START UP AND ENTREPRENEURSHIP

LAW

FIRST INTERNAL

Limited Liability Partnership and its impact on Start-up business

environment- Legislative analysis

Submitted by:

Name: Kaushiki Sharma

PRN: 18010125484

Class: BA.LLB (Hons)

Year: IV year

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 INDEX

ABSTRACT ........................................................................................................................................... 3
LITERATURE REVIEW .................................................................................................................... 4
(Akanksha Tomar & Jatin Kapoor: Limited Liability Partnership – The Hybrid Structure,
2017) ................................................................................................................................................... 4
(Suvansh Majmudar, The Era of Limited Liability Partnership, 2021) ...................................... 4
(Ushi Rajanahalli , Limited Liability Partnership as a better alternative to Incorporation,
2020) ................................................................................................................................................... 4
RESEARCH GAP ............................................................................................................................. 5
OBJECTIVE OF THE PAPER ........................................................................................................... 5
RESEARCH METHODOLOGY ........................................................................................................ 5
INTRODUCTION................................................................................................................................. 6
• HISTORY OF LLP ................................................................................................................... 6
• LLP IN INDIA........................................................................................................................... 6
• NUANCE OF LLP .................................................................................................................... 6
LEGISLATIVE ANALYSIS OF THE LLP ACT HOW EFFECT BUSINESS ENVIRONMENT
................................................................................................................................................................ 7
LEGISLATIVE ANALYSIS OF THE 2021 AMENDMENT ....................................................... 9
CONCLUSION ................................................................................................................................... 10
BIBLIOGRAPHY ............................................................................................................................... 10

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 ABSTRACT

In today’s world concocting about start-ups is a new blossoming trend. Over the last six years
start-ups have grown exceptionally in India. Surge of start-ups can be inferred from following
data, over 61,400 start-ups have been recognised by the Department for Promotion of Industry
and Internal Trade (DPIIT).1 According to economic survey around 14,000 start-ups got
recognised during the fiscal year of 2022.2 In India almost 83 start-ups have been received
unicorn status and after China and US, India has the largest start-ups ecosystem in the world
Recent drive of ‘Aatmanirbhar Bharat’ initiated by the government of India highly encourages
Indian start-ups to innovate, earn, and contribute to the world holistically.

It is important for the Start-ups to set aside issues and march forward in order to grow into a
successful organization. Intricacy which founders of the start-ups commonly face is about what
sort of entity it would like to function as. Choosing correct entity is crucial because it helps to
ease out future regulatory and liability complications. A business model or entity act as a
blueprint for achieving desired goals.

LLP that is Limited Liability Partnership is one such business model which is ideally best
vehicles for a Start-ups or small and medium business. In recent years, there has been a
appreciable hike in the number of entrepreneurs opting for Limited Liability Partnerships
(LLPs).

A need was felt to provide a hybrid business platform which combines the benefit of both
company and partnership to small and medium enterprises and professional firms of company
secretaries, chartered accountants, advocates so that they can survive in the competitive market.
That’s when in the year 2008 Lok Sabha passed the Limited Liability Partnership Bill thereafter
it received the assent of the President.

1
Priyanka Sahay, Economic Survey: India recognised 14,000 new start-ups in 2021, 555 districts in India had
at least one new start-up, MONEY CONTROL, (Jan 21 2022),
https://www.moneycontrol.com/news/business/startup/economicsurvey-india-recognised-14000-new-startups-
in-2021-555-districts-in-india-had-at-least-one-new-startup-8008021.html
2
Arun Padmanabhan, Economic Survey 2022: At least 14,000 new start-ups recognised in India, up 20 times in
five years, ECONOMIC TIMES, (Jan 31 2022), https://economictimes.indiatimes.com/tech/startups/economic-
survey-2022-at-least-14000-new-startups-recognised-in-india/articleshow/89243366.cm

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After 13year, government of India in order to simplify and to provide structural and financial
ease of business for the very first time amended LLP act 2008, On 21 August 2021 the LLP
amendment act 2021 got President Assent. In recent years, there has been a noticeable increase
in the number of entrepreneurs opting for Limited Liability Partnerships (LLPs). As per the
MCA’S 2021 (June) report over 2.1 lakh firms in India are LLP. Though it can be said opting
LLP as a business model does bring additional benefits but still adoption is comparatively
small.
The paper tests the usefulness of this new business form for professional together with small
and medium size business concerns, which are widely perceived to be the primary beneficiaries
of the LLPAct.

