Last six months have been harrowing for a few SMEs who registered as limited liability partnerships (LLP), hoping they would sail more comfortably in their financials with equity and debt in good balance. In an LLP, partners do not have to bear unlimited loss, but all these firms faced the wall when they approached banks. They were asked to convert into private limited firms or partnership companies where liability is not limited.

When one LLP firm approached the RBI for recognition as a non-banking finance company, the central bank said it does not recognise the business form. No wonder the banks are sulking.

India has around 10,000 LLPs as of May 2012 — (this is the latest data available on the website of the corporate affairs ministry) — with the western region accounting for around 44 per cent of the total; the south, 24 per cent. The other two regions take the balance.

Unfinished business LLP shall be a body corporate and a legal entity separate from its partners. This form of business organisation is flourishing in the UK, US, Australia, Singapore and some gulf countries as well. The Limited Liability Partnership Act, 2008, brought lot of hope to the SME sector riding mostly on debt till then.

This new body incorporate was supposed to facilitate equity flow to the sector. Seven years down the line, this form of business seems to have not found favour with the intended group of clientele.

LLP is an alternative corporate business form that gives the benefits of limited liability of a company and the flexibility of a partnership. It can continue its existence irrespective of changes in partners. It is capable of entering into contracts and holding property. It is a separate legal entity liable to the full extent of its assets but liability of partners is limited to their agreed contribution.

Further, no partner is liable on account of the independent or un-authorised actions of other partners. The firm’s liability to the creditors does not extinguish.

While a joint stock company has its governance structure regulated under Companies Act