Formation and incorporation of LLP, Partners and their relations, Financial disclosures, Conversion into LLP, Foreign LLP

Formation and incorporation of LLP

The Limited Liability Partnership (LLP) is a corporate business structure that combines the flexibility of a partnership and the limited liability protection of a company. In India, the formation and incorporation of LLP are governed by the Limited Liability Partnership Act, 2008.

The process of forming and incorporating an LLP involves several essential steps, which are as follows:

• Choosing a name: The first step in forming an LLP is to choose a name for the proposed LLP. The name should be unique, and it should not be identical or similar to the name of any existing LLP or company. The name should not be contrary to any law or offensive.
• Obtaining Digital Signature Certificate (DSC) and Designated Partner Identification Number (DPIN): The designated partners of the LLP should obtain a Digital Signature Certificate (DSC) and a Designated Partner Identification Number (DPIN) from the Ministry of Corporate Affairs (MCA).
• Drafting the LLP agreement: The LLP agreement is a legal document that governs the operations of the LLP. The agreement should be drafted carefully, and it should include the rights and duties of partners, profit-sharing ratio, the capital contribution of partners, etc.
• Filing the incorporation documents: The next step is to file the incorporation documents with the Registrar of Companies (ROC). The incorporation documents include Form 2 (Incorporation Document and Statement), Form 3 (Details of LLP Partners), and Form 4 (Notice of Appointment of Partners).
• Paying the requisite fees: The LLP should pay the requisite fees as prescribed under the LLP Act, 2008, for registering the LLP and filing the incorporation documents.
• Obtaining the Certificate of Incorporation: Once the ROC is satisfied that all the documents and fees are in order, the ROC will issue the Certificate of Incorporation. This certificate is proof that the LLP has been registered with the ROC.

The process of forming and incorporating an LLP can take anywhere between 15 to 20 days, depending on the time taken by the ROC to process the application and issue the Certificate of Incorporation.

Partners and their Relations

The Indian Partnership Act, 1932 defines a partnership as “the relation between two or more persons who have agreed to share the profits of a business carried on by all or any of them acting for all.” The Act governs the partnership firms in India and specifies the rights and duties of partners, dissolution of partnership, and other related matters.

In the Indian Partnership Act, partners can be classified into different types based on their relations, such as follows:

• General Partners: General partners are the ones who actively participate in the management and operation of the business. They share the profits and losses of the firm, and have unlimited liability for the debts and obligations of the firm.
• Sleeping or Dormant Partners: Sleeping or dormant partners are the ones who contribute capital to the business but do not actively participate in the management or operation of the business. They have limited liability and share only in the profits of the firm.
• Nominal Partners: Nominal partners are the ones who lend their name to the firm but do not have any real interest in the business. They are not liable for the debts or obligations of the firm and do not share in the profits or losses.
• Partner in Profit only: A partner in profit only is one who shares in the profits of the firm but does not bear any loss. Such a partner is not liable for the debts and obligations of the firm.
• Partner by Estoppel: A partner by estoppel is one who holds himself out as a partner or allows others to believe that he is a partner, and thereby induces others to deal with the firm. Such a person is liable as a partner for the debts and obligations of the firm, even though he may not be an actual partner.
• Minor Partner: A minor can be admitted to the benefits of the partnership, but he cannot become a partner in the firm. His share in the profits is credited to his account, and he is not personally liable for the debts or obligations of the firm.

The rights and duties of the partners in a partnership firm are specified in the Indian Partnership Act, and they vary based on the type of partner. The general partners have the right to participate in the management and operation of the business, share the profits and losses of the firm, and have unlimited liability for the debts and obligations of the firm. The dormant partners have the right to share in the profits of the firm, but they do not have any say in the management or operation of the business. The nominal partners have no rights or duties in the firm, while the partners in profit only share in the profits but do not bear any loss.

The partners in a partnership firm have certain duties towards each other and the firm, such as follows:

• Duty of Good Faith: Every partner must act in good faith towards the other partners and the firm. He must not act for his own personal gain at the expense of the firm.
• Duty of Loyalty: Every partner must be loyal to the firm and the other partners. He must not compete with the firm or do anything that would harm the interests of the firm.
• Duty of Care: Every partner must exercise reasonable care and diligence in the management and operation of the business. He must act in the best interests of the firm and the other partners.
• Duty to Account: Every partner must keep accurate accounts of the transactions of the firm and must provide full and true information to the other partners.
• Duty to Indemnify: Every partner must indemnify the firm and the other partners for any loss caused by his wilful or negligent act.