Key Words- LLP, Start-ups, Liability, Tax, LLP Amendment Act.

LITERATURE REVIEW

(Akanksha Tomar & Jatin Kapoor: Limited Liability Partnership – The Hybrid
Structure, 2017)
This research paper reckoned LLP as a hybrid corporate business vehicle which can guarantee
favourable future. Unfolds the procedure for incorporating a Limited Liability Partnership and
the benefits and advantages of LLP alluring start-ups

(Suvansh Majmudar, The Era of Limited Liability Partnership, 2021)

This research paper gives comparative study of LLP legislation in US, New York, Wales of
UK and Australia. The paper also helped in exploring the process of registration and winding
up of an LLP in India

(Ushi Rajanahalli , Limited Liability Partnership as a better alternative to Incorporation,

2020)
This paper elucidates legal position of LLP related to taxation and convertibility in India in
light of other countries as well as the advantages that are attainable by the professionals through
LLP firm.

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 RESEARCH GAP

The gap in these literature reviews are regarding the effect that recent LLP amendment act
2021will bring on the existing and upcoming start-ups along with the disadvantages that
small business and professional have to bear when they opt LLP as business model.

OBJECTIVE OF THE PAPER

The research paper aims to highlight some pivotal aspects of LLP’s and its swift takeover of
corporate business world.

To examine how the Limited Liability Partnership amendment act 2021 will benefit the
budding start-ups in India.
To analyse the advantages that Limited Liability Partnership provides to start- ups over
traditional partnership and company.

RESEARCH METHODOLOGY

The current research work is empirical in approach. Secondary data is used as the basis of the
research, secondary data has been garnered from different books, e-journals and websites.

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 INTRODUCTION

HISTORY OF LLP

Before we draw relations between LLP and start-ups let us first understand from where did this
concept originated. LLP is no longer a new subject the concept of LLP is applied by different
countries in absconded ways. Concept of LLP originated in the year 1991 from the city
ofTexas, USA and after its origin this predominately floated in USA, UK and in Singapore.
The concept of LLP floated around mostly USA, UK and some in Singapore3.

LLP IN INDIA

Although India adopted LLP Act in the year 2008, but as far as history is concerned, for the
very first time in the year 1957 the idea of LLP was propounded and didn’t received assent
from the law commission. Second attempt to bring LLP into existence was made in the year
1997 by Abid Hussain committee, again in the year 2003 Naresh Chandra committee re-
introduced the idea of LLP with the backing that LLP is an important vehicle for professionals
like lawyers, accountants. Then JJ Irani Expert Committee on Company Law in 2005 followed
the footsteps of the Naresh committee and contented that a separate act should be made in India
which should extend its focus on small enterprises too. This was done so that there would be
some flexibility and would be easier for the small scale enterprises to access modern
technology as well as to enter in joint venture agreements. Finally in the year 2008 Lok Sabha
passed the Limited Liability Partnership Bill thereafter it received the assent of the President.4

NUANCE OF LLP

Succeeding the history of LLP Act it is imperative to understand what a Limited Liability
Partnership actually is. The true intention of the legislature while adopting LLP Act 2008 was
to encourage people to get involved in small business and to emancipate entrepreneur from the

3
Jatin Kapoor &Akanksha Tomar, India: Limited Liability Partnership -The Hybrid Structure, MONDAQ, (29
Oct 2017), https://www.mondaq.com/india/corporate-and-company-law/637738/limited-liability-partnership-
the-hybrid-structure
4
Astha Mehta & Sachin Rastog, Limited liability partnership: An emerging form of business organisation, 5
IJRARA.976, (2018)

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fear of losing personal assets in the event of a failure of the business.5 To ensure the same,
legislature imbedded two important section that is section 8 and section 26.

As per section 8 in an LLP, partners have limited liability i.e personal assets of the partners are
not used for setting of any obligation arising out any contract, torts, or otherwise. 6Further
section 8(3) and section 26 work together because section 8(3) states that no partner will be
personally liable for the unauthorised action of the other partner of the LLP and in lieu of
section 26 which states that every partner is an exclusive agent of the LLP but not of the other
partners.7 Thus it can be said that these two section make LLP unique and different from
bygone business models (proprietorship and partnership).

