Introduction

Limited Liability Partnership (LLP) as a new business vehicle emerged in India with the enactment of the Limited Liability Partnership Act 2008 (LLP Act), which was made effective from April 2009.

One of the main advantages of an LLP is that it provides the benefits of limited liability company (especially separate legal entity status and limited liability of stakeholders), as well as allows operational flexibilities available to a partnership firm.

Foreign Direct Investment in LLPs

Whilst internationally LLPs have been a preferred business vehicle, in India, the concept is relatively new as far as international businesses are concerned.

Though at the domestic front, post 2009, several LLPs have been formed, particularly for service industries and for activities involving professionals, there has been far less momentum as far as foreign investments in LLPs is concerned. This is because prior to issue of Press Note 12 of 2015 dated 24 November 2015 issued by the Department of Industrial Policy and Promotion (Press Note 12), foreign direct investment (FDI) in LLP was permitted only after obtaining prior government approval, with a blanket restriction on downstream investments.

In an effort to improve ease of doing business and to make India a world class investment destination, the Government by way of Press Note 12 introduced several reforms, including allowing FDI under the automatic route in LLPs operating in sectors where 100% FDI is allowed under the automatic route without FDI-linked performance conditions (such as, power, information technology, manufacturing).

Under the aforesaid liberalization, an Indian company or an LLP, having FDI, is also permitted to make downstream investment in another company or LLP in sectors where 100% FDI is allowed, through the automatic route and there are no FDI‐linked performance related conditions.

Designated Partners

Under the LLP Act, there should be minimum 2 designated partners (who need to be individuals). Out of the 2 designated partners, atleast 1 designated partner needs to be an Indian resident, that is, who has stayed in India for a period of not less than 182 days during the immediately preceding year.

Liability

The individual designated partners are responsible for doing all acts, matters and things as required under the LLP Act. An LLP is considered a separate legal entity under Indian law and is liable to the full extent of its assets. However, the liability of the partners is limited to their agreed contribution in the LLP except in case of unauthorised acts, fraud or negligence. Further, a partner would not be personally liable for the wrongful acts or omissions of any other partner.

Funding of LLPs

The funding options for an LLP are less as compared to a limited liability company and this may be a hindrance for foreign companies looking for alternative funding arrangements.  For example:

  1. LLPs are not permitted to avail external commercial borrowings;
  2. Foreign capital participation in the capital structure of the LLPs is allowed only by way of cash considerations and prior permission of Government of India is required for making non cash/intangible contribution.

Timeline for Incorporation of LLP

Incorporation of an LLP will typically take approximately 2-4 weeks (subject to all requisite documents being available). Various steps are involved, such as, obtaining Digital Signature Certificate and Designated Partner Identification Number for the designated partners of the LLP (in case where they do not already possess it), filing application for reservation of name, filing LLP agreement with the Registrar of Companies, etc.

Apart from this, various procedural formalities are required to be complied, in case where foreign investment in LLP is concerned, including filing certain forms with the Reserve Bank of India  with respect to receipt of contribution from foreign partners, adherence to pricing guidelines, etc.

Conversion

Even though FDI is allowed under automatic route in LLPs operating in sectors where 100% FDI is allowed under the automatic route without FDI-linked performance conditions, any conversion of an existing company into an LLP is possible only after obtaining prior approval of the Government of India.

Further, conversion of LLP into private limited company is currently not possible in India, as both LLP Act 2008 and Companies Act 2013 are silent on the matter.

Comment

LLP as a corporate entity has many advantages. The incorporation costs for an LLP are lower a limited liability company. Also, compliance requirements for an LLP are easier than a limited liability company (in view of the stricter regime under the (new) Companies Act, 2013).

As far as tax laws are concerned, LLPs do have a distinct advantage as profits distributed to partners which are included in LLP’s income, are exempt in the hands of the partner. Also, LLPs have a much better minimum alternate tax regime (as compared to companies).

With all this and the recent liberalization of the FDI policy, we now expect momentum in this space. Foreign companies intending to set up operations in India can now increasingly use LLP as a vehicle.

In fact, Khaitan & Co has assisted foreign client in setting up LLP, which is one of the first few LLPs to be incorporated in India with foreign investment, post issue of Press Note 12.