The ease of doing business for startups in the light of recent amendments to LLP Act 2008  

Why LLP over Private Company?

An LLP (limited liability partnership) firm is a form of partnership in which each partner is independent. No member is held accountable for other partners' independent or unauthorized conduct since other partners do not create joint responsibility. It is, therefore, a legal entity distinct from its partners, with everlasting succession. Section 3 of the LLP Act of 2008 defines an LLP as a "separate corporate body which is being incorporated under this act and will be considered as a separate legal entity from that of the partners." Usually, there is uncertainty over whether to incorporate an LLP or a Private Limited Company; however, in terms of startups, building it as an LLP is preferred and appropriate because it gives certain advantages to the entrepreneurs over the Private Limited Company.

1.      LLPs require at least two members and have no maximum number of members, unlike private limited companies, which can have up to 200 members.

2.      LLPs have unlimited partners, whereas private limited companies have a minimum of 2 directors and a maximum of 15.

3.      Forming an LLP costs just Rs 1500, whereas creating a Private Limited Company costs Rs 6000, which can be increased based on the number of directors, members, and approved share capital.

4.      LLPs must file an Annual Return and a Statement of Accounts & Solvency, unlike Private Limited Liability Partnerships.

5.      LLPs must file an Annual Return and Statement of Accounts & Solvency, but Private Limited Companies must comply with 8-10 compliances annually.

6.      All public and private limited companies must have their accounts audited regardless of share capital. Nonetheless, LLPs are required to conduct audits under two conditions: if the donation reaches Rs. 25 lakhs and if the annual turnover surpasses Rs. 40 lakhs.

Both private businesses and LLPs have distinct advantages, but setting up a Startup as an LLP is frequently preferable. This is owing to reduced incorporation costs, less compliance requirements, unrestricted ownership, and minimal taxes and fines. Despite these benefits, many businesses have hesitated to use the LLP structure. Recent modifications attempt to overcome these problems and persuade businesses to regard LLPs as viable.

Objectives of the LLP Amendment Act 2021-

The Limited Liability Partnership Act, 2008 was amended on 13^th of August 2021 by The Limited Liability Partnership (Amendment) Act, 2021. The LLP Amendment Act 2021 introduces several changes, including new sections, substitutions, and omissions, to enhance the business environment. Key objectives include:

1.      The act gives power to the Central Government to recommend changing an LLP name if it Is undesirable or similar to an existing LLP. It will allot 3 months to do the same starting from the date of issue of the same, failing to which the government has the power to rename an LLP.

2.      In case an LLP or any of its members having the intention to defraud its creditors, all the individuals who are knowingly a part to it will be punishable, now with the amendment the maximum imprisonment term for fraudulent activities has been increased from two years to five years. This step has been taken to curb fraudulent practices among LLP partners, protecting creditors and investors.

3.      A new concept of small LLP has been introduced. As per Section 3(f) of the act, small LLPs are defined based on increased thresholds for partners’ contributions (from 25 lakhs to 5 crores) and turnover (from 40 lakhs to 50 crores). Small LLPs benefit from reduced compliance, lower fees, minimal penalties, and exemptions from standard audits (except in the manufacturing sector). This encourages startups to opt for small LLPs over traditional partnership agreements or companies.

4.      Previously, LLPs could not issue NCDs to raise funds. The amendment now allows LLPs to raise capital through secured NCDs, attracting corporate bodies and trusts regulated by SEBI or RBI. NCDs offer higher returns, low credit risk, and tax-free deductions, making them an attractive option for startups requiring significant investment.

5.      Under Section 67A, the central government has the power to form special courts for speedy trials. These courts, comprising sessions judges or an additional sessions Judge. These will also comprise of a Metropolitan magistrate or a Judicial Magistrate of First Class.

6.      The amendment introduces Section 34-A, which mandates compliance with accounting and auditing standards prescribed by the Institute of Chartered Accountants of India (ICAI). This brings standardization to LLPs’ financial reporting, enhancing transparency and reliability.

7.      Compounding allows offenders to pay a monetary penalty instead of facing prosecution. The amendment aligns with Section 441 of the Companies Act, detailing procedures for compounding offences and involving regional directors. This mechanism reduces legal complexities and encourages compliance among LLPs.

8.      Section 69 of the Act has been amended to prescribe different additional fees for different classes of LLPs or documents. This reduces compliance pressure on Startup LLPs, making the filing process more economical and less burdensome.

9.      The amendment to Section 17 simplifies the process of changing an LLP's name, aligning it with the Trademarks Act, 1999. If an LLP fails to comply with a name change directive, the central government can now allocate a new name, streamlining the procedural requirements.

10.  Section 72 of the amended act provides for appeals against tribunal orders to be made to the National Company Law Tribunal (NCLT). The appeal must be filed within 60 days, extendable by another 60 days for valid reasons, ensuring timely resolution of disputes.

11.  The amendment reduces the residency requirement for LLP partners from 182 days to 120 days during a financial year. This change encourages foreign individuals to become partners in Indian LLPs, fostering cross-border entrepreneurship.

12.   The amendment decriminalizes 12 minor offences, converting them into civil defaults punishable by monetary penalties. This reduces the legal burden on LLP partners, saving time and resources.

Conclusion

The 2021 amendment to the Limited Liability Partnership (LLP) Act introduces comprehensive reforms aimed at significantly improving the ease of doing business for startups in India. These amendments streamline compliance requirements, notably reduce fees, and implement protective measures for investors, collectively crafting a more inviting and supportive environment for Startup ventures. While the reforms address many critical areas, they leave certain issues, such as the potential for merging LLPs with private companies and the need for more detailed regulations specific to manufacturing industries, unexplored. Despite these omissions, the amendments lay down a highly promising framework that encourages startups to consider the LLP model as their preferred business structure. The improvements offer to create an innovative and growth-oriented culture within India's developing entrepreneurial ecosystem by making the legal framework more flexible, lowering administrative costs, and improving support systems. The overall aim is to nurture startups, paving the way for them to thrive in a competitive global market while contributing significantly to the country's economic vitality.