recipient. This article is not intended to be a substitute for professional, technical or legal advice.  We advise you to contact a DMH Business Advisor associate for more information.