What are Limited Liability Partnerships (LLPs)?
Limited Liability Partnerships (LLPs) are a corporate business structure that enables entrepreneurs, professionals, and enterprises to provide services via commercially efficient vehicles suited to their requirements. LLPs offer flexibility in structure and operation, as members can internally organize themselves into a partnership based on limited liability of the partners.
- Limited Liability Partnerships (LLPs) are a corporate business structure that enables entrepreneurs, professionals, and enterprises to provide services via commercially efficient vehicles suited to their requirements.
- LLPs are body corporates, which means that once incorporated, they become legal entities separate from their partners.
- The rights and duties of the partners, who may either be individuals or body corporates, are laid out by a mutually arrived upon LLP agreement according to the provisions of the law.
History of Limited Liability Partnerships
During the late 20th century, legislators around the world were of the view that unlimited accountability and responsibility in general partnerships had come in the way of business growth. Moreover, such professionals without access to large amounts of capital were debilitated as far as competing internationally. Therefore, a special vehicle that combined the features of both corporate entities and partnerships was needed for partnerships among professionals who are already regulated, e.g., chartered accountants, lawyers, and doctors.
In the United Kingdom, the LLP Act was enacted in 2000 to encourage growth in the services sector. In India, laws governing the formation and functioning of LLPs were passed in 2008. In the United States of America, LLPs became part of the Uniform Partnership Act in 1996, with several states enacting their own statutes governing the same.
How LLPs Work
LLPs are body corporates, which means that once incorporated, they become legal entities separate from their partners. Like corporates, an LLP is characterized by perpetual succession, which means that its existence is independent of any change in partners. The rights and duties of the partners, who may either be individuals or body corporates, are laid out by a mutually arrived upon LLP agreement according to the provisions of the law. Thus, they are different from traditional partnerships that are created by contracts.
In an LLP, each of the partners is responsible only to the extent of their individual contribution, as per the LLP agreement. This means that the partners receive immunity from the actions of other partners in case of negligence and fraud, which is the most distinguishing characteristic of an LLP.
Similarly, the LLP, as a whole, is liable fully for its acts only to the extent of its assets. Such a framework can be used for enterprises that provide services or are engaged in knowledge and technology-related fields. It can also be used for entities such as venture capital funds that combine risk capital with financial expertise, and for individuals such as company secretaries and advocates, or those associated with scientific, artistic, or research production.
Advantages of LLPs
- An LLP is a distinct legal entity, which means that it can sue or be sued, and own, hold, or dispose of a property in its own name.
- There is no liability on a partner’s personal assets, which gives a certain degree of freedom and flexibility to the organization.
- There is no minimum legal requirement with regard to capital.
- An LLP enjoys full freedom in the matter of conducting its business and operation. There is no imposition of detailed legal and procedural requirements.
- Diversification or expansion of activities is very easy because there is no restriction on the maximum number of partners.
- LLPs do not need to remit traditional taxes, such as corporate tax or wealth tax, which are required of other companies. Partners earning income through the LLP must settle their tax obligations individually.
Disadvantages of LLPs
- There may be an unlimited liability on the firm and its partners in certain cases.
- Cash or assets contributed by a partner are not returned to a continuing partner unless specifically mentioned in the LLP agreement.
- Ownership rights are transferable only with the consent of all the partners of the LLP.
- LLPs are required to name a “designated” or “general” partner who is responsible for compliance with the provisions of the law and who is personally liable for all offenses and penalties of the LLP.
- LLPs are not able to access public money, which means that they are dependent on contributions made by partners for their functioning.
- LLPs are under increased scrutiny, following many large accountancy firms’ move to reorganize themselves into LLPs to relieve themselves of responsibilities owed to companies adversely affected by audit failures.
CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and developing your knowledge base, please explore the additional relevant CFI resources below: