The Welcome Concept of Start-up LLPs and Small LLPs

Limited Liability Partnerships (“LLPs“) are flexible legal entities that enable partners to benefit from a joint, collaborative initiative whilst reducing their liability for the actions or inactions of the other partners. This structure combines the benefits of a partnership firm and a company in that it limits the liability of partners to their contribution and constitutes a separate legal entity like a company; while also operating based on an agreement and leaving the partners to mutually decide the nuances of the business, like the internal managerial structure.

The major point of difference between a LLP and a regular partnership is that a LLP exists as a legal entity distinct from the partners who constitute it. Although a LLP is treated as a company for the purpose of determining liability, it is taxed as a regular partnership and has regulatory requirements that are similar to that of a regular partnership.

The Limited Liability Partnership (Amendment) Act, 2021 (“Amendment Act“) amends the Limited Liability Partnership Act, 2008 (“LLP Act“) and introduces the concept of small LLPs and start-up LLPs—similar to ‘small companies’ under the Companies Act, 2013. This amendment seeks to make the corporate ecosystem more streamlined for smaller LLPs and aid the ease of doing business in India—falling in line with the other steps the Government of India has recently taken like the decriminalization of the Companies Act, 2013, pardoning of delayed filings with the Registrar of Companies for some categories of companies, and the introduction of the In-House Adjudication framework by way of the Companies (Amendment) Act, 2019. Other than the introduction of small LLPs and start-up LLPs, the Amendment Act also empowers the Central Government to direct LLPs to change their names in case the names are identical to other trademarks/names of LLPs, establish special courts for speedy adjudication of offences under the LLP Act, appoint adjudicating officers, prescribe standards of auditing and accounting, etc.

Small Limited Liability Partnership

The Amendment Act has expressly defined a ‘small limited liability partnership’ to mean any LLP:

  • whose contribution is below Rs. 25,00,000 (Rupees Twenty-Five Lakhs) or other higher amount (not exceeding Rs. 5,00,00,000 (Rupees Five Crores)) that may be prescribed; and
  • whose turnover for the preceding financial year does not exceed Rs. 40,00,000 (Rupees Forty Lakhs) or other higher amount (not exceeding Rs. 50,00,00,000 (Rupees Fifty Crores)) that may be prescribed; or
  • which meets other requirements that are prescribed1. 

Start-Up Limited Liability Partnership

The Amendment Act has also afforded the Central Government the power to recognize certain LLPs (that are incorporated under LLP Act) as start-up LLPs by issuing notifications from time to time2. 

Advantages of Small LLPs & Start-Up LLPs

Other than being inclusive of smaller enterprises by way of the aforesaid provisions, the Amendment Act also culls out certain advantages for small LLPs and start-up LLPs over other LLPs in events of default. If a small LLP or start-up LLP is found to not be complying with the provisions of the LLP Act, it would be subjected to one-half of the penalty that is specified in the LLP Act not exceeding Rs. 1,00,000 (Rupees One Lakh); whereas if such non-compliance under the LLP Act is attributed to a partner of a small LLP or start-up LLP, he/she would also be liable to pay one-half of the specified penalty, not exceeding Rs. 50,000/- (Rupees Fifty Thousand)3. 

The Way Ahead

The classification of LLPs based on thresholds for turnover, the total of the fixed and current assets in a LLP’s balance sheet, the average number of employees, etc. is a concept that is also predominant in various other jurisdictions. In the United Kingdom, for instance, LLPs are divided into small, medium and large, and small LLP’s are further sub-divided into micro-entities. These small LLPs can then access a host of benefits including gaining exemption from audits, disclosing less information than medium and large LLPs, etc.4

Over and above the more general advantages that the LLP business model provides like (a) being organized and operating based on an agreement; (b) providing the flexibility necessary to scale a business without the imposition of elaborate legal and procedural requirements; and (c) enabling professional prowess and initiative to harmonize with financial risk appetite in a manner that is efficient and streamlined5; such classifications have encouraged smaller businesses to enter into formalized agreements with business partners and benefit from economies of scale across jurisdictions.

At the outset, this is a welcome move in encouraging smaller businesses to operate within formalized business structures. However, the eligibility criteria the Central Government notifies for start-up LLPs and small LLPs will determine the long-term effectiveness of the Amendment Act and whether its effect is to dilute the concept of LLPs or further nuance it to make room for smaller businesses.

1 Section 2(1)(ta) of the Limited Liability Partnership (Amendment) Act, 2021.

2 Section 76A(3)(a) of the Limited Liability Partnership (Amendment) Act, 2021.

3 Section 76A(3)(a) of the Limited Liability Partnership (Amendment) Act, 2021.

4 https://www.gov.uk/government/publications/limited-liability-partnership-accounts-guidance/llp-accounts#small-llps

5 Advantages of LLP Form; https://www.mca.gov.in/MinistryV2/natureoflimitedliabilityparterneshipllp.html