Limited Liability Partnership

Lesson
LESSON 3
Limited Liability Partnership
3

KEY CONCEPTS
n Limited Liability Partnership n LLP Agreement n Designated Partner n Small Limited Liability Partnership

Learning Objectives
To understand:
 The concept of LLP and its features
 Formation and Registration of LLP
 LLP Agreement and its essential clauses
 Provisions on maintenance of Books of Account, Records and Audit
 Compliance related to Annual Filing of LLP

Lesson Outline
 Introduction  Cessation of Partnership Interest
 Regulatory Framework - LLP Act, 2008  Registration of Changes in Partners
 Salient Features of “Limited Liability  Extent and Limitation of Liability of Limited
Partnership” or “LLP” Liability Partnership and Partners
 Important Definitions  Whistle Blowing
 Nature of Limited Liability Partnership  Contributions
 Partners  Financial Disclosures
 Minimum Number of Partners  Maintenance of Books of Account, other
Records and Audit
 Designated Partners
 Annual Return
 Liabilities of Designated Partners
 Compounding of Offences
 Changes in Designated Partners
 Lesson Round-Up
 Incorporation of Limited Liability Partnership
 Test Yourself
 Incorporation Document
 List of Further Readings
 Incorporation by Registration
 Other References
 Effect of Registration
 Partners and their Relations

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EP-SBI&LL Limited Liability Partnership

REGULATORY FRAMEWORK
l The Limited Liability Partnership Act, 2008
l The Limited Liability Partnership Rules, 2009

INTRODUCTION
The concept of LLPs emerged as a hybrid form of business entity that combines the flexibility and benefits of a
partnership with the limited liability protection typically associated with a corporation. The need for dedicated
legislation for LLPs arose due to the limitations and complexities associated with traditional partnerships. LLP
has become an alternative business vehicle to carry out business as it combines the characteristics of a private
company and a conventional partnership. The difference between LLP & traditional partnership firms is under
a traditional partnership firm, every partner is liable, jointly and severally, with all the other partners for all acts
of the firm done while he is a partner. Under the LLP structure, the liability of the partner is limited to his agreed
contribution. Additionally, individual partners are not held responsible for the independent or unauthorized
actions of their counterparts. This provision ensures that partners can be protected from collective liability
resulting from the wrongful acts or misconduct of another partner.
The LLP is an alternative operating vehicle that offers the distinctive feature of limited liability for its members
while maintaining an open and flexible internal structure based on mutual understanding and a duly executed
agreement. This flexibility makes LLP a suitable vehicle for small and medium enterprises and investment
venture capitalists, which allows them to provide services with minimum cost and risk, thereby enhancing
competitiveness in the global market and making it an attractive choice for their business endeavors and that
is why nowadays many start-ups choose LLP over private companies.
The increasing popularity of LLPs has been instrumental in encouraging unorganized and unincorporated
structures to shift towards an organized and incorporated business structure. Recognizing this trend, the LLP
Act has undergone several amendments since its inception. These amendments aim to improve the ease of
business and ensure that LLPs operate on a level playing field with companies. In recent years, the growth of
LLPs in India has been significant and showcases a positive trajectory.

LIMITED LIABILITY PARTNERSHIP ACT, 2008

Chapter I Preliminary Sections 1 to 2

Chapter II Nature Of LLP Sections 3 to 10

Chapter III Incorporation of Limited LLP And Matters Incidental to it Sections 11 to 21

Chapter IV Partners and Their Relations Sections 22 to 25

Chapter V Extent and Limitation of Liability of LLP And Partners Sections 26 to 31

Chapter VI Contributions Sections 32 to 33

Chapter VII Financial Disclosures Sections 34 to 41

Chapter VIII Assignment and Transfer of Partnership Rights Section 42

Chapter IX Investigation Sections 43 to 54

Chapter X Conversion Into LLP Sections 55 to 58

Chapter XI Foreign LLPs Section 59

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Limited Liability Partnership LESSON 3

Chapter XII Compromise, Arrangement or Reconstruction of LLP Sections 60 to 62

Chapter XIII Winding Up and Dissolution Sections 63 to 65

Chapter XIV Miscellaneous Sections 66 to 80

First Schedule Provisions regarding matters relating to mutual rights and duties of partners and LLP and
its partners applicable in the absence of any agreement on such matters

Second Conversion from Firm into Limited LLP

Schedule

Third Schedule Conversion from Private Company Into LLP

Fourth Schedule Conversion from Unlisted Public Company Into LLP

SALIENT FEATURES OF “LIMITED LIABILITY PARTNERSHIP” OR “LLP”

 The name of every LLP must bear the words “Limited Liability Partnership” or “LLP”.
 Any two or more persons associated with carrying on a lawful business with a view to profit may by
subscribing their names to an incorporation document and filing the same with the Registrar, form LLP.
 LLP is a suitable structure for medium-sized businesses and commercial activities such as manufacturing,
trading, export, consultancy, professional services, education, joint ventures, and similar endeavors,
unless specifically prohibited by notification.
 The incorporation procedure of LLP is, to a certain extent, similar to a company. LLP’s incorporation
documents (parallel to the memorandum) and LLP agreement (parallel to Articles of Association) are
required to be filed online.
 Minimum two partners, no limit on a maximum number of partners. A minimum of two partners should be
designated as ‘Designated Partners’, out of which one should be a resident of India to fulfil day-to-day
statutory obligations under LLP Act. However, other partners are not normally liable except in cases of
fraud etc.
 LLP is a body corporate which must be registered with the Registrar having a distinct name, and such
name shall not be the same as other LLP, company or partnership firm already registered.
 It is a separate legal entity and a simple form of a partnership firm which holds the property in its
name; thus, any type of debt of the LLP shall be borne by itself, and partners are separated from such
obligations.
 LLP itself decide the relationship between the partners through its agreement thus, give the liberty to
the partners to set the terms and conditions for effective business; however, subject to the LLP Act and
Rules made there under.
 LLP activities are controlled and managed by its partner, whose name is specified in the incorporated
documents. Designated partners have the fiduciary responsibility to carry on the day-to-day activities
of the LLP.
 The right and duties of the LLP and its partners are defined in the LLP agreement.
 There is no limit on the capital contribution quantum that is to be made available in the business, just