LEGISLATIVE ANALYSIS OF THE LLP ACT HOW EFFECT BUSINESS

ENVIRONMENT

Before we talk about the legislative development let us see some basic advantages that LLP act
2008 offered to the entrepreneurs.

No of Partners – In general there is no restriction on number of partners, but the minimum

number of partners of LLP should be 2.8
LLP Agreement - There is a large flexibility in operations as the partnership is formed
under the LLP agreement and the partners can edit it according to the circumstances.9
Tax Benefit – For calculating tax there are two popular methods namely the French model
and other being the UK and Singapore model, India has opted for the latter one.10 As per the
UK and Singapore method LLPs are treated at par with a general partnership, so far as the
tax treatment is concerned. This model was adopted by India by virtue of Finance bill 2009
which introduced procedure for LLPs in the Income tax act. 11

5
Ishita Ramani, India LLP Act 2008 and all you need to know about LLP in India, TAX GURU (9 Jan 2020)
https://taxguru.in/corporate-law/india-llp-act-2008-llp-india.html.
6
Section 8 of LLP Act, 2008, Act No. 6 Of 2009
7
Section 26 of LLP Act, 2008, Act No.6 of 2009
8
Suvansh Majumdar, The Era of Limited Liability Partnership, 4 IJLMH. 4584, ( 2021)
9
Id.
10
Hetal Doshi, Limited Liability Partnership in the wake of start-up era, SCC BLOGS, (Sep 72018),
https://www.scconline.com/blog/post/2018/09/07/limited-liability-partnership-in-the-wake-of-start-up-era
11
Kushi Ranjanahalli. Limited Liability Partnership as a better alternative to Incorporation, 5 IJLMH. 514,
(2020)

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 As per section 2(23)(i) of the income tax act 1961, LLP shall be treated separate taxable
entity. All the provisions concerning taxation of general partnership firms would apply
mutatis mutandis to LLPs.12
As per section 10 of the Income tax act 1961 LLP are taxed on the profits and such profits
would be taxable in the hands of the LLP itself and all partners are treated as self employed
and are they are not included in computing the total income.
As per Information Technology Act, 2000 LLP are considered to be a non resident thus LLP
would continue to be taxed at 30% plus applicable cess. 13Another tax advantage that LLP
gets is that , they are exempted from Minimum Alternate Tax and Dividend Distribution
Tax. All these attributes make LLP an appealing modus operandi of business as far as tax is
regarded.14
Audit- Rule 24 of the LLP rules, 2009 provides that I. any LLP whose turnover does not
exceed 40 lakh rupees in any financial year, or II. Whose contribution does not exceed 25
lakh rupees, is not mandatorily required to get its accounts audited. If these limits are crossed
for an LLP, it must get its account mandatorily audited15.

FDI IN LLP- DIPP, Ministry of Commerce & Industry, Government of India on 1 October,
2011 passed a consolidated FDI policy through which FDI was allowed in LLP’s by way of
insertion of a new paragraph 3.3.5, replacing the present paragraph 3.3.5.16

Apart from these many more flexibilities are provided under the LLP Act of 2008 but many
start-ups and entrepreneurs have not adopted LLP model because of lack of enough incentives
like issuance of instrument like debenture’s, criminalisation of procedural lapses. Keeping in
mind these lapses and to motive start-ups government adopted Limited Liability Partnership
(Amendment) Bill, 2021.17

12
Section 2 (23) (i) of The Income Tax Act, 1961, Act no. 2of 1961
13
Section 24 of IT Act, 2002, Act No.24 of 2002.
14
Supra Note 10.
15
Nritika Sangwan, Why your Start-up should be an LLP, IPLEADERS, (Mar 22 2018),
https://blog.ipleaders.in/flexibilities-of-llps-over-other-business-structures/,
16
Sanskrit Rastogi and Akshay, Foreign Direct Investment in Limited Liability Partnership in India, ILJ,5(2),
http://www.indialawjournal.org/achives/volume5/issue-2 /articles-6.html.
17
Will Amended LLP Act give start- ups a boost? BUSINESS LINE, (Sep 8 2021),
https://www.thehindubusinessline.com/opinion/will-amended-llp-act-give-start-ups-a-boost/article36365791.ece

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 LEGISLATIVE ANALYSIS OF THE 2021 AMENDMENT

