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Cash in on limited liability

It was one of the important policy initiatives of the United Progressive Alliance government in its first term, particularly for small and medium enterprises or SMEs.

Print Edition: December 26, 2010

It was one of the important policy initiat ives of the United Progressive Alliance government in its first term, particularly for small and medium enterprises or SMEs.

Increasingly, entrepreneurs and professionals are opting for the Limited Liability Par tner ship Act, passed by Parliament in December 2008. Already, there are about 3,000 registered LLPs in India. Here is a primer.

What is the Limited Liability Partnership Act?
The Act provides for establishing Limited Liability Partnerships, or LLPs, which are hybrid corporate business vehicles. They give the benefit of limited liability to their partners and allow them the flexibility of organising the internal structure of their outfit on the basis of an agreement.This format is especially useful for SMEs.

What are the advantages of LLPs over companies?
LLPs have members or partners and are managed in accordance with an LLP agreement. Unlike the norms for companies, there is no requirement of a minimum capital contribution to an LLP. The big advantage of an LLP is that the liability of its partners is limited to their contribution in the agreement, not the entire value of its assets. No partner of an LLP is liable on account of the independent or unauthorised actions of the other partners in it. This structure protects individual partners from joint liability arising out of another partner's wrongful business decisions or misconduct.

What statutory conditions do LLPs need to comply with?
The accounts of an LLP with a turnover of over Rs 40 lakh must be audited by a chartered accountant. The same is true of LLPs where a partner has contributed more than Rs 25 lakh. LLPs need to maintain annual accounts and comply with all income tax provisions. In addition, LLPs need to prepare and file statements of solvency and accounts every year with the Registrar of Companies.

Can companies convert into LLPs?
Private companies can convert into LLPs but the erstwhile shareholders and partners have to retain their interest in the LLP for five years. The conversion option is available only to those companies with a turnover of less than Rs 60 lakh in the three years preceding the conversion.

What is the global experience?
All the major economies, including the US, the UK, Germany, and China, permit LLPs. In the US, in particular, it has emerged as a popular choice with the services industry. In India, too, awareness about the inherent benefits of an LLP is growing.

-Puja Mehra

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