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like a company where there is no requirement of the paid-up capital unless the context is otherwise
provided.
 In the absence of the LLP agreement or any provisions therein, then the majority number of partners
decide the specific matter by having one vote one partner. Also, material matters like the change of
name, change in object or change in the registered office of the LLP etc., cannot be made unless the
consent of all the partners.
 As the LLP itself is liable for the debts incurred to it to the full extent of its assets, this means that
partners will be liable only for the limited contribution they have made to those assets, and likewise,
partners may also be liable for their wrongful or fraudulent activity. It means that the personal asset
of the partner of the LLP will not be at risk for the wrongful acts of the LLP or other partners. Thus, the
separate legal entity limits the liability of its partners.
 LLP is also required to notify the Registrar if there is any change in name, registered office, terms and
conditions of the LLP agreement. Also, it is required to submit the financials and annual return to the
Registrar.
 LLP must display its name, place, registration number, and registered office address on all the
conspicuous places of the business.
 LLP is capable of creating a charge over its movable and immovable property, thus enabling financial
institutes to obtain finance. Also, the partners can lend money to the LLP in their personal capacity.
 Also, foreign direct investment is allowed in LLP, subject to the terms and conditions.
 Under the provisions of the LLP Act, a partnership firm, private company, or unlisted public company
can be converted into an LLP.
 LLP can also take actions like compromise, arrangements, reconstructions, mergers, and amalgamations.
Similarly, there are strike-off, winding up, dissolution, inspection and investigation provisions.
 Accounts are required to be maintained by LLP.
 If necessary, the Central Government possesses the authority to examine the operations of an LLP by
appointing a qualified Inspector for the designated objective of investigation.

IMPORTANT DEFINITIONS

Body Corporate
Body Corporate means a company as defined in section 2(20) of the Companies Act, 2013 and includes
(i) a limited liability partnership registered under this Act;
(ii) a limited liability partnership incorporated outside India; and
(iii) a company incorporated outside India,
but does not include
(i) a corporation sole;
(ii) a co-operative society registered under any law for the time being in force; and
(iii) any other body corporate (not being a company as defined in section 2 (20) of the Companies Act,
2013 or a limited liability partnership as defined in this Act), which the Central Government may, by
notification in the Official Gazette, specify in this behalf. [Section 2(1)(d)]

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Business
Business includes every trade, profession, service and occupation except any activity which the Central
Government may, by notification, exclude. [Section 2(1)(e)]

Designated Partner
Designated partner means any partner designated as such pursuant to section 7. [Section 2(1)( j)]

Entity
Entity means any body corporate and includes, for the purposes of sections 18, 46, 47, 48, 49, 50, 52 and 53, a
firm set-up under the Indian Partnership Act, 1932. [Section 2(1) (k)]

Financial Year
Financial year, in relation to a limited liability partnership, means the period from the 1st day of April of a year to
the 31st day of March of the following year. However, in the case of a limited liability partnership incorporated
after the 30th day of September of a year, the financial year may end on the 31st day of March of the year next
following that year. [Section 2(1) (l)]

Foreign Limited Liability Partnership

Foreign limited liability partnership means a limited liability partnership formed, incorporated or registered
outside India which establishes a place of business within India. [Section 2(1)(m)]

Limited Liability Partnership

Limited liability partnership means a partnership formed and registered under this Act. [Section 2(1) (n)]

Limited Liability Partnership Agreement

Limited liability partnership agreement means any written agreement between the partners of the limited liability
partnership or between the limited liability partnership and its partners which determines the mutual rights and
duties of the partners and their rights and duties in relation to that limited liability partnership. [Section 2(1) (o)]

Partner
Partner, in relation to a limited liability partnership, means any person who becomes a partner in the limited
liability partnership in accordance with the limited liability partnership agreement. [Section 2(1) (q)]

Small Limited Liability Partnership

Small limited liability partnership means a limited liability partnership—
(i) the contribution of which, does not exceed twenty-five lakh rupees or such higher amount, not exceeding
five crore rupees, as may be prescribed; and
(ii) the turnover of which, as per the Statement of Accounts and Solvency for the immediately preceding
financial year, does not exceed forty lakh rupees or such higher amount, not exceeding fifty crore
rupees, as may be prescribed; or
(iii) which meets such other requirements as may be prescribed, and fulfils such terms and conditions as
may be prescribed. [Section 2(1) (ta)]

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NATURE OF LIMITED LIABILITY PARTNERSHIP

Limited Liability Partnership to be Body Corporate

According to Section 3 of the LLP Act, 2008, a limited liability partnership is a body corporate formed and
incorporated under this Act and is a legal entity separate from that of its partners.
A limited liability partnership shall have perpetual succession.
Any change in the partners of a limited liability partnership shall not affect the existence, rights or liabilities of
the limited liability partnership.
It may be noted that the provisions of the Indian Partnership Act, 1932 shall not apply to a limited liability
partnership.