The main aspiration of the legislature behind enacting this act was ‘’ improve the ease of doing
business and encourage more start-ups in the country’’ following are the key changes:
Decriminalisation of Offences- The recent amendment decriminalised 12 compoundable
offences.18 The Amendment Act converts these decriminalized offences into civil defaults.
Further the bill seeks to change the provision from “punishable with fine” to “liable to
penalties”. Section 77 sets up In house Adjudicating Mechanism for adjudicating there civil
defaults. 19This act will help to solve matters swiftly and will reduce the burden of courts.20

Small LLP’S - The 2021 bill introduces the new concept of small LLP. As per it is
Section3(f) of the Act 2021 propounded that not exceeding Rs 25 lacs which can be extended
to Rs 5 Crores and turnover not exceeding Rs 40 lacs which can be extended to Rs 50 crore.21
This initiative will surely boost the start-up ecosystem because small LLP ‘s will be entitled
with following relaxation: Reduced filing fees, less compliances, less additional fees, less
penalties, accounting standard only limited to manufacturing fees.22
One of the main reason as to why entrepreneurs hesitated in taking up LLP business model
was their inability to understand complicated and regulations of the system by reducing the
regulatory compliance this amendment will make start- up ecosystem more condusive.23

18
A list of the offences decriminalized are as follows: Section 9- Changes in Designated Partners, Section
10- Punishment for contravention of Section 7,8 and 9, Section 13- Registered office of Limited liability
partnership and change therein, Section 21- Publication of name and Limited liability, Section 25- Registration
of changes in partners, Section 34- Maintenance of books of account, other records and audit, etc., Section
35- Annual Return, Section 60- Compromise, or arrangement or Limited liability partnerships, Section
62- Provisions for facilitating reconstruction or amalgamation of Limited liability partnerships.
19
Section 77 of the LLP Amendment Bill, 2021, https://prsindia.org/billtrack/the-limited-liability-partnership-
amendment-bill-2021
20
Amol Pushp, An Insight into the Limited Liability Partnership (Amendment) Bill, 2021, LAW INSIDERS, (Aug
29 2020), https://www.lawinsider.in/columns/an-insight-into-the-limited-liability-partnership-amendment-bill-
2021.
21
Section3(f) of the LLP Amendment Bill, 2021, https://prsindia.org/billtrack/the-limited-liability-partnership-
amendment-bill-2021
22
Diana Mathias & Vaibhav Gandhi, LLP reforms 2021: How the Amendment Bill facilitates ease of doing
business encourage entrepreneurs, FINANCIAL EXPRESS, (Aug21 2021),
https://www.financialexpress.com/industry/sme/cafe-sme/msme-eodb-llp-reforms-2021-how-amendment-bill-
facilitates-ease-of-doing-business-encourage-entrepreneurs/2319989/.
23
Mainak Mukherjee, Analysing LLP (Amendment) Act 2021: A Revolutionary Reform in the Start-Up Era?,
ICCRL,(Jan 23 2021), https://www.irccl.in/post/analysing-llp-amendment-act-2021-a-revolutionary-reform-in-
the-start-up-era

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 Non-convertible debentures- The Bill for the first time has dealt with the issuance of
debentures by an LLP as a mode of fundraise. These debenture are fully secured non-
convertible debentures from investors regulated by the RBI or SEBI. This provision will
definitely attract more investors as secured non-convertible debentures of an LLP will be a
safe investment option in this start-up era.24

Amalgamation with companies- The recent amendment tries to safe the existence of LLP
by restricting LLPs from amalgamating into companies. This could result in increased
timelines and may also derail M&A opportunities.25

CONCLUSION

There reforms will surely encourage entrepreneurs and professionals to consider LLP for
business formation. The recent amendments proposed by the central government are exactly
same as that of the company act amendment shows that the government want to make corporate
field in the country. Start-up ecosystem will see a boost because of the recent amendments,
further it is suggested that in future government should take into consideration the problem of
angel investors. There should be a focus on improving ease in accessing angel investors. Small-
scale start-ups usually operate with minimal capital, which makes them conducive for angel
investments.

BIBLIOGRAPHY

ARTICLES
1. Priyanka Sahay, Economic Survey: India recognised 14,000 new start-ups in 2021, 555 districts in India had at
least one new start-up, MONEY CONTROL, (Jan 21 2022),
https://www.moneycontrol.com/news/business/startup/economicsurvey-india-recognised-14000-new-startups-in-
2021-555-districts-in-india-had-at-least-one-new-startup-8008021.html

2. Arun Padmanabhan, Economic Survey 2022: At least 14,000 new start-ups recognised in India, up 20 times in five
years, ECONOMIC TIMES, (Jan 31 2022),https://economictimes.indiatimes.com/tech/startups/economic-survey-
2022-at-least-14000-new-startups-recognised-in-india/articleshow/89243366.cm

3. Jatin Kapoor &Akanksha Tomar, India: Limited Liability Partnership -The Hybrid Structure, MONDAQ, (29 Oct
2017), https://www.mondaq.com/india/corporate-and-company-law/637738/limited-liability-partnership-the-
hybrid-structure.

24
Karthikeyan M, The ease of doing business for startups in the light of recent amendments to LLP Act 2008,
IPLEADERS, (Nov. 21 2021), https://blog.ipleaders.in/the-ease-of-doing-business-for-startups-in-the-light-of-
recent-amendments-to-llp-act-2008/
25
Supra 23.

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4. Ishita Ramani, India LLP Act 2008 and all you need to know about LLP in India, TAX GURU (9 Jan 2020)
https://taxguru.in/corporate-law/india-llp-act-2008-llp-india.html.

5. Hetal Doshi, Limited Liability Partnership in the wake of start-up era, SCC BLOGS, (Sep 72018),
https://www.scconline.com/blog/post/2018/09/07/limited-liability-partnership-in-the-wake-of-start-up-era

6. Nritika Sangwan, Why your Start-up should be an LLP, IPLEADERS, (Mar 22 2018),
https://blog.ipleaders.in/flexibilities-of-llps-over-other-business-structures

7. Will Amended LLP Act give start- ups a boost? BUSINESS LINE, (Sep 8 2021),
https://www.thehindubusinessline.com/opinion/will-amended-llp-act-give-start-ups-a-boost/article36365791.ece.
8. Section 77 of the LLP Amendment Bill, 2021, https://prsindia.org/billtrack/the-limited-liability-partnership-
amendment-bill-2021
9. Amol Pushp, An Insight into the Limited Liability Partnership (Amendment) Bill, 2021, LAW INSIDERS, (Aug 29 2020),
https://www.lawinsider.in/columns/an-insight-into-the-limited-liability-partnership-amendment-bill-2021.
10. Section3(f) of the LLP Amendment Bill, 2021, https://prsindia.org/billtrack/the-limited-liability-partnership-
amendment-bill-2021
11. Diana Mathias & Vaibhav Gandhi, LLP reforms 2021: How the Amendment Bill facilitates ease of doing business
encourage entrepreneurs, FINANCIAL EXPRESS, (Aug21 2021),
https://www.financialexpress.com/industry/sme/cafe-sme/msme-eodb-llp-reforms-2021-how-amendment-bill-
facilitates-ease-of-doing-business-encourage-entrepreneurs/2319989/.

12. Karthikeyan M, The ease of doing business for startups in the light of recent amendments to LLP Act 2008,
IPLEADERS, (Nov. 21 2021), https://blog.ipleaders.in/the-ease-of-doing-business-for-startups-in-the-light-of-
recent-amendments-to-llp-act-2008/

JOURNALS

1. Kushi Ranjanahalli. Limited Liability Partnership as a better alternative to Incorporation, 5 IJLMH. 514, (2020)
2. Astha Mehta & Sachin Rastog, Limited liability partnership: An emerging form of business organisation, 5
IJRARA.976, (2018).
3. Suvansh Majumdar, The Era of Limited Liability Partnership, 4 IJLMH. 4584, (2021)
4. Sanskrit Rastogi and Akshay, Foreign Direct Investment in Limited Liability Partnership in India, ILJ,5(2),
http://www.indialawjournal.org/achives/volume5/issue-2 /articles-6.html.
5. Mainak Mukherjee, Analysing LLP (Amendment) Act 2021: A Revolutionary Reform in the Start-Up Era?,
ICCRL,(Jan 23 2021), https://www.irccl.in/post/analysing-llp-amendment-act-2021-a-revolutionary-reform-in-the-
start-up-era

ACTS

1. Section 8 of LLP Act, 2008, Act No. 6 Of 2009

2. Section 26 of LLP Act, 2008, Act No.6 of 2009
3. Section 2 (23) (i) of The Income Tax Act, 1961, Act no. 2of 1961

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