What is the difference between LLC & LLP in India?

The author in this article discusses the difference between LLP and LLC in India and the related provisions. The article further discusses the concepts and their distinguishing features with the help of laws and judicial pronouncements.
Estimated Reading Time: 9 minutes

Introduction

The concept for LLPs in India was introduced in 2008, with “The Limited Liability Partnership Act 2008”, the first limited liability Partnership was incorporated back in 2009. LLP, as mentioned earlier stands for Limited Liability Partnership. This means that there exists only a limited liability towards the incorporated legal entity by each of its partners. We shall delve into it as we discuss it later. Let us discuss the difference between LLC and LLP.

A similar concept is of an LLC. LLC or ‘Limited liability Company’ is similar in its concept to that of an LLP. It too is a Legal entity which functions a partnership and corporation hybrid[i] and limits the liability of its ‘partners’. Since LLCs are not incorporated in India, concepts regarding it will be cleared first. 

Concept of LLC & distinguishing features

 As discussed above, LLC is indeed a legal entity, but it is yet to be recognized by Indian Law. In foreign law, it is generally preferred by small businesses and corporations due to its tax benefits and the nature of its management. LLC offers a cross between traditional corporations and partnerships;[ii] thus, LLC can have more than one owner and these owners could be anyone from private individuals to foreign entities and even other LLC’s. These owners are more commonly referred to as members.[iii]

These features make it remarkably similar to LLP. After all, LLP, and LLC both are pass-through Business type entities.[iv] This means that partners/members of both the entities only have to pay income tax on their share of the business. These benefits are varied from state to state (in case of USA) and LLCs are governed by state statutes. LLC’s may be formed to get the tax benefits of a partnership while having the limited liability of a corporation.

 LLC requires the owners to file a document known as Articles of the organization for the LLC to be a legal entity.[v] Articles of organization are the United States’ version of Article of Association. Owners are supposed to state the details of the incorporated entity to get it registered with the concerned officials. 

The next step for forming an LLC would be for it its members to come together to agree.[vi] This agreement may not be required for some incorporations as LLC Acts differ from one state to another. In case it is not required; the members would be governed by default terms and conditions. This agreement may be written or oral. This agreement is required to address the following issues:

  1. How shares are allocated. This determines the division of profits and loss. Furthermore, tax division is also decided through this;
  2. Voting power among its members will be divided through what means;
  3. Which actions would require voting to be performed;
  4. When will the LLC be Dissolved;
  5. Rules regarding admissions and disqualification of membership; and
  6. The duties and liabilities of the members of the LLC.

So far, LLC seems to be similar to an LLP. That’s because the two concepts are almost similar. The first distinguishing factor for an LLC is the fact that an LLC may choose one of two management structures[vii] i.e., LLC’s members can choose member management or manager-management. In a member-managed LLC, every member is an agent of the LLC to conduct its business and affairs. Every member is given an equal right to manage LLC’S business. The day-to-day management is in this case supervised by the members

In the case of management by managers, the LLC’s run like corporations with the daily operation managed by the manager. The LLC has a central governing body deliberating and then acting on the LLC’s consent first.[viii] Managers also undertake it upon themselves to run the office or hire some to do it, while they formulate policies and make important decisions

An LLP, on the Other Hand, operates as more of a business partnership. The duties of management are divided between the partners. Similar to the member’s agreements in case of an LLC, LLP also requires an agreement and this agreement sets out how these decisions will be made.

LLC’s are not traditional corporations and hence have fewer restrictions placed on them.[ix] So much that in Gatz Properties, LLC v. Auriga Capital Corp[x], the SC held that “parties to an LLC remain free to expand, restrict, or eliminate fiduciary duties in their LLC agreements (subject to the implied covenant of good faith and fair dealing)”.[xi]

Concept of LLP & distinguishing features

LLP, as discussed above enables the partners to enjoy the benefits of limited liability of a company and flexibility of operations like a partnership. LLP’s are capable of functioning under a change in partnerships and holding its name as a separate legal entity.

LLP protects against liabilities to its partners by limiting their liability to the contribution agreed to in the agreement during incorporation. At the same time, it is liable to the full extent of its assets as a legal entity. LLP by allowing limiting liability helps to avoid joint liability of a partner not engaged with another whose fault caused misconduct. The relationship of the partners is being governed by the agreement entered into by them and it helps in avoiding any minuscule conflicts.

For the formation of an LLP, a minimum of two partners are required with no maximum cap. governed by the contract or the agreement between partners, duties, and obligations of the said partners are governed by the law. Like LLC, an individual, Corporation, another LLP can form a partnership and have an agreement.

An agreement for an LLP is a written contract that is executed between the partners of the said LLP. Such a written agreement establishes the rights and duties of the partner. These duties are generally towards other partners of the LLP. The nature of this agreement is mandatory and compulsory, this means that LLPs need to execute the said document and have the agreement filed before the Ministry of Corporate Affairs. This stipulated time is 30 days from the incorporation of LLP.

Further, capital investment from each partner is required. The invested amount is the amount agreed upon in the agreement. Furthermore, a name and a registered office are required to apply for registration. In India, Online registration is functional and except name, address & agreement between the partners, nothing more is generally required to form an LLP.  The agreement acts as a foundation for the LLP. The functioning of an LLP is dependent on its agreement. The multiple issues addressed by having an agreement in an LLP are resolved, issues such as how to add a new partner, procedure for when a partner leaves, how the key managerial decisions would be made in an LLP.

