A limited liability partnership (“LLP”) is generally viewed as an alternative corporate business vehicle that provides limited liability benefits, but allows members to organize their internal structure as a partnership based on a mutually agreed upon arrangement. An investor can start a business in India or invest in India through an LLP. Here’s a primer on limited liability partnerships in India that answers frequently asked questions.
- How does a limited liability company work?
LLPs are governed by what laws? LLPs are separate legal entities from their partners, and they operate as corporations. The succession of an LLP is perpetual. A Limited Liability Partnership in India is governed by the Limited Liability Partnership Act, 2008 (“LLP Act”) and its regulations.
- Incorporating a LLP: what are the steps?
2.1. Before an LLP can be incorporated, it must reserve its name. Contact the Ministry of Corporate Affairs (“MCA”) through their web service, Reserve Unique Name LLP, to reserve a name.
2.2. Companies can be incorporated through the MCA’s online portal by applying to the Registrar of Companies (“RoC”) in their state of registered office.
2.3. Within 30 days of incorporation, limited liability partnerships must execute and file their limited liability partnership agreements.Within 30 days of incorporation, limited liability partnerships must execute and file their limited liability partnership agreements. Limited liability partnership agreements define the rights, obligations, and responsibilities of partners.
- In a limited liability partnership agreement, what terms are typically included?
3.1. An LLP agreement generally describes the rights and duties of the partners and the LLP itself.
3.2. The following terms are included in a limited liability partnership agreement:
Registered office of the LLP;
Nature of business of the LLP;
Rights of the partners;
Contribution and profit share of the partners;
Process for change in partner;
Transfer/ assignment of rights; and
3.3. Without a limited liability partnership agreement, the First Schedule of the LLP Act determines the rights and duties of the partners as well as those of the LLP. A number of provisions are included in the First Schedule, including:
Profits, losses, and capital of the LLP are shared equally;
The LLP shall be indemnified for any losses sustained by a partner who conducts its business fraudulently;
As a partner, you are not remunerated for your participation in the LLP’s business or management;
Each existing partner must consent to the addition of a new partner;
It is the responsibility of the partners to decide all matters pertaining to the LLP by a majority vote;
In 30 days after a decision has been made, LLP minutes must be recorded;
A full disclosure of all matters affecting the LLP should be provided by each partner;
As per the Arbitration and Conciliation Act, 1996, all disputes between partners should be arbitrated.
- What are the requirements for becoming a partner in an LLP? LLP Act compliance requirements for partner appointment?
4.1. A limited liability partnership must have at least two partners. It is the sole partner of an LLP that is personally liable for the LLP’s obligations during the period when the LLP has fewer than 2 partners for at least 6 months.
4.2. Limited Liability Partnerships can have both individuals and corporations as partners. An LLP can also partner with another LLP. You must also refrain from the following as a partner in an LLP:
An individual’s mental state must be declared unsound by a court;
be an undischarged insolvent; or
have applied to be adjudicated as an insolvent.
4.3. A person may be appointed as a partner under a limited liability partnership agreement. Profit shares can be acquired in an LLP or capital contributions can be made. If the partner is foreign, the consideration for acquiring the capital contribution or profit share must be obtained through normal banking channels and at a price that is not less than the fair market value determined by a chartered accountant. The Reserve Bank of India must approve the foreign partner’s capital contribution or profit share if it is non-cash or below fair market value. An LLP must report foreign direct investment to the Reserve Bank of India.
4.4. Limited liability partnerships must amend their limited liability partnership agreements when new partners are appointed. Within 30 days of amending the limited liability partnership agreement, Form 3 must be filed with the RoC. Furthermore, the RoC must receive the Form 4 along with the consent of the partner within 30 days of their appointment.
- How does an LLP handle FDI?
5.1. People residing outside India, or entities incorporated outside India (except citizens of Pakistan or Bangladesh or entities incorporated outside India), who are not Foreign Portfolio Investors or Foreign Venture Capital Investors, may contribute to the capital of an LLP operating in sectors or activities where foreign investment is permitted up to 100 percent under the automatic route without FDI-linked performance requirements.
5.2. If an LLP is not owned and controlled by a resident Indian citizen or is controlled by a person located outside India, it can invest in an Indian company downstream when foreign investment is permitted up to 100% under the automatic route and performance conditions are not linked to foreign investment.
5.3. Investing in an LLP requires compliance with certain conditions.
5.4. Under the automatic route, foreign-invested LLPs can convert into companies without any FDI-linked performance criteria, and vice versa, in sectors that allow up to 100% foreign investment.
5.5. Capital contributions or profit shares can be used to invest in a LLP. Chartered accountants should use international valuation methods to determine the fair market value, and the price must not be lower than the fair market value.
5.6. Transfers of capital contributions or profits from individuals outside India must be made for a consideration not less than fair market value. Transfers of capital contributions or profit shares from a person living outside India to a person living in India are subject to a fair market value consideration.