Financial Disclosures of LLP

The Limited Liability Partnership (LLP) Act, 2008 mandates certain financial disclosures that LLPs are required to make. These disclosures are made to ensure transparency in the financial affairs of the LLP and to provide information to stakeholders who have an interest in the LLP. The following are some of the financial disclosures required under the LLP Act:

• Annual Statement of Accounts: Every LLP is required to maintain a book of accounts that contains a true and fair view of its financial affairs. The LLP is required to prepare an annual statement of accounts, which includes a balance sheet, profit and loss account, and cash flow statement. The statement of accounts must be audited by a chartered accountant.
• Filing of Annual Return: Every LLP is required to file an annual return with the Registrar of Companies (RoC) within 60 days from the end of the financial year. The annual return must be accompanied by a certificate from a practicing chartered accountant or company secretary.
• Filing of Statement of Account and Solvency: Every LLP is required to file a statement of account and solvency with the Registrar of Companies (RoC) within 30 days from the end of six months of the financial year. The statement of account and solvency must be signed by designated partners of the LLP and must contain a declaration that the LLP is solvent.
• Disclosure of Financial Interest: Every partner in an LLP is required to disclose any financial interest he or she may have in any transaction or business of the LLP. This disclosure must be made in writing to the other partners and must be recorded in the minutes of the meeting.
• Books of Accounts: Every LLP is required to maintain books of accounts for a minimum of eight years from the end of the financial year to which they relate.
• Financial Disclosure in Prospectus: In case an LLP issues a prospectus, it is required to disclose all material information relating to its financial affairs.

Conversion into LLP

Conversion of a partnership firm into an LLP is governed by the Limited Liability Partnership Act, 2008, and the rules and regulations framed thereunder. The process of conversion involves several steps and compliances, as outlined below:

• Obtain DPIN/DIN: The designated partners or partners of the partnership firm must first obtain a Designated Partner Identification Number (DPIN) or Director Identification Number (DIN), as applicable, from the Ministry of Corporate Affairs (MCA).
• Obtain DSC: The designated partners or partners must then obtain a Digital Signature Certificate (DSC) from a certifying agency authorized by the MCA.
• Name reservation: The next step is to reserve a name for the proposed LLP using the RUN-LLP (Reserve Unique Name-Limited Liability Partnership) facility on the MCA portal.
• Drafting of LLP agreement: The partners must then prepare an LLP agreement, which should be in accordance with the LLP Act and rules. The agreement should include details of the partners, their rights, duties, profit-sharing ratio, contribution, and other relevant provisions.
• Filing of conversion form: After the LLP agreement is prepared, the partners must file Form 17 (Application and Statement for the conversion of a firm into an LLP) and Form 2 (Incorporation Document and Statement) with the Registrar of Companies (ROC). The forms must be accompanied by the following documents:
• LLP agreement
• Statement of assets and liabilities of the partnership firm
• Consent of all partners
• Certificate of registration of the partnership firm
• NOC from the tax authorities
• Issuance of Certificate of Registration: After verifying the documents and forms, the ROC will issue a Certificate of Registration of LLP, which is conclusive evidence of the conversion of the partnership firm into an LLP.
• Intimation to other authorities: After obtaining the Certificate of Registration, the partners must intimate other relevant authorities, such as the income tax department, GST department, etc., about the conversion of the partnership firm into an LLP.

It is important to note that the conversion of a partnership firm into an LLP may have tax implications, and therefore, it is advisable to seek professional advice before undertaking the conversion process.

Foreign LLP

A Foreign Limited Liability Partnership (FLLP) refers to an LLP registered or incorporated outside India, but operates in India. The concept of FLLP was introduced in India by the Limited Liability Partnership (Amendment) Act, 2015, which amended the Limited Liability Partnership Act, 2008.

Foreign LLPs can operate in India through two modes: by setting up a branch office or liaison office or by registering as an FLLP. A branch office or liaison office can be set up under the Foreign Exchange Management Act (FEMA), and they have certain restrictions on their activities in India. On the other hand, registering as an FLLP under the Limited Liability Partnership Act, 2008, provides more flexibility to foreign entities to carry on business activities in India.

To register as an FLLP in India, the foreign LLP must first obtain a Digital Signature Certificate (DSC) and a Designated Partner Identification Number (DPIN). Once these are obtained, the application for registration can be made to the Ministry of Corporate Affairs (MCA) along with the necessary documents such as the LLP agreement, proof of registration outside India, and a statement of partners.

An FLLP is required to comply with the provisions of the LLP Act, 2008, and the rules made thereunder. They are also required to file annual returns and financial statements with the Registrar of Companies (RoC) in India.

In terms of taxation, FLLPs are treated as foreign companies and are subject to tax on their income earned in India. They are required to obtain a Permanent Account Number (PAN) and file income tax returns in India. The tax liability will depend on various factors such as the nature of business, the amount of income earned, and the applicable tax treaty between India and the foreign country.

Overall, registering as an FLLP provides foreign entities with a convenient and flexible way to carry on business activities in India while also ensuring compliance with Indian laws and regulations.