PARTNERS
Partner, in relation to a limited liability partnership, means any person who becomes a partner in the limited
liability partnership in accordance with the limited liability partnership agreement.
Section 5 of the Act provides that any individual or body corporate may be a partner in a limited liability
partnership.
An individual shall not be capable of becoming a partner of a limited liability partnership, if:
(a) he has been found to be of unsound mind by a Court of competent jurisdiction and the finding is in force;
(b) he is an undischarged insolvent; or
(c) he has applied to be adjudicated as an insolvent and his application is pending.

Minimum Number of Partners

Section 6 states that every limited liability partnership shall have at least two partners.
If at any time the number of partners of a limited liability partnership is reduced below two and the limited
liability partnership carries on business for more than six months while the number is so reduced, the person,
who is the only partner of the limited liability partnership during the time that it so carries on business after
those six months and has the knowledge of the fact that it is carrying on business with him alone, shall be liable
personally for the obligations of the limited liability partnership incurred during that period.
It may be noted that business includes every trade, profession, service and occupation except any activity
which the Central Government may, by notification, exclude. [Section 2(1)(e)]

Designated Partners
Designated Partner means any partner designated as such pursuant to section 7.
Section 7(1) of the Act provides that every limited liability partnership shall have at least two designated partners
who are individuals and at least one of them shall be a resident in India.
However, in case of a limited liability partnership in which all the partners are bodies corporate or in which one
or more partners are individuals and bodies corporate, at least two individuals who are partners of such limited
liability partnership or nominees of such bodies corporate shall act as designated partners.
It may be noted that the term resident in India means a person who has stayed in India for a period of not
less than one hundred and twenty days during the financial year.

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If the incorporation document:

(a) specifies who are to be designated partners, such persons shall be designated partners on incorporation;
or
(b) states that each of the partners from time to time of limited liability partnership is to be designated
partner, every partner shall be a designated partner;
Any partner may become a designated partner by and in accordance with the limited liability partnership
agreement and a partner may cease to be a designated partner in accordance with limited liability partnership
agreement.
An individual shall not become a designated partner in any limited liability partnership unless he has given his
prior consent to act as such to the limited liability partnership in such form and manner as may be prescribed.
Every limited liability partnership shall file with the Registrar the particulars of every individual who has given
his consent to act as designated partner in such form and manner as may be prescribed within thirty days of
his appointment.
An individual eligible to be a designated partner shall satisfy such conditions and requirements as may be
prescribed.
Every designated partner of a limited liability partnership shall obtain a Designated Partners Identification
Number (DPIN) from the Central Government and the provisions of sections 153 to 159 (both inclusive) of the
Companies Act, 2013 shall apply mutatis mutandis for the said purpose.

Liabilities of Designated Partners

As per Section 8 of the Act, a designated partner shall be-
(a) responsible for the doing of all acts, matters and things as are required to be done by the limited liability
partnership in respect of compliance of the provisions of this Act including filing of any document,
return, statement and the like report pursuant to the provisions of this Act and as may be specified in
the limited liability partnership agreement; and
(b) liable to all penalties imposed on the limited liability partnership for any contravention of those
provisions.

Changes in Designated Partners

Section 9 provides that a limited liability partnership may appoint a designated partner within thirty days of a
vacancy arising for any reason and provisions of section 7(4) & (5) shall apply in respect of such new designated
partner.
It may be noted that if no designated partner is appointed, or if at any time there is only one designated partner,
each partner shall be deemed to be a designated partner.

INCORPORATION OF LIMITED LIABILITY PARTNERSHIP

Incorporation Document
Section 11(1) of the Act states that for a limited liability partnership to be incorporated,
(a) two or more persons associated for carrying on a lawful business with a view to profit shall subscribe
their names to an incorporation document;
(b) the incorporation document shall be filed in such manner and with such fees, as may be prescribed

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with the Registrar of the State in which the registered office of the limited liability partnership is to be
situated; and
(c) there shall be filed along with the incorporation document, a statement in the prescribed form, made by
either an advocate, or a Company Secretary or a Chartered Accountant or a Cost Accountant, who is
engaged in the formation of the limited liability partnership and by any one who subscribed his name
to the incorporation document, that all the requirements of this Act and the rules made thereunder have
been complied with, in respect of incorporation and matters precedent and incidental thereto.
According to Section 11(2) of the Act, the incorporation document shall be:
(a) filed in Form FiLLiP with the Registrar having jurisdiction over the State in which the registered office of
the limited liability partnership is to be situated along with prescribed fee.
 If an individual required to be appointed as designated partner does not have a DPIN or DIN,
application for allotment of DPIN shall be made in Form FiLLiP.
 An Application for allotment of DPIN shall not be made by more than five individuals in Form
FiLLiP.
 An Application for reservation of name may be made through Form FiLLiP.
 Where an applicant had applied for reservation of name under rule 18 in Form RUN-LLP and
which has been approved, he may fill the reserved name as the proposed name of limited liability
partnership.
Further, the incorporation document shall:
(b) state the name of the limited liability partnership;
(c) state the proposed business of the limited liability partnership;
(d) state the address of the registered office of the limited liability partnership;
(e) state the name and address of each of the persons who are to be partners of the limited liability
partnership on incorporation;
(f) state the name and address of the persons who are to be designated partners of the limited liability
partnership on incorporation;
(g) contain such other information concerning the proposed LLP.
Where the Registrar, on examining Form FiLLiP, finds that it is necessary to call for further information or finds
such application or document to be defective or incomplete in any respect, he shall give intimation to the
applicant to remove the defects and re-submit the e-form within fifteen days from the date of such intimation
given by the Registrar.
After re-submission of the document, if the Registrar still finds that the document is defective or incomplete in
any respect, he shall give one more opportunity of fifteen days time to remove such defects or deficiencies.
It may be noted that the total period for re-submission of documents shall not exceed thirty days.
The Certificate of Incorporation of limited liability partnership shall be issued by the Registrar in Form 16 and
shall mention Permanent Account Number and Tax Deduction Account Number issued by the Income Tax
Department.

