Know the essentials of Fundraising in LLP
The concept of Limited Liability Partnership, shortly known as LLP, was introduced in April 2009. Due to its unique features, in a short time, LLP registration has become quite popular amongst entrepreneurs and start-ups. This article deals with the ways and norms of fundraising in LLP.
Highlighting hereunder some of the features which distinguish the LLP
- LLP is a body corporate having a separate legal entity, i.e. both LLP and the partners are distinct from each other.
- It shall have perpetual succession.
- LLP is like a hybrid between a partnership firm and a company. It combines the flexibility of the partnership firm and limited liability of the company.
- More importantly, the partners of the LLP are not liable for each other’s acts.
It is pertinent to note that the major disadvantage of the LLP is that it cannot raise funds from the public at large.
In the present article, we would try to evaluate and understand the fund-raising essentials of the LLP.
Manner of the contribution of a partner
Under LLP, contribution means the amount brought in/ invested by each partner. The provisions of section 32 (1) of the LLP Act, 2008 provides the manner/ ways in which the partners can contribute under the Limited Liability Partnership. The different manner/ ways of contribution under LLP are –
- Tangible movable or tangible immovable property; or
- Intangible property; or
- Agreements to contribute property or cash; or
- Contracts for services performed or to be performed; or
- Promissory Notes; or
- Monetary contribution.
The above list covers both the monetary as well as a non-monetary contribution. The provisions of section 32 (2) of the LLP Act, 2008 and rule 23(1) of the LLP Rules, 2009 deals with the disclosure of the contribution under LLP.
As per the above-referred section and rule, it is mandatory for the LLP to account for and disclose the monetary value of the contribution of each of the partners in the LLP accounts.
Also, for non-monetary contributions of the partners, the appropriate value is also required to be accounted in the LLP accounts. Accordingly, rule 23 (2) of the LLP Rules, 2009 provides that contribution of the partners in the form of tangible, movable or immovable property; intangible property; agreement to contribute property; or contract for services performed or to be performed can be valued by any of the following –
- A practising Chartered Accountant; or
- A practising Cost Accountant; or
- An approved valuer from the panel maintained by the Central Government.
After determining the appropriate value of the non-monetary contribution by any of the above-referred valuer, it would be accounted for in the LLP accounts.
Minimum contribution requirement
While reviewing the concept of the contribution of partners under LLP, 1 basic question relating to the requirement of minimum contribution under LLP arises. For this, we need to refer to the provisions of section 33(1) of the LLP Act 2008.
The said provisions clearly state that the obligation of the partners to contribute (monetarily or non-monetarily) shall be as per the LLP agreement. Hence, interestingly, it can be concluded that there is no minimum contribution required under the LLP law.
In other words, the contribution is not a criterion for a formation of the Limited Liability Partnership. Further, there is no criterion for partners to contribute a minimum capital to be recognized as a partner in a Limited Liability Partnership.
Contribution vis-à-vis profit sharing
In LLP, the profit is shared in the ratio, as mentioned in the LLP agreement. In the absence of the same, as per the LLP Act, the profits would be divided equally between the partners. Hence, theoretically, there is no link between the contribution and the profit-sharing ratio. However, practically, in the general business scenario, the profit-sharing ratio is generally based on the contribution brought in by each partner.
Fundraising in LLP by increasing existing partners’ contribution limit
Other than the initial contribution brought in by the partners, the simplest way of fund raising in Limited Liability Partnership is increasing the contribution limit of each partner. The following procedure is to be followed to increase the contribution limit of the existing partners –
|Increase in total contribution uniformly: Increasing the contribution of each partner. In other words, the overall contribution ratio remains the same.||Passing of resolution to amend LLP agreement. LLP agreement to be amended, reflecting a change in contribution. Filing of Form 3 with the Registrar within 30 days of passing of the resolution.|
|Increase in total contribution non-uniformly: Changing the contribution of each partner. In other words, the contribution ratio changes.||Passing of resolution to amend LLP agreement. LLP agreement to be amended, reflecting a change in contribution. Filing of Form 3 with the Registrar within 30 days of passing of the resolution. If the contribution ratio and the profit-sharing ratio is the same, the books of accounts till the date of change of contribution ratio needs to be finalized.|
Fund raising by increasing the contribution by adding a new partner
Another option of fundraising in LLP is the addition of a new partner which adds on to the contribution. The procedure for increasing the contribution by adding a new partner is –
- Passing of resolution for the addition of the new partner.
- LLP agreement to be amended reflecting the addition of a new partner and change in contribution.
- Filing of form 4 and form 3 intimating changes to the Registrar.
CA Poonam Gandhi
Chartered Accountant, based at Ahmedabad having vast practice experience of more than 9 years in the field of Indirect Taxation. Currently, working as a 'freelance content writer' and associated with the top most leading sites. Also acting as an educator for the taxation course, 'Certificate on taxation law and GST', for the site https://www.intolegalworld.com/.