There exist multiple benefits in LLP, having an agreement formed by mutual consent helps in day to day management. It also helps in limiting liability in case of misconduct or something else. LLP’s carry on like a separate legal entity from their partners meaning it is easy to leave or join or transfer an LLP.[xii]

Difference between a public limited company and a limited liability partnership

While LLCs might not be a thing in India, Public and Private companies form a major part of the Corporate structure in India. While it is suitable for small businesses to have a corporate structure of an LLP, bigger managements prefer a public limited company. While a public company does not offer the protection of an LLP, it can have its benefits. In the table given below, certain differences, advantages, and disadvantages would become clear in both cases.

S.noPUBLIC LIMITED COMPANYLIMITED LIABILITY PARTNERSHIP
 GOVERNING LAW
 A public company is governed by the Companies Act 2013. It needs to be registered under the Companies Act, 2013 with the registrar of companies. The governing laws regarding the registration for a public ltd. The company is more stringent than the laws for forming an LLP.An LLP is registered with the Ministry of Corporate Affairs under the Limited Liability Partnership Act, 2008. Relatively easier to get it registered.
2.CREATION
 A Public Limited Company needs to have at least 3 directors and 7 members at the time of company registration. No limit for the maximum number of members Shareholders are not obligated to partake in the daily activity of the companyFor LLP registration, a minimum of two partners is required. No limit to the maximum number of partners. No officers or designated shareholders, only the partners run the company.
3.LEGAL STATUS
 Such a company is a separate legal entity and has the right to acquire, own or sell property or assets in its name and the shareholders cannot claim their right upon any of the company’s assets as long as the company is running smoothly.Such a company is a separate legal entity with the right to acquire, own, or sell the tangible or intangible property or assets in its name.
4.SUCCESSION
 After company formation, the ownership of a Public Limited Company can be easily transferred by simply giving a share transfer form and share certificate to the buyer. The shares of a company can be issued or transferred without the need for any consent from other shareholders or the company itself.The ownership of such a company is easily transferred. The ownership can be transferred numerous times. This is because an LLP is a separate legal entity on its own and does not dissolve with its partners but can be transferred from one partner to the other.
5.Ownership of Assets and liability
 In a Public Limited Company, the Company has its assets as a separate legal entity. Although liability is limited to a certain extent, directors, management can be made liable for an action involving the company’s assets hence, the extent of liability of each shareholder of a Public Limited Company is limited to the face value of the shares he/she owns. Such a company is a separate legal entity and has the right to acquire, own or sell property or assets in its name and the shareholders cannot claim their right upon any of the company’s assets as long as the company is running smoothly.In case of an LLP, the LLP has its assets due to it being a separate legal entity, this prevents the liability from shifting onto the personal assets of the partners involved as the assets have already been defined under an agreement which limits the liability hence, the liability of the partners is limited to the contribution of each partner in an LLP.
6.Minors Position
 A minor can only be a shareholder through their guardians or parents. Minors are incapable of buying the shares directly and the shares must be transferred or gifted to them. This is because the minor cannot enter into the contract. Minors do not hold any position of liability in a company and would not be held liable in case of dissolution and will be paid up in case of liquidation.Alike director in the company, the designated partner of any LLP requires DIN for an appointment. Hence, a minor cannot become Designated Partner in an LLP as he cannot apply for allotment of DIN. A designated partner is also a person who is responsible for the operations and compliance of LLP but a person cannot. An agreement cannot be entered by a minor, however, the Act also allows including minor as a partner for profit only. But a minor won’t be responsible for the firm or will they be required to pay off any liabilities. 

[i]  Roberta Codemo, “Difference Between LLC and LLP”, LegalZoom,

https://www.legalzoom.com/articles/difference-between-llc-and-llp

[ii] Larson, Aaron “What is a Limited Liability Company (LLC)”. ExpertLaw. https://www.expertlaw.com/library/business/limited_liability_company.html

[iii] Johnston, Kevin. “What Is the Difference Between a Shareholder Vs. a LLC Member?”. Hearst Newspapers, LLC. Houston Chronicle. http://smallbusiness.chron.com/difference-between-shareholder-vs-llc-member-61708.html

[iv]Schwindt, Kari (1996). “Limited Liability Companies: Issues in Member Liability”. UCLA Law Review44: 1541. http://heinonline.org/HOL/LandingPage?handle=hein.journals/uclalr44&div=43

[v] CT Corporation, “The Limited Liability Company Handbook”, 2012,

https://foleypearson.com/global_pictures/CT_Corp_LLC_Handbook_2012.pdf

[vi]Id

[vii]Id

[viii]Supra note 1.

[ix]  “Pros and Cons of a Limited Liability Company (LLC)”. AllBusiness.com. https://www.allbusiness.com/pros-and-cons-of-a-limited-liability-company-llc-2517-1.html

“Gatz Properties, LLC v. Auriga Capital Corp., 59 A. 3d 1206 (2012)”.   https://scholar.google.com/scholar_case?case=13162396720159555258

[xi]Finally, Bruce E. “Delaware amends its LLC Act: managers and controllers owe fiduciary duties unless LLC agreement provides otherwise”. DLA Piper. https://www.dlapiper.com/en/us/insights/publications/2013/08/delaware-amends-its-llc-act–managers-and-contro__/;

[xii]SALOMON v. A SALOMON AND CO LTD [1897] AC 22.

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