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Incorporation by Registration
According to Section 12(1) of the Act, when the requirements imposed by section 11(1)(b) &(c) have been complied
with, the Registrar shall retain the incorporation document and, unless the requirement imposed by section 11(1)
(a) of that sub-section has not been complied with, he shall, within a period of fourteen days:
(a) register the incorporation document; and
(b) give a certificate that the limited liability partnership is incorporated by the name specified therein.
The certificate issued shall be signed by the Registrar and authenticated by his official seal.
The certificate shall be conclusive evidence that the limited liability partnership is incorporated by the name
specified therein.

Registered Office of Limited Liability Partnership and Change therein

Section 13 of the Act states that every limited liability partnership shall have a registered office to which all
communications and notices may be addressed and where they shall be received.
A document may be served on a limited liability partnership or a partner or designated partner thereof by sending
it by post under a certificate of posting or by registered post or by any other manner, as may be prescribed,
at the registered office and any other address specifically declared by the limited liability partnership for the
purpose in such form and manner as may be prescribed.
A limited liability partnership may change the place of its registered office and file the notice of such change
with the Registrar in such form and manner and subject to such conditions as may be prescribed and any such
change shall take effect only upon such filing.

Effect of Registration
Section 14 of the Act provides that on registration, a limited liability partnership shall, by its name, be capable of
(a) suing and being sued;
(b) acquiring, owning, holding and developing or disposing of property, whether movable or immovable,
tangible or intangible;
(c) having a common seal, if it decides to have one; and
(d) doing and suffering such other acts and things as bodies corporate may lawfully do and suffer.

PARTNERS AND THEIR RELATIONS

Eligibility to be Partners
According to Section 22 of the Act, on the incorporation of a limited liability partnership, the persons who
subscribed their names to the incorporation document shall be its partners and any other person may become a
partner of the limited liability partnership by and in accordance with the limited liability partnership agreement.

Relationship of Partners
Section 23 provides that save as otherwise provided by this Act, the mutual rights and duties of the partners of
a limited liability partnership, and the mutual rights and duties of a limited liability partnership and its partners,
shall be governed by the limited liability partnership agreement between the partners, or between the limited
liability partnership and its partners.

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It may be noted that Limited Liability Partnership Agreement means any written agreement between the
partners of the limited liability partnership or between the limited liability partnership and its partners which
determines the mutual rights and duties of the partners and their rights and duties in relation to that limited
liability partnership. {Section 2(1) (o)}
The limited liability partnership agreement and any changes, if any, made therein shall be filed with the Registrar
in prescribed form, manner and accompanied by such prescribed fees.
An agreement in writing made before the incorporation of a limited liability partnership between the persons
who subscribe their names to the incorporation document may impose obligations on the limited liability
partnership, provided such agreement is ratified by all the partners after the incorporation of the limited liability
partnership.
In the absence of agreement as to any matter, the mutual rights and duties of the partners and the mutual rights
and duties of the limited liability partnership and the partners shall be determined by the provisions relating to
that matter as are set out in the First Schedule.
It may be noted that the First Schedule provides provisions regarding matters relating to mutual rights
and duties of partners and Limited Liability Partnership and Its partners applicable in the absence of any
agreement on such matters. The matters are as under:
1. The mutual rights and duties of the partners and the mutual rights and duties of the limited liability
partnership and its partners shall be determined, subject to the terms of any limited liability partnership
agreement or in the absence of any such agreement on any matter, by the provisions in this First
Schedule.
2. All the partners of a limited liability partnership are entitled to share equally in the capital, profits and
losses of the limited liability partnership.
3. The limited liability partnership shall indemnify each partner in respect of payments made and personal
liabilities incurred by him.
(a) in the ordinary and proper conduct of the business of the limited liability partnership; or
(b) in or about anything necessarily done for the preservation of the business or property of the
limited liability partnership.
4. Every partner shall indemnify the limited liability partnership for any loss caused to it by his fraud in the
conduct of the business of the limited liability partnership.
5. Every partner may take part in the management of the limited liability partnership.
6. No partner shall be entitled to remuneration for acting in the business or management of the limited
liability partnership.
7. No person may be introduced as a partner without the consent of all the existing partners.
8. Any matter or issue relating to the limited liability partnership shall be decided by a resolution passed
by a majority in number of the partners, and for this purpose, each partner shall have one vote. However,
no change may be made in the nature of business of the limited liability partnership without the consent
of all the partners.
9. Every limited liability partnership shall ensure that decisions taken by it are recorded in the minutes
within thirty days of taking such decisions and are kept and maintained at the registered office of the
limited liability partnership.

