Limitations/ Disadvantages of LLP

Understanding the Limited Liability Partnership definition (LLP) limitations & disadvantages would help the entrepreneur  get the additional perspective of this structure.  The entrepreneur needs to understand these things quite in details as it may create various stumbling blocks, which  may delay  breakthrough related to Startup growth. Here in this article we would explore some of the limitations/disadvantages, that would help us avoid future hassles.

Limitation in the formation of LLP
As the basic structure or model of the LLP is similar to that of any partnership firm  but it requires minimum two partners to form it.  LLP cannot be formed by a single person.  NRI/ Foreign national who want to form an LLP in India then at least one partner should be a resident of India. Two foreign partners cannot form LLP without having one resident Indian partner along with them.

It takes more days to form, as all the partners’ signatures are required for each  and every document which is then to be attached to required e-forms. Therefore self attestation of each partner on documents is more as compared to the formation of any Private Ltd company.

Assets of LLP
Partners undertake to contribute some amount towards LLP firm which they contribute in the form of cash or assets, while executing the LLP agreement.  Once cash or assets are contributed to LLP, it cannot be returned to the partners of an LLP unless there is any specific provision mentioned in LLP agreement.

Difficulty in transfer of ownership
Ownership rights are not transferable easily without obtaining consents of all partners of the LLP.

If any partner wishes to transfer some portion of ownership, he has to obtain consent of all partners. The resolution to be passed by majority in numbers of the partners in some of these cases  – increase or decrease in contribution, increase or decrease of designated partners, alteration of working partners, amalgamation, shifting of the registered office of firm, opening or closing of bank account.

Admission of new partner
The supplementary agreement containing details of new partners and his contribution  has to be created and then accordingly the existing partners need to revise or change the contribution held by them due to admission of new partners in the LLP agreement.

These changes have to be intimated to the concerned Registrar of Companies within whose jurisdiction registered office of the LLP is situated.

Offenses and penalties
LLP Act has provided the provisions of offenses and penalties. For default/ non-compliance on procedural matters such as delay in filing of e-forms, one has to pay default fee for every day for which the default continues.
Such default fee would be payable at the rate of rupee one hundred per day after the expiry of the date of filing (as prescribed in relevant provision) up to a period of three hundred days. The offense can result in either (i) through payment of fine or (ii) through payment of fine as well as imprisonment of the offender.

Permission of Foreign Direct Investment (FDI) in LLP
As per FDI Policy, FDI in LLP is allowed only through Government route,  FDI in LLP under automatic route is not permissible.
Further FDI in LLP through Government route is allowed to only those sectors where 100% FDI is allowed under automatic route under the FDI policy.
Foreign company or individual can invest in LLP in India but it requires prior government approval.

Limitation in External Commercial Borrowing (ECB)
LLP is not allowed to raise External Commercial Borrowing (“ECB”). Thus LLP cannot take commercial loans from its foreign partners, FII’s (Foreign Institutional Investors), banks from outside India, any financial institution outside India or any other entity outside India.