The government has introduced in the Rajya Sabha the Limited Liability Partnership (Amendment) Bill, which seeks to encourage the startup ecosystem and further boost ease of doing business in the country.

Key changes as proposed in the bill includes as viz. introduction of the concept of ‘small companies’, decriminalization of certain offences, empowering Govt. to establish special courts etc.

What are LLPs?

A Limited Liability Partnership (LLP) is a partnership in which some or all partners have limited liability. It therefore exhibits elements of partnerships and corporations.
In an LLP, one partner is not responsible or liable for another partner’s misconduct or negligence.
This is an important difference from that of an unlimited partnership.
In an LLP, some partners have a form of limited liability similar to that of the shareholders of a corporation.

Liability. But against whom?

Limited liability means that if the partnership fails, then creditors cannot go after a partner’s personal assets or income.
LLPs are common in professional business-like law firms, accounting firms, and wealth managers.

Benefits offered by an LLP

Risk avoidance: For a long time, a need has been felt to provide for a business format that would combine the flexibility of a partnership and the advantages of limited liability of a company at a low compliance cost.
Flexibility: The LLP format is an alternative corporate business vehicle that provides the benefits of limited liability of a company but allows its members the flexibility of organizing their internal management on the basis of a mutually arrived agreement.
Startup-promotion: This format would be quite useful for small and medium enterprises in general and for the enterprises in services sector in particular.
Service-oriented: Internationally, LLPs are the preferred vehicle of business particularly for service industry or for activities involving professionals.
Investment promotion: The hybrid structure of LLP will facilitate entrepreneurs, service providers and professionals to organize and operate in an innovative and efficient manner for effectively competing in the global market.
Ease of Doing Business: The cost of forming an LLP is low and there’s’ less compliance and regulatory burden. It has no requirement of minimum capital contribution.

Limitations of LLP

Penalty on non-compliance: The compliance that is to be followed by LLP is minimal. But, if these compliances are not completed on time, then the LLP will have to pay a heavy penalty.
Winding up and dissolution of LLP: A minimum of two partners is required to form an LLP. If the minimum number of partners is below two for six months, then the LLP will be dissolved. It may be dissolved if the LLP is unable to pay its debts.
Difficulty to raise capital: The LLP does not have the concept of an IPO (equity or shareholders like a company). Angel investors and venture capitalists cannot invest in the LLP as shareholders.

LLPs in India

The concept of the Limited Liability Partnership (LLP) was introduced in India in 2008.
An LLP has the characteristics of both the partnership firm and company.
The Limited liability Partnership Act, 2008 regulates the LLP in India.
Minimum two partners are required to incorporate an LLP. However, there is no upper limit on the maximum number of partners of an LLP.

Setting up of an LLP

Minimum two partners are required to incorporate an LLP. However, there is no upper limit on the maximum number of partners of an LLP.
Among the partners, there should be a minimum of two designated partners who shall be individuals, and at least one of them should be resident in India.
The rights and duties of designated partners are governed by the LLP agreement.
They are directly responsible for the compliance of all the provisions of the LLP Act, 2008 and provisions specified in the LLP agreement.
The rights and duties of designated partners are governed by the LLP agreement.
They are directly responsible for the compliance of all the provisions of the LLP Act 2008 and provisions specified in the LLP agreement.

LLP Amendment Bill, 2021

Key Highlights:

Total of 12 offences to be decriminalized under LLPs. The decriminalized offences will then get shifted to an internal adjudication mechanism to help unclog criminal courts from routine cases.
The government has also approved creation of a class of small LLPs to encourage entrepreneurs. These LLPs will be subject to fewer compliances, reduced fee or additional fee, and smaller penalties in the event of default.
The changes, including removing criminal action for failure to comply with provisions of the Act, will help about 2.30 lakh such firms in the country.
A penalty in the form of a fine has been decided for violations of general trends. This boosts Aatmanirbhar Bharat.

New Concepts:

Definition of Small Company: The government will also introduce a new definition of small LLPs based on their turnover size and contributions by partners or proprietors. At present, there are relaxations for thresholds up to turnover size and partner’s contribution of Rs 40 lakh and Rs 25 lakh, respectively.
Lower compliance: It will incentivize unincorporated micro and small partnerships to convert into the organized structure of an LLP and derive its benefits. The corporate affairs ministry is also working towards setting up an e-adjudication platform as part of the new version of the MCA21 portal.