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10. Each partner shall render true accounts and full information of all things affecting the limited liability
partnership to any partner or his legal representatives.
11. If a partner, without the consent of the limited liability partnership, carries on any business of the same
nature as and competing with the limited liability partnership, he must account for and pay over to the
limited liability partnership all profits made by him in that business.
12. Every partner shall account to the limited liability partnership for any benefit derived by him without
the consent of the limited liability partnership from any transaction concerning the limited liability
partnership, or from any use by him of the property, name or any business connection of the limited
liability partnership.
13. No majority of the partners can expel any partner unless a power to do so has been conferred by
express agreement between the partners.
14. All disputes between the partners arising out of the limited liability partnership agreement which cannot
be resolved in terms of such agreement shall be referred for arbitration as per the provisions of the
Arbitration and Conciliation Act, 1996.

Cessation of Partnership Interest

As per Section 24 of the Act, a person may cease to be a partner of a limited liability partnership in accordance
with an agreement 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 partners of his intention
to resign as partner.
A person shall cease to be a partner of a limited liability partnership:
(a) on his death or dissolution of the limited liability partnership; or
(b) if he is declared to be of unsound mind by a competent Court; or
(c) if he has applied to be adjudged as an insolvent or declared as an insolvent.
Where a person has ceased to be a partner of a limited liability partnership (hereinafter referred to as former
partner), the former partner is to be regarded (in relation to any person dealing with the limited liability
partnership) as still being a partner of the limited liability partnership unless:
(a) the person has notice that the former partner has ceased to be a partner of the limited liability
partnership; or
(b) notice that the former partner has ceased to be a partner of the limited liability partnership has been
delivered to the Registrar.
The cessation of a partner from the limited liability partnership does not by itself discharge the partner from any
obligation to the limited liability partnership or to the other partners or to any other person which he incurred
while being a partner.
Where a partner of a limited liability partnership ceases to be a partner, unless otherwise provided in the limited
liability partnership agreement, the former partner or a person entitled to his share in consequence of the death
or insolvency of the former partner, shall be entitled to receive from the limited liability partnership:
(a) an amount equal to the capital contribution of the former partner actually made to the limited liability
partnership; and
(b) his right to share in the accumulated profits of the limited liability partnership,

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after the deduction of accumulated losses of the limited liability partnership, determined as at the date the
former partner ceased to be a partner.
A former partner or a person entitled to his share in consequence of the death or insolvency of the former
partner shall not have any right to interfere in the management of the limited liability partnership.

Registration of Changes in Partners

Section 25 provides that every partner shall inform the limited liability partnership of any change in his name or
address within a period of fifteen days of such change.
A limited liability partnership shall:
(a) where a person becomes or ceases to be a partner, file a notice with the Registrar within thirty days
from the date he becomes or ceases to be a partner; and
(b) where there is any change in the name or address of a partner, file a notice with the Registrar within
thirty days of such change.
A notice filed with the Registrar:
(a) shall be in such form and accompanied by such fees as may be prescribed;
(b) shall be signed by the designated partner of the limited liability partnership and authenticated in a
manner as may be prescribed; and
(c) if it relates to an incoming partner, shall contain a statement by such partner that he consents to
becoming a partner, signed by him and authenticated in the manner as may be prescribed.
Any person who ceases to be a partner of a limited liability partnership may himself file with the Registrar the
notice of his cession.
if he has reasonable cause to believe that the limited liability partnership may not file the notice with the
Registrar and in case of any such notice filed by a partner, the Registrar shall obtain a confirmation to this effect
from the limited liability partnership unless the limited liability partnership has also filed such notice.
It may be noted that where no confirmation is given by the limited liability partnership within fifteen days, the
Registrar shall register the notice made by a person ceasing to be a partner under this section.

EXTENT AND LIMITATION OF LIABILITY OF LIMITED LIABILITY PARTNERSHIP AND PARTNERS

Partner as Agent
Section 26 states that every partner of a limited liability partnership is, for the purpose of the business of the
limited liability partnership, the agent of the limited liability partnership, but not of other partners.

Extent of Liability of Limited Liability Partnership

Section 27 of the Act provides that a limited liability partnership is not bound by anything done by a partner in
dealing with a person if:
(a) the partner in fact has no authority to act for the limited liability partnership in doing a particular act;
and
(b) the person knows that he has no authority or does not know or believe him to be a partner of the limited
liability partnership.

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The limited liability partnership is liable if a partner of a limited liability partnership is liable to any person as a
result of a wrongful act or omission on his part in the course of the business of the limited liability partnership
or with its authority.
An obligation of the limited liability partnership whether arising in contract or otherwise, shall be solely the
obligation of the limited liability partnership.
The liabilities of the limited liability partnership shall be met out of the property of the limited liability partnership.

Unlimited Liability in case of Fraud

According to Section 30(1) of the Act, in the event of an act carried out by a limited liability partnership, or any
of its partners, with intent to defraud creditors of the limited liability partnership or any other person, or for any
fraudulent purpose, the liability of the limited liability partnership and partners who acted with intent to defraud
creditors or for any fraudulent purpose shall be unlimited for all or any of the debts or other liabilities of the
limited liability partnership.
However, in case any such act is carried out by a partner, the limited liability partnership is liable to the same
extent as the partner unless it is established by the limited liability partnership that such act was without the
knowledge or the authority of the limited liability partnership.
Where any business is carried on with such intent or for such purpose as mentioned in Section 30(1), every person
who was knowingly a party to the carrying on of the business in the manner aforesaid shall be punishable with
imprisonment for a term which may extend to five years and with fine which shall not be less than fifty thousand
rupees but which may extend to five lakh rupees.
Where a limited liability partnership or any partner or designated partner or employee of such limited liability
partnership has conducted the affairs of the limited liability partnership in a fraudulent manner, then without
prejudice to any criminal proceedings which may arise under any law for the time being in force, the limited
liability partnership and any such partner or designated partner or employee shall be liable to pay compensation
to any person who has suffered any loss or damage by reason of such conduct.
It may be noted that such limited liability partnership shall not be liable if any such partner or designated
partner or employee has acted fraudulently without knowledge of the limited liability partnership.

