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LLPs a SWOT analysis
May, 31st 2007
Winning Limited Liability Partnerships would be those that are professionally equipped to face global changes and challenges.

The hallmark of a professional is adaptability to changes thrust upon by globalisation. Unfortunately, in India, professionals are often seen fighting among themselves for getting recognitions/acceptance from the external stakeholders such as Government, industry, or investors rather than gearing up themselves to face new challenges. The seeds of globalisation would bear fruit only when our technical and professional manpower is recognised internationally. Globalisation require professionals to have a new vision and dynamic mission combined with urge for constant knowledge upgradation.

As a corollary to the globalisation process unleashed by various countries, the Government at the Centre wants to integrate India with the world economy by introducing the concept of LLP, or Limited Liability Partnership. A hybrid between a limited liability company and a partnership firm, the new structure, as envisaged in the Bill, is expected to benefit entrepreneurs, professionals and companies to a great extent.

The Bill was introduced in the Rajya Sabha on December 15, 2006 and the Parliamentary Standing Committee on Finance is examining it. The strengths, weaknesses, opportunities and threats of LLP are briefly given hereunder:

Strengths

With LLP professionals would be able to form multi-disciplinary partnerships.

Flexibility of operations as board/general and extraordinary general meetings are not required to be conducted.

Business can be expanded depending upon the increases in the area of operations.

Limited procedural formalities.

The Liability of an LLP is met out of the property of the LLP; the partner is not liable.

A partner is not responsible for the wrongful act or omission of any other partner.

Weaknesses

No collective responsibility for every action of the LLP. The First Schedule is not exhaustive as in the absence of LLP agreement its provisions shall apply.

The control of the Registrar of Companies on LLPs would be substantial as there are 12 circumstances/matters, which require compliance to RoC under the LLP Act.

The Centre would have enormous rule-making power under the Act as there are 33 specific matters under sub-section (2) of Section 72 of the Act, which require the Central Government to make rules. This means that the legislation is cumbersome, tedious and expensive. Lack of ceiling on the maximum number of partners may make LLPs unmanageable (Private Ltd Company have maximum ceiling of 50).

Fines/penalties/prosecutions and imprisonment provided for in the Act may prove a major irritant for forming LLPs.

The Bill does not provide for conversion/re-conversion of LLPs into firms/private companies and unlisted companies.

Financial disclosures may act as a deterrent for formation of LLPs

Opportunities

In the WTO scenario, services are bound to play a vital role in developed as well as developing countries alike. LLPs rendering professional services may also grow in size to successfully meet the challenges posed by globalisation.

Threats

Unnecessary paperwork, regulatory environment, expensive operations may prove a major threat to the LLPs.

As a foreign LLP may enter India and establish itself, without any restriction and reciprocal arrangements, indigenous LLPs may slowly go out of business. The Government should be cautious in allowing foreign professionals to enter India without reciprocal arrangements.

Whistle blowing introduced for the first time in India through this LLP Bill may also act as a disadvantage raising questions of integrity among the partners of an LLP.

Lack of insurance cover to the LLP may deter creation of shell LLPs.

Thus, globalisation in its wake has not only brought about competition but also uncertainty to the production, trade and services.

Main Features

LLP shall be a body corporate.

LLP to have separate legal entity distinct from its members.

LLP shall by its name, have the power of suing and being sued.

LLP shall have the power to acquire, own, hold, develop or dispose of property both movable and immovable.

LLP will have perpetual succession.

LLP to have a common seal.

Registering authority of LLP will be the Registrar of Companies under the Companies Act.

Minimum number of partners in an LLP is two.

Every LLP shall have at least two Designated partners who are individuals and at least one of them shall be a resident in India.

Every designated partner shall obtain a Partner Identification Number (PIN) and provisions relating to Director Identification Number as laid down in Sections 266A to 266G of the Companies Act 1956 shall apply in relation thereto.

There is no maximum limit on the number of partners in an LLP.

Any individual or body corporate may be a partner in an LLP.

If all the partners of any LLP are bodies corporate, they shall nominate their respective individuals to act, as designated partners and one of the nominees shall be a resident in India.

Consent to act, as designated partner shall be filed with the Registrar.

LLP agreement to determine mutual rights and duties of the partners and their rights and duties in relation to LLP.

In the absence of LLP agreement provisions contained in the First Schedule shall apply.

One or more professionals can form an LLP.

LLP is an alternative corporate business vehicle and suitable for professionals, small enterprises and for investment by venture capital.

The name of am LLP must end with the words "limited liability partnership" or the acronym "LLP".

The provisions of the Indian Partnership Act 1932 shall not apply to LLPs and the provisions of the Companies Act 1956 shall apply to the extent of they being notified from time to time.

Other entities such as firms, private companies and unlisted public companies can get themselves converted into LLPs under the provisions of the Schedules to the Act.

Every partner of the LLP is an agent of the LLP and not of the other partners.

LLPs shall be obliged to maintain annual accounts, file a statement of accounts and solvency with the Registrar every year.

The Centre shall have the powers to investigate the affairs of an LLP.

The Centre may appoint inspectors (it could be Cost Accountants also) to investigate the affairs of LLPs.

LLP has been successfully adopted in the US, the UK, Australia and Singapore. Adopting the concept from these countries without proper adaptation to the local conditions can endanger the sustenance of LLPs. Thus, the winning LLPs would be those that are professionally equipped to face global changes and challenges whereas the losers would be those which are ill equipped and incapable of so acclimatising themselves.

S. Bhasker
(The author is Deputy Secretary, ICWAI. The views are of the author and do not represent those of the ICWAI.)

 
 
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