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Limited Liability Partnership (Amendment) Bill 2021

Context:

The Rajya Sabha passed the Limited Liability Partnership (Amendment) Bill 2020 which seeks to amend the Limited Liability Partnership Act of 2008.

Relevance:

GS-III: Indian Economy (Growth and Development of Indian Economy, Inclusive Growth), GS-II: Governance (Government Interventions and policies)

Dimensions of the Article:

  1. What is Limited Liability Partnership (LLP)?
  2. Limited Liability Partnership (Amendment) Bill, 2021
  3. What can be changed regarding LLPs in the future?

What is Limited Liability Partnership (LLP)?

  • A Limited Liability Partnership (LLP) is a hybrid model of a partnership firm and a company in which some or all partners (depending on the jurisdiction) have limited liabilities.
  • In an LLP, each partner is not responsible or liable for another partner’s misconduct or negligence.
  • The partners in an LLP are liable only to their extent of agreed contribution to the capital. They are not liable to any unauthorised actions of the other partners.
  • In a traditional partnership firm, all the partners are liable for any action taken by any partner and the liability is unlimited. However, in an LLP, the liability extent of any partner is determined by the amount of capital that has been invested by him/her.
  • LLP is governed by Limited Liability Partnership Act, 2008 and Companies Act while traditional partnership is governed by Indian Partnership Act, 1932.
  • An LLP has a separate legal entity and is liable to the full extent of its assets (liability of partners is limited) while a traditional partnership firm does not have any kind of separate legal entity.
  • Foreign Nationals can become partners in LLP, whereas in traditional partnership firms, foreign nationals can’t become the partner.
  • In a partnership firm, there is professional expertise but the risk-taking capacity often gets undermined due to high liabilities on the partners. The LLP provides an alternative solution to it because it combines the benefits of professional expertise and the risk-taking capacity of the partners and gives them the viable options.

Limited Liability Partnership (Amendment) Bill, 2021

  • The Limited Liability Partnership (Amendment) Bill 2021 makes amendments to the Limited Liability Partnership (LLP) Act, 2008 to bring an equal playing field for Limited Liability Partnerships (LLPs), compared to large companies which come under the Companies Act, 2013.
  • The Bill aims to facilitate the Ease of Doing Business and encourage startups across the country.
  • The bill proposes the creation of a class of small LLPs which will be subject to fewer compliances, reduced fee/additional fee, and smaller penalties in the civil defaults – to encourage entrepreneurs.
  • The bill seeks to decriminalise 12 of the existing 24 penal provisions, 21 compoundable offences and 3 non-compoundable ones under the LLP Act by omitting those offences which are more appropriate to be dealt with under other laws.
  • Offences that relate to minor/ less serious compliance issues, involving predominantly objective determinations, are proposed to be shifted to the In-House Adjudication Mechanism (IAM) framework instead of being treated as criminal offences.
  • The threshold contribution for the partners for the LLPs have been enhanced from Rs. 25 lacs to around Rs. 5 crores and the turnover size from 40 lacs to 50 crores.
  • The amendment allows the LLPs to issue fully secured Non-Convertible Debentures from investors regulated by SEBI or the RBI – this will facilitate the enhanced capability of raising capital and financing operations of LLPs.
  • The accounting standards and auditing standards for LLPs have been introduced to bring standardisation in the procedures as the LLPs were not enjoying the kind of standard accounting systems that their counterpart companies are enjoying under the provisions of the Companies Act, 2013.

What can be changed regarding LLPs in the future?

  • Even if its partners qualify for ’angel investors’ in their individual capacity, the LLP might not be eligible for it as LLPs have to meet certain criteria to be eligible for an angel investor. Norms can be eased to enable LLPs access to angel investors become easier.
  • Currently, no two NRIs can form an LLP in India as one of the partners has to be an Indian resident. Further, the Foreign Direct investment (FDI) in an LLP can only happen through the government route and therefore, the time required to form this partnership is much more. These norms can be eased to support foreign funding for LLPs as well.
  • An LLP does not allow to issue Employee Stock Ownership Plan (ESOP). This restriction can be removed as ESOPs are used as a tool to retain the key personnel of the company.

-Source: The Hindu

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October 2022
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