Whistle Blowing
Section 31(1) of the Act states that the Court or Tribunal may reduce or waive any penalty leviable against any
partner or employee of a limited liability partnership, if it is satisfied that:
(a) such partner or employee of a limited liability partnership has provided useful information during
investigation of such limited liability partnership; or
(b) when any information given by any partner or employee (whether or not during investigation) leads
to limited liability partnership or any partner or employee of such limited liability partnership being
convicted under this Act or any other Act.
Partner or employee of any limited liability partnership may not be discharged, demoted, suspended,
threatened, harassed or in any other manner discriminated against the terms and conditions of his limited
liability partnership or employment merely because of his providing information or causing information to be
provided pursuant to Section 31(1).

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CONTRIBUTIONS

Form of Contribution
Section 32 of the Act provides that a contribution of a partner may consist of tangible, movable or immovable or
intangible property or other benefit to the limited liability partnership, including money, promissory notes, other
agreements to contribute cash or property, and contracts for services performed or to be performed.
The monetary value of contribution of each partner shall be accounted for and disclosed in the accounts of the
limited liability partnership in the manner as may be prescribed.

Obligation to Contribute
Section 33 of the Act provides that the obligation of a partner to contribute money or other property or other
benefit or to perform services for a limited liability partnership shall be as per the limited liability partnership
agreement.
A creditor of a limited liability partnership, which extends credit or otherwise acts in reliance on an obligation
described in that agreement, without notice of any compromise between partners, may enforce the original
obligation against such partner.

FINANCIAL DISCLOSURES

Maintenance of Books of Account, other Records and Audit

According to Section 34(1) of the Act the limited liability partnership shall maintain such proper books of account
as may be prescribed relating to its affairs for each year of its existence on cash basis or accrual basis and
according to double entry system of accounting and shall maintain the same at its registered office for such
period as may be prescribed.
Section 34 (2) states that every limited liability partnership shall, within a period of six months from the end
of each financial year, prepare a Statement of Account and Solvency for the said financial year as at the last
day of the said financial year in such form as may be prescribed, and such statement shall be signed by the
designated partners of the limited liability partnership.
Rule 24(1) of the LLP Rules 2009 provides that every limited liability partnership shall keep books of accounts
which are sufficient to show and explain the limited liability partnership’s transactions and are such as to-
(a) disclose with reasonable accuracy, at any time, the financial position of the limited liability partnership
at that time; and
(b) enable the designated partners to ensure that any Statement of Account and Solvency prepared under
this rule complies with the requirements of the Act.
According to Rule 24(2) of the LLP Rules the books of account shall contain-
(a) particulars of all sums of money received and expended by the limited liability partnership and the
matters in respect of which the receipt and expenditure takes place;
(b) a record of the assets and liabilities of the limited liability partnership;
(c) statements of cost of goods purchased, inventories, work-in-progress, finished goods and cost of goods
sold; and
(d) any other particulars which the partners may decide.
Rule 24(3) states that the books of account which a limited liability partnership is required to keep shall be
preserved for eight years from the date on which they are made.

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As per Rule 24(6) of the LLP Rules, Statement of Account and Solvency shall be signed on behalf of the limited
liability partnership by its designated partners. Where the corporate insolvency resolution process has been
initiated against the limited liability partnership under the Insolvency and Bankruptcy Code, 2016 or the Limited
Liability Partnership Act, 2008 has come under liquidation under the said Code, 2016 or the said Act, 2008,
the said Statement of Account and Solvency may be signed on behalf of limited liability partnership by interim
resolution professional or resolution professional, or liquidator or limited liability partnership administrator.
Rule 24 (7) of the LLP Rules states that the Statement of Account and Solvency of a limited liability partnership
shall be signed by the designated partners of the LLP and each designated partner shall be taken to be a party
to its approval unless he shows that he took all reasonable steps to prevent their being approved and signed.
Section 34(3) provides that every limited liability partnership shall file within the prescribed time, the Statement
of Account and Solvency prepared pursuant to sub-section (2) with the Registrar every year in such form and
manner and accompanied by such fees as may be prescribed.
For the purposes of sub-section (3) of section 34, every limited liability partnership shall file the Statement of
Account and Solvency in Form 8 with the Registrar, within a period of thirty days from the end of six months of
the financial year to which the Statement of Account and Solvency relates. {Rule 24(4)}
As per Section 34(4) of the Act, the accounts of limited liability partnerships shall be audited in accordance with
such rules as may be prescribed.
Provided that the Central Government may, by notification in the Official Gazette, exempt any class or classes
of limited liability partnerships from the requirements of this sub-section.
Any limited liability partnership which fails to comply with the provisions of sub-section (3), such limited liability
partnership and its designated partners shall be liable to a penalty of one hundred rupees for each day during
which such failure continues, subject to a maximum of one lakh rupees for the limited liability partnership and
fifty thousand rupees for every designated partner. {Section 34(5)}
Any limited liability partnership which fails to comply with the provisions of sub-section (1), sub-section (2) and
sub-section (4), such limited liability partnership shall be punishable with fine which shall not be less than
twenty-five thousand rupees, but may extend to five lakh rupees and every designated partner of such limited
liability partnership shall be punishable with fine which shall not be less than ten thousand rupees, but may
extend to one lakh rupees. {Section 34 (6)}
The statement of Account and Solvency of a LLP shall be signed by the designated partners of the LLP and each
designated partner shall be taken to be a party to its approval unless he shows that he took all reasonable
steps to prevent their being approved and signed. [Rule 24(7)]
Rule 24(8) of the LLP Rules provides that the accounts of every limited liability partnership shall be audited in
accordance with LLP Rules.
However, limited liability partnership whose turnover does not exceed, in any financial year, forty lakh rupees,
or whose contribution does not exceed twenty-five lakh rupees shall not be required to get its accounts audited.
Provided further that if partners of such limited liability partnership decide to get the accounts of such LLP
audited, the accounts shall be audited in accordance with these rules.
Provided also that where the partners of such LLP do not decide for audit of the accounts of the LLP, such
LLP shall include in the Statement of Account and Solvency a statement by the partners to the effect that the
partners acknowledge their responsibilities for complying with the requirements of the Act and the Rules with
respect to preparation of books of account and a certificate in the form specified in Form 8.
Rule 24(9) of the Rules states that a person shall not be qualified for appointment as an auditor of a limited
liability partnership unless he is a Chartered Accountant in practice.

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According to Rule 24(10) an auditor or auditors of a limited liability partnership shall be appointed for each
financial year of the LLP for auditing its accounts.
Rule 24(11) of the LLP Rules provides that the designated partners may appoint an auditor or auditors-
(a) at any time for the first financial year but before the end of the first financial year,
(b) at least 30 days prior to the end of each financial year (other than the first financial year),
(c) to fill a casual vacancy in the office of auditor, including in the case when the turnover or contribution
of a limited liability partnership exceeds the limits specified under sub-rule (8), or
(d) to fill up the vacancy caused by removal of an auditor.
As per Rule 24(12) the partners may appoint an auditor or auditors where the designated partners have power
to appoint under sub-rule (11) and have failed to appoint.
According to Rule 24(13) an auditor or auditors of an LLP shall hold office in accordance with the terms of his or
their appointment and shall continue to hold such office till the period-
(a) the new auditors are appointed, or
(b) they are re-appointed.
Rule 24(14) provides that where no auditor has been appointed under sub-rule (11), any auditor in office shall be
deemed to be re-appointed, unless-
(a) the limited liability partnership agreement requires actual re-appointment, or
(b) the majority of partners have determined that he should not be re-appointed and have given a notice
to this effect to the LLP.
Provisions of sub-rule (14) shall be applicable without prejudice to the provisions of the rules relating to removal
and resignation of auditors. {Rule 24 (15)}
Rule 24(16) states that a notice specified under clause (b) of sub-rule 14-
(a) may be in hard copy or electronic form, and
(b) must be authenticated by the person or persons giving it.
Rule 24 (17) provides that the remuneration of an auditor appointed by the limited liability partnership may be
fixed by the designated partners or by following the procedure as laid down in the limited liability partnership
agreement.
Rule 24 (18) of the LLP Rules states that:
(a) The partners of a limited liability partnership may remove an auditor from office at any time by following
the procedure as laid down in the limited liability partnership agreement.
(b) Where the limited liability partnership agreement does not provide for removal of an auditor, consent of
all the partners shall be required for removal of the auditor from his office.
Rule 24 (19) LLP Rules provides that:
(a) An auditor of an LLP may resign his office by depositing a notice in writing to that effect at the LLP’s
registered office.
(b) Where an auditor is unwilling to be re-appointed, he shall give a notice in writing to that effect at the
LLP’s registered office, not less than 14 days before the end of the time allowed for appointing the new
auditor.

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(c) The notice under clause (a) or (b) is not effective unless it is accompanied by the statement of the
circumstances connected with his ceasing to hold office.
(d) The auditor’s term comes to an end as on the date on which the notice is deposited or on such later
date as may be specified in the notice.

ANNUAL RETURN
Section 35(1) of the LLP Act provides that every limited liability partnership shall file an annual return duly
authenticated with the Registrar within sixty days of closure of its financial year in such form and manner and
accompanied by such fee as may be prescribed.
Every limited liability partnership shall file an annual return with the Registrar in Form 11.
The annual return of an LLP having turnover upto five crore rupees during the corresponding financial year or
contribution upto fifty lakh rupees shall be accompanied with a certificate from a designated partner, other than
the signatory to the annual return, to the effect that annual return contains true and correct information. In all
other cases, the annual return shall be accompanied with a certificate from a Company Secretary in Practice
to the effect that he has verified the particulars from the books and records of the limited liability partnership
and found them to be true and correct.
It may be noted that where the corporate insolvency resolution process has been initiated against the limited
liability partnership under the Insolvency and Bankruptcy Code, 2016 or the Limited Liability Partnership Act,
2008 having turnover upto five crore rupees during the corresponding financial year or contribution upto fifty
lakh rupees has come under liquidation under the said Code, 2016 or the said Act, 2008, the said annual
return may be signed on behalf of limited liability artnership by interim resolution professional or resolution
professional, or liquidator or limited liability partnership administrator and no certification by a designated
partner shall be required.
As per Section 35 (2) of the Act, if any limited liability partnership fails to file its annual return under sub-section
(1) before the expiry of the period specified therein, such limited liability partnership and its designated partners
shall be liable to a penalty of one hundred rupees for each day during which such failure continues, subject
to a maximum of one lakh rupees for the limited liability partnership and fifty thousand rupees for designated
partners.

COMPOUNDING OF OFFENCES
According to Section 39(1) of the LLP Act, notwithstanding anything contained in the Code of Criminal Procedure,
1973, the Regional Director or any other officer not below the rank of Regional Director authorised by the
Central Government may compound any offence under this Act which is punishable with fine only, by collecting
from a person reasonably suspected of having committed the offence, a sum which may extend to the amount
of the maximum fine provided for the offence but shall not be lower than the minimum amount provided for the
offence.
Nothing contained in sub-section (1) shall apply to an offence committed by a limited liability partnership or its
partner or its designated partner within a period of three years from the date on which similar offence committed
by it or him was compounded under this section.
It is hereby clarified that any second or subsequent offence committed after the expiry of the period of three
years from the date on which the offence was previously compounded, shall be deemed to be the first offence.
Every application for the compounding of an offence shall be made to the Registrar who shall forward the same,
together with his comments thereon, to the Regional Director or any other officer not below the rank of Regional
Director authorised by the Central Government, as the case may be.

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Where any offence is compounded under this section, whether before or after the institution of any prosecution,
intimation thereof shall be given to the Registrar within a period of seven days from the date on which the
offence is so compounded.
Where any offence is compounded before the institution of any prosecution, no prosecution shall be instituted
in relation to such offence.
Where the compounding of any offence is made after the institution of any prosecution, such compounding
shall be brought by the Registrar in writing, to the notice of the court in which prosecution is pending and on
such notice of the compounding of the offence being given, the offender in relation to which the offence is so
compounded shall be discharged.
The Regional Director or any other officer not below the rank of Regional Director authorised by the Central
Government, while dealing with the proposal for compounding of an offence may, by an order, direct any partner,
designated partner or other employee of the limited liability partnership to file or register, or on payment of fee
or additional fee as required to be paid under this Act, such return, account or other document within such time
as may be specified in the order.
Notwithstanding anything contained in this section, if any partner or designated partner or other employee
of the limited liability partnership who fails to comply with any order made by the Regional Director or any
other officer not below the rank of Regional Director authorised by the Central Government, the maximum
amount of fine for the offence, which was under consideration of Regional Director or such authorised officer
for compounding under this section shall be twice the amount provided in the corresponding section in which
punishment for such offence is provided.

LESSON ROUND-UP

l The concept of LLPs emerged as a hybrid form of business entity that combines the flexibility and
benefits of a partnership with the limited liability protection typically associated with a corporation.
l Minimum two partners, no limit on a maximum number of partners. A minimum of two partners should be
designated as ‘Designated Partners’, out of which one should be a resident of India to fulfil day-to-day
statutory obligations under LLP Act. However, other partners are not normally liable except in cases of
fraud etc.
l According to Section 3 of the LLP Act, 2008, a limited liability partnership is a body corporate formed
and incorporated under this Act and is a legal entity separate from that of its partners.
l The mutual rights and duties of the partners of a limited liability partnership, and the mutual rights
and duties of a limited liability partnership and its partners, shall be governed by the limited liability
partnership agreement between the partners, or between the limited liability partnership and its partners.
l Contribution of a partner may consist of tangible, movable or immovable or intangible property or
other benefit to the limited liability partnership, including money, promissory notes, other agreements
to contribute cash or property, and contracts for services performed or to be performed.
l Section 34 (2) states that every limited liability partnership shall, within a period of six months from the
end of each financial year, prepare a Statement of Account and Solvency for the said financial year as
at the last day of the said financial year in such form as may be prescribed, and such statement shall
be signed by the designated partners of the limited liability partnership.

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l Section 35(1) of the LLP Act provides that every limited liability partnership shall file an annual return
duly authenticated with the Registrar within sixty days of closure of its financial year in such form and
manner and accompanied by such fee as may be prescribed.
l The Regional Director or any other officer not below the rank of Regional Director authorised by the
Central Government may compound any offence under this Act which is punishable with fine only, by
collecting from a person reasonably suspected of having committed the offence, a sum which may
extend to the amount of the maximum fine provided for the offence but shall not be lower than the
minimum amount provided for the offence.

TEST YOURSELF

(These are meant for re-capitulation only. Answers to these questions are not to be submitted for evaluation)
1. What are the steps involved in the formation and registration of LLP?
2. What is an LLP Agreement? State the procedure for altering the LLP Agreement.
3. A Limited Liability Partnership wants to change its name. Explain under what factors have to be borne
in mind and the procedure for the same.
4. LLP Agreement is the essence of LLP formation. Examine the statement in light of all the essential
clauses of the LLP Agreement.
5. ABC LLP wants to shift its registered office from Delhi to Maharashtra. Suggest the partners the
procedure for the change in the registered office of the company.
6. The Financial Statements of Limited Liability partnership are nor mandatorily required to be audited by
a Chartered Accountant. Comment.

LIST OF FURTHER READINGS

l Bare Act- The LLP Act, 2008

l The LLP Rules, 2009

OTHER REFERENCES (Including Websites/ Video Links)

l [Link]

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