Difference between LLC and LLP

Introduction

The Concept of Limited Liability Partnership was authorised and introduced in India in 2008 when the Act was enacted specially dealing with such companies and the act was authorised by the name “The Limited Liability Partnership Act, 2008”. Under this act the major advantage which was provided that they are different from the general partnership in India as it is a body corporate and legal entity of all the partners are separate from each other. The liability of the partners is limited to the extent of their contribution. If there is any change in partnership of an LLP it will not affect the existence of the LLP this means they have perpetual succession.

Before enactment of LLP Act, 2008 partnership companies were governed by Partnership Act, in which a major problem was faced is that all the partners have unlimited liability. Rules of Partnership Act generally state that the debts incurred by the business it is a legal responsibility of each partner to pay off such liability.

Illustration:- if A and B are the partners of a firm and A does any wrongful act or omitted anything then both A and B have an unlimited liability to pay off under Partnership Act, but the liability is limited to the extent of contribution of the partner under LLP Act, 2008.

Characteristics of both company and partnership

LLP in India provide to incorporate as partnership business to become an option for entrepreneurs by starting a new business as an LLP rather than incorporating as a traditional Limited Liability Company. LLP provides benefit like flexibility under the partnership as it includes characteristics of both company and partnership.

Perpetual Succession- The first characteristic of LLP is that regardless of any changes in the partnership, business will continue without any changes. The existence of partnership will remain unaffected. Also, LLP is able to enter in to contracts by own and can hold properties in their name.
Separate legal entity- LLP has a separate legal entity, which means that all the partners have separate legal entity as they are only liable to the extent of their contribution in the business which is agreed upon.
Limited Liability Partnership- Under LLP, liability of partners are limited to the contribution of their extent. After that, no partner is liable of independent actions of any partner or any unauthorised actions of their partners. Neither partners are liable for any misconduct cause by other partners.
Agreement- Under LLP, rights and obligations of the partners are agreed upon by an agreement. The LLP, however, is not protected of the liability for its other obligations as a separate entity.

Since LLP contains elements of both ‘a corporate body’ as well as ‘a partnership firm structure’ LLP is called a hybrid between a company and a partnership.

Structure of LLP

LLP is a body corporate having a characteristic of a company and a legal entity separate from its partners. It has another characteristic under their structure which is perpetual succession which means that the existence of the LLP does not comes to an end even if anything changes under partnership.

Our act of Limited Liability Partnership is inspired and majorly based upon UK LLP Act 2000 and Singapore LLP Act 2005. Both these Acts allow creating of LLPs in a body corporate form i.e., as a separate legal entity which is separate from its partners/members.

There is a major difference in the traditional partnership firm and limited liability partnership that every partner is liable jointly with all the other partners under Partnership Act and in addition to it severally for all acts of the firm done while he is a partner in the firm. But LLP protects individual partners from joint liability created by another partner’s wrongful acts, omission, or misconduct.

Advantages of Limited liability partnership

Give flexibility as a partnership business.
Give separate legal entity as an artificial person like a company.

Registration of LLP

STEP-1 After forming an LLP, it should be registered with Registrar of Companies which is appointed under the Companies Act, 1956 by following the provisions given under LLP Act.
STEP-2 There is a condition that every LLP who undergo with registrar for registration of company must have a registered office.
STEP-3 Then an incorporation document must be signed and subscribed by at least two partners which is to be filed with registrar in a prescribed form.
STEP-4 All the duties and rights which are agreed upon at the time of incorporation or the contents must be filed in a prescribed form given under LLP act.

There is one more important thing in forming LLP in India that not only individuals, but a company can also incorporate an LLP. Also, a foreign company and LLP can also incorporate as LLP in India only with a condition that one partner must be from India. In the last of the company name “limited liability partnership” or the acronym “LLP” must be written as the last words of its name. If the name of LLP is not suitable according to Central Government, then it does not get any name.

Accounts and Audit

Under LLP maintenance of annual accounts is same as companies but under different head which is “Statement of Accounts and Solvency” in prescribed form which is to be filed with registrar every year. The object of maintaining annual accounts under an LLP is to reflect true view of their state of affairs. Under Rule 24 of LLP, Rules 2009 all the accounts must be audited.

Concept of LLC in India

A company incorporated can be registered as Limited Liability Company or unlimited company under Companies Act, 2013. The limited liability company can be classified under three heads given as under: –

1. Companies limited by share

Under Section 4(1)(d)(i) a company can limit the liability of its members through memorandum to the amount which is unpaid upon the shares which are held by them, respectively. One thing which must be noted that the liability of the companies is never limited it is the members whose liability is limited. The enforcement of limited liability can be enforced anytime during the existence of a company, also during winding-up of the company. A company must have share capital as the extent of liability is determined by the face value of shares.

2. Companies limited by guarantee

Under Section 4(1)(d)(ii) the concept of companies which are limited by guarantee are given it may be defined as a company which has liability of its members limited through the memorandum of such amount as the members willing to contribute:

To the assets of the company in the event of its being winding-up or if he ceases to be the member of the debts and liabilities or the contracted debts and liabilities
To the cost, charge, and expense of winding up

3. Companies limited by guarantee having share capital

According to Section 285 liability of a member which is guaranteed by share capital not merely limited to that amount as they may be called upon to also contribute to the extent of any sum remaining which is unpaid on the shares held by him. Rule 39 which is added by the Companies (Incorporation) Fourth Amendment Rules, 2016 has given the procedure for conversion of a company which is limited by guarantee to the company limited by shares.

Some Concepts of LLC

There is also a procedure given for conversion of unlimited liability company into a limited liability company by shares or guarantee which is given under Rule 37 of the companies (Incorporation) Rules, 2014 inserted by the Companies (Incorporation) Third Amendment Rules, 2016. It is also to be noted under Section 8(3) of the act that a partnership firm can also become a member of limited company. But on dissolution of the firm there membership will come to an end.

Procedure to register LLC in India

Any seven or more members should be associated to form a company.
Apply for DPIN (Designated Partner Identification Number) by filling the online form.
Acquire your Digital Signature Certificate and register it on MCA portal.
Get the approval for your LLC name from the Ministry of Corporate Affairs.
File Incorporation documents like memorandum of association and article of association or Receive simplified performa for incorporating company electronically.
Registrar of companies’ issue certificate of incorporation after receiving all the documents.
Allotment of Corporate Identity Number.

Characteristics of Limited Liability Company

LLC’s have separate legal entities, as it is an artificial person.
Liability is limited to their share capital contributions or through guarantee.

Note: – If an LLC is sued in a court of law then the shareholders do not have personal liability for the company’s liabilities or debts and misconduct of other partners also will not affect the personal liability of other partners.

Directors- In India Limited Liability Company must have at least of two Directors who are citizens of the country and residing in any country. The Indian director is not required to be a shareholder.

Note: – Legal entities cannot be Directors. Because of these Foreign nationals choose at least one of the Indian directors.

Accounting and Auditing- There is an important condition that every LLC is required to file an audited statement of their annual accounts like every other company.

Annual General Meeting- An annual general meeting of shareholders is necessary. Board of Directors meetings can be held anywhere in the world even with the new rules given during the time of Covid-19 it can also be held virtually. However, there is condition to shareholders meetings as they must be held in India. Meeting Minutes records are required and must be maintained in the registered office and it is not to be given as public record.

Advantages to form LLC

There are many advantages to form LLC in Indian by the citizens and also by the foreign nations as it needs less and provide more advantage. The advantages are mentioned below:

Ownership does not differ between a foreign national or an Indian citizen, it can be formed with 100 percent ownership of foreign nationals with no restrictions given under the act.
Liability is separate of a company and of its members, so by these members are protected from company debts.
Requirement of shareholding structure is not very vast as under LLC only two shareholders are needed for forming the company.
Company documents can be made in a standard language which is spoken which is English this is a major advantage for foreign business to form LLC in India.
Big capitals are not needed by the act to form an LLC in India.

By looking at the shareholding structure of LLC, it has been noticed that the shares of LLC in India can be owned by members of the company, natural persons, foreigners, or any legal entity. In addition to that mix of members and companies without differentiating in its origin can have company’s share.

Conclusion

In conclusion LLP is better option to be registered as a company in India, as it has both the features of corporate entity and a flexibility of partnership. In India, the most adaptable form is LLP.