LLP is a new form of organisation introduced through LLP Act 2008 and enacted on 7/01/2009. LLP stands for Limited Liability Partnership which bring the best features of Partnership firms and Limited Companies.
Need of the Hour !
Before the introduction of LLP, we had mainly two forms of organisations (works for profit). Limited Companies and Partnership firms. Both had their own drawbacks and advantages. Lets analyse these one by one...
(a) Partnership firms : Partnership firms are governed by Indian Partnership Act 1932. It doesnt mandate the registration of partnership firms. It gives the partners a lot of freedom since the act gives freedom to the firm and its partners to design and enact major rules and regulations for internal proceedings through the Partnership deed. And its formation is easy and less expensive as it requires only a stamp paper (the stamp duty varies from state to state in India, at an average Rs.1000/-) and the drafting of the deed. Registration is not compulsory but registration gives the authority to sue third parties and hence it is recommended. Registration is really cheap since it required only Rs.15/- (Rupees Fifteen Only) and it is done with Registrar of Firms of respective states.
When we look at the draw backs of Partnership firm, its unlimited liability stands first. Unlimited liability stands for the creditors right over the personal estate of the partners in case of winding of the firm. That means the partners are personally liable for the activities of the firm. This situation is there because the firm doesnt have a separate legal status apart from its members. It doesnt have a corporate status. The maximum number of persons that can be partners in a firm is restricted to 20. that means the resources available is limited. At this juncture, lets analyse about limited companies..
(b) Limited Company : Companies Act 1956 (Section 3(1)(i)) defines a company as a company formed and registered under this Act or an existing Company. Companies have a corporate status, which means it is separated from its members. Company itself is a legal entity and hence it can own and transfer property and can sue as well as sued by others. This feature of a Company gives its members the advantage of limited liability. Members liability is limited to the amount remaining unpaid on the face value of shares. On the basis of number of members and restrictions imposed by Sectin 3(1)(iii) of Companies Act 1956 they can be further divided into two,ie, private limited and Public Limited Companies. Maximum number of members allowed in a private limited company is restricted to fifty and whereas in a public limited company it is unlimited. Hence these features allows to overcome the disadvantages posed by Partnership firms.
The disadvantage of a limited company is the statutes governing it. The laws are very strict and hence the flexibility of the organisation is very low compared to partnership firms. Law has its claws even on each and every internal proceedings. So for a small organisation it is very difficult to follow these rules and sometimes members ignorance of law may stand against him. In a country like India where ignorance of law is not considered as an excuse, it may be a costly affair. And maintenance and formation of limited company is also at an higher end.
Thus, in this liberalised and investor friendly environment there comes a need of new form of organisation which has all the better sides of these two very popular forms of organisations to boost the confidence of investors. As solution for this Limited Liability Partnership Bill was introduced in Rajya sabha on 15/12/2006 and was referred to the Parliament Standing Committee for suggestions. A new revised bill, called LLP Bill 2008 was introduced in Rajya Sabha on 21/10/2008 and was passed 24/10/2008. Loksabha also passed the bill on 21/12/2008 and finally enacted on 7/1/2009.
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