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Limited Partnership (LLP)

Limited Liability Partnership

In the world of business Limited Liability Partnership is a relatively new concept. This term came into being as late as April 2001. The sanction of the Partnerships Act 2000 made way for this business entity to be formed.

 

Prior to this legislature it could be either a private or public limited company. There was no provision for Limited Liability Partnership in the past. They are a hybrid of limited liability companies and conventional partnerships. They offered limited liability to the shareholders and also provided flexibility of the tax regime given to partnerships.
The origin of the Limited Liability Partnership was the partnerships formed by professionals like surveyors, lawyers, engineers, accountants etc who were unable to work as a limited company because of restrictions from their professional groups and memberships.

 

There are various advantages of a Limited Liability Partnership firm. The partners are able to limit their liabilities if something goes wrong with the company. This is equivalent to the limited liability of shareholders. LLP's are taxed quite differently than the traditional business entities. The profits of the partners are treated as personal income and taxed accordingly.

 

A Limited Liability Partnership firm offers great deal of flexibility. The flexibility comes from the basic concept that the individual rights are separated. This can be explained with an example. An entity seeding a new fund might be given rights to an income. If an individual is made a member or a retiring member he or she is entitled to a fixed level of income. The percentages of members might differ according to the wish of the founding heads. The founders can have the majority of voting rights. These details are chalked out before in the member’s agreement. Since there are no fixed rule to govern these individual Limited Liability Partnership firms may have different plans.

 

However the management of a Limited Liability Partnership can be a difficult issue if the agreements are not worked on in advance. Just as all shareholders participate in a meeting to determine the objective of the company, so can the partner in this type of entity can meet up and discuss issues freely. The partners can agree amongst themselves the relationship between them. This means that the LLP is able to enter into contracts and buy and sell property and the entity is able to continue independent of changes in memberships. If the partners change or alter the entity does not naturally change.

 

For forming of a Limited Liability Partnership it is important to take the consent of third parties. The lending partners like the banks can require personal guarantee from the partners just as they get guarantee from the shareholders. If an existing business entity is converted to a LLP, it is imperative to check whether the overdrafts and borrowings of the partnerships are converted to the new entity. The security provided by the bank might be less compared to a conventional partnership and they may require personal guarantees of the members. Also the landlord’s consent is required for lease and property issues.

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