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Partnerships has been one of the oldest forms of business relationships which can be evidenced in terms of complex business, partnerships have been replaced by limited liability companies concept, but it is still a preferred form for small trading and business enterprises, especially for the professionals worldwide. But gradually, this form has lost its demand because of inherent demerits in it, the primarily being the unlimited liability of partners. So, a need was felt to develop a format that would combine the flexibility of partnership and the advantages of limited liability of a limited liability company at a low compliance cost which amalgamates the features of both partnership as well as company. With respect to India, Limited Liability Partnership (LLP) entities have been introduced in India by way of LLP Act, 2008 that was notified with effect from March 2009. In other words, it is also recognized as ‘Alternate or Hybrid Corporate Vehicle’.



LLP comes with following advantages:

·   The partners of an LLP including the foreign investors have the limited liability i.e. up to a fixed contribution. Here, unlike partnership, joint liability can’t be created on all the partners by any illegal or independent act of other partner.

·   A company that has received foreign investment can now be converted into an LLP under the automatic route.

·   The partners are free and have the choice to leave LLP or transfer interest in LLP provided it is as per the LLP agreement. LLP allows greater flexibility to the partners.

·   Unlike Company, there are no restrictions on the partners, if they wish to enter into any legal contracts outside India.

·   As compare to the other incorporations, the foreign investors enjoys tax benefits such as:

     * lower tax rate in comparison to that of a company.

     * No Dividend distribution tax if it agrees to distribute profits among its partners.

     * there is no applicability of Income Tax Act’s provision of ‘Deemed income’ on the LLP.



It is very important to throw light on the aspect of the tax benefits for the foreign investors as applicable on LLP under Income Tax Act (IT Act):

·   As per the IT Act, LLP shall follow the similar tax regime as that of a Partnership Firm with an amendment which says that only LLP shall be liable to pay Income Tax and the share of the designated partners shall not be taxed.

·   The tax rate on LLP is comparatively less than that of limited companies.

·   LLPs can distribute profits among its partners without any burden of tax liability like Dividend Distribution Tax.

Interestingly, LLPs have turned out to be an impressive form of body corporate especially for foreign investors who are seeking self-employment or planning to launch a new venture in India. It doesn’t involve too many compliance requirements and also safeguard entrepreneurs from unlimited liability risks in contrast to sole-proprietorship or partnership firms.



·   Liability of Partners

According to the section 26 of the LLP Act, it provides that for the purpose of the business of LLP every partner of the LLP is the agent of the LLP and not of other partners. Liability of partners shall be limited to except in case of unauthorized acts, fraud and negligence. One of the most distinguishing features of the LLP is that partner shall not be personally liable for the wrongful acts or omission of any other partner of the LLP. This is because, in an LLP, a partner does not act as an agent for other partner(s). Unlike traditional partnership, a partner of LLP will not be regarded as the agent of other partners of the LLP. In other words, if there is any wrong doing or gross negligence by any one of the partners, the liability of such acts shall not traverse to the other partners. 


·   Cessation of Partnership Interest: As per Section 24(1) of the LLP Act, 2008 provides that a person may cease to be a partner of a LLP in accordance with the other partners or, in the absence of agreement with the other partners as to cessation of being a partner, by giving a notice in writing of not less than thirty days to the other partner of his intention to resign as partner.


·   Circumstances for automatic cessation of partner from LLP: An individual partner shall be cease to be a partner of a LLP (i) on his death or dissolution of LLP, (ii) if he is declared to be of unsound mind by a competent court, (iii) if has applied to be adjudged as an insolvent or declared as an insolvent.




Earlier, FDI under the automatic route was allowed only in a company (Private Limited or Limited Company) incorporated under the Companies Act, 1956 & 2013 or Venture Capital Funds. Thereafter, it has been decided a Limited Liability Partnership (LLP) formed and registered under the LLP Act, 2008 shall be eligible to accept FDI subject to certain conditions.

FDI in a Limited Liability Partnership (LLP) required prior Government approval. However, vide amendments to the Consolidated FDI Policy Circular of 2015, Ministry of Commerce & Industry, Government of India has allowed FDI in LLPs, which are operating in sectors/activities where 100% FDI is allowed under the automatic route and there are no FDI-linked performance conditions. Therefore , the foreigners who are intending to set up the small medium sized start up in India can operate their business through LLPs.

LLP formed and registered under LLP Act, 2008 shall be eligible to accept Foreign Direct Investment/FDI subject to following conditions:

·   A person residing outside India or an entity incorporated outside India shall be eligible investor for the purpose of FDI in LLPs.

·   LLP operating in sectors/activities where 100% FDI is allowed under the automatic route of FDI scheme would be eligible to receive FDI.

·   LLPs shall not be permitted to avail External Commercial Borrowings.



•   Any individual or body corporate may be a partner in a LLP.

•   Minimum two partners required, who shall be individuals and one of them must be a person resident in India.

•   LLP shall be eligible to accept FDI subject to certain conditions.

•   LLP under the Limited Liability Partnership Act, are required to file Form 8 and Form 11 for annual filing with the Registrar every year.

•   Every meeting shall be held at such place and time as the person convening the same considers most convenient for the majority of the creditors or partners or both. Different times or places or both may, if thought fit, be appointed for the meetings of creditors and the meetings of partners.

Gautam Khurana
7 July 2017

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