What is the Latest Amendment for a Limited Liability Partnership?
Limited Liability Partnership

What is the Latest Amendment for Limited Liability Partnership?

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As per data, till 2022, 252460 Limited Liability Partnerships (LLP)s were registered in India. A limited liability partnership is a type of business entity that offers entrepreneurs the opportunity to combine the benefits of both a partnership and a company. It provides limited liability to its partners. The concept of Limited Liability Partnership (LLP) was introduced in India with the enactment of the Limited Liability Partnership Act of 2008. A Limited Liability Partnership (LLP) is a hybrid business structure that combines the benefits of a partnership and a company. The main objective of the Act was to encourage small and medium-sized businesses (SMEs) to benefit from limited liability while preserving operational flexibility, which was the primary goal of the LLP Act, 2008. Numerous changes have been made to the LLP’s framework since its inception in order to improve its compliance processes, regulatory environment, and convenience of doing business.

In this guide, we shall understand the existing framework of the LLP Act, 2008, the latest amendment affecting LLPs in India, and its implications in India.

What is a Limited Liability Partnership (LLP)?

A Limited Liability Partnership (LLP) is a business entity that provides the advantages of limited liability to its partners. It allows the partners to operate their business as a partnership. Unlike a traditional partnership, where all partners have unlimited liability, an LLP allows each partner’s liability to be limited to their agreed contribution to the partnership. The LLP Act of 2008 was enacted by the Indian government to introduce this legal form of business, making it easier for businesses to form without the heavy regulatory burden associated with corporations.

The key amendments impacting the LLP over the years include:

  1. The LLP Act, 2008:

The LLP Act of 2008 was the foundation for introducing LLPs as a business structure in India. The main objective of introducing this act was to offer a more business-friendly alternative to traditional partnerships and private limited companies. The act provided the following key provisions:

  • Formation of LLPs with two or more partners.
  • Partners’ liability was limited to their contribution to the LLP.
  • The ability to operate without the stringent compliance regulations required of private limited companies.
  1. The Companies (Amendment) Act, 2017

In 2017, the Companies (Amendment) Act was amended, and various provisions were introduced to strengthen corporate governance in India. Several provisions of the act impacted LLPs indirectly, particularly in relation to compliance and penalties. For example:

  • The removal of the requirement for a minimum capital requirement for incorporation.
  • The act strengthened penalties for non-compliance.
  • The introduction of provisions related to the filing of LLP annual returns.
  1. The Finance Act, 2020

In the Finance Act of 2020, the government introduced several tax-related amendments to the LLP. Some of the key changes were:

  • The act allowed LLPs to avail of the benefits of the “start-up” category, which was initially available only to companies.
  • The Act introduced a scheme to simplify the taxation process for SMEs and LLPs.

2021 Amendment in the Limited Liability Partnerships Act, 2008

The government of India brought 29 amendments to the original LLP Act, 2008, and vide notification dated 12.02.2022 by the Ministry of Corporate Affairs, the provisions of the LLP Act, 2021 were applicable from 01.04.2022. Some key points of the 2021 amendment include:

1. Small LLPs:

A new section 2(1) (a) was inserted in the original LLP act that brought the provisions for Small LLP, which is a new category aimed at helping smaller businesses. The criteria for being classified as a small LLP are:

  • The contribution from partners must not exceed INR 25 lakhs.
  • The annual turnover of the business must not exceed INR 40 lakhs.

2. Relaxation in the Residency Requirement for Designated Partners:

A key requirement for an LLP was to have at least one designated partner who was a resident of India. The amendment reduced this requirement from 182 days to 120 days in a financial year.

3. Decriminalization of Minor Offences:

One of the main objectives was to reduce the severity of penalties for minor, technical, and compliance-related violations. Businesses can now resolve these issues through an In-house Adjudication Mechanism (IHAM).

4. Reduction of Penalties:

The penalties for many non-serious offences were reduced. For example, minor compliance violations, such as filing delays or missing specific documentation, were no longer treated as serious crimes with hefty fines.

5. General Penalties:

Section 74 of the LLP Act was fully substituted to include that in LLP if a partner or the Designated Partner violates any of the provisions or rules of the Act or does any act for which no penalty or punishment is provided elsewhere in the Act, the person who is in default shall be liable to pay a penalty of Rs. 5000. In case of continuous default, a penalty of Rs. One hundred shall be imposed for each day with a maximum fine of Rs. 1 lakh.

6. More Flexibility in Name Changes for LLPs:

If an LLP’s name was similar to a registered trademark or considered undesirable, earlier rules required it to change its name. The 2021 amendments made this process easier, removing some restrictive grounds and allowing the government to directly assign a new name to the LLP instead of imposing a fine.

7. Compounding of Offences:

Under the 2022 amendment, Section 39 was fully substituted as the compounding of the offence shall now be done by a Regional Director or officer not below the rank of Regional Director. However, the government has introduced a clause that if the same violation happens again within three years, the penalties may increase.

8. Introduction of Special Courts for LLP Offences:

The amendment added a new provision, Section 67A, to the LLP Act, 2008, that states that in order to provide speedy trials, Special Courts are established under Section 435 of the Companies Act, 2013, to handle criminal cases related to fraud within LLPs. Special courts will have the power to conduct summary trials for crimes punishable with up to three years of imprisonment. Decisions made by these courts are appealable in the high court.

9. Imprisonment for Fraud:

The amendment increased the punishment for fraudulent activities within an LLP. Previously, individuals found guilty of fraud faced a maximum of two years of imprisonment. With the 2022 amendment, the punishment can now be up to five years for serious fraud or deceit within an LLP.

10. Formation of Registration Offices:

The amendment also allows the government to create new registration offices. This aims to reduce administrative delays and make registration more accessible for businesses, especially in regions where such facilities are lacking.

11. Revised Fees and Penalties:

The 2022 amendments introduced a revised fee structure for various LLP-related filings, which has been elaborated on the MCA portal.

12. Changes to Penalty Adjudication Process:

A new rule (Rule 37A) allows the central government to appoint an officer not below the rank of Registrar to adjudicate penalties for non-compliance. The officer will issue notices to businesses about the penalty, and the company can appeal the decision if it disagrees with it. If the penalty is confirmed, it must be paid through the Ministry of Corporate Affairs (MCA) portal.

13. Simplified LLP Registration Process:

The amendments also made changes to the LLP registration process, such as:

  • Allowing up to five designated partners to apply for registration makes it easier to include multiple partners.
  • Including PAN and TAN (Tax Deduction Account Number) in the incorporation process for LLPs, similar to companies, eliminates the need to apply for these separately.
  • Increase in the Number of Days for Compliance: The rules also introduced more flexibility in compliance timelines. The government has removed the cap of 300 days for late filings of returns and documents. It means that businesses now have more time to file the required returns and submit essential documents.

Conclusion

The LLP Act of 2008 has undergone significant changes over the years. These improvements aim to facilitate business dealings for professionals, entrepreneurs, and small and medium-sized businesses (SMEs) in India. The latest amendment in 2022 maintains strict protections against fraudulent activities while making doing business easier. The amendment introduced the establishment of special courts for speedy adjudication of disputes and simplified registration processes. As a result, India continues to grow in popularity as a business destination, particularly for startups and small businesses.

Frequently Asked Questions

1. What is the purpose of the LLP Act, 2008 in India?

The LLP Act of 2008 was introduced to provide a hybrid business structure that combines the advantages of partnerships and companies and offers limited liability to partners.

2. What are the main features of a Limited Liability Partnership (LLP)?

LLPs offer limited liability to partners, flexibility in management, and easier compliance than private limited companies.

3. What changes were made in the 2021 amendment to the LLP Act?

The 2021 amendment introduced a new category for small LLPs, relaxed the residency requirement for designated partners, and decriminalised minor offences.

4. How did the 2022 amendment affect penalties for minor violations?

The 2022 amendment reduced penalties for minor violations and introduced a more lenient In-house Adjudication Mechanism (IHAM).

5. What is the new penalty structure introduced in the 2021 amendment?

Penalties for non-compliance were revised, with fines ranging from Rs. 5,000 to Rs. 1 lakh for minor violations and continuous defaults facing daily penalties.

6. What flexibility was introduced for name changes in LLPs under the 2021 amendment?

The amendment made the name-change process more manageable by removing restrictive grounds and enabling the government to assign new names directly.

7. What is the significance of special courts under the 2022 amendment?

Special courts were established to handle criminal fraud cases related to LLPs, providing faster trials and appeal options in high courts.

8. What are the key benefits of the “small LLP” category introduced in 2021?

Small LLPs with a partner contribution not exceeding INR 25 lakhs and turnover below INR 40 lakhs enjoy relaxed compliance and regulatory benefits.

9. What is the role of the Ministry of Corporate Affairs in LLP filings under the new amendments?

The Ministry of Corporate Affairs (MCA) now handles revised filing fees, penalty adjudications, and the simplification of the registration process for LLPs.

10. How does the LLP Act’s amendment impact business growth in India?

The amendments streamline business processes, reduce costs for SMEs, and enhance legal protections, making India a more attractive place for entrepreneurship and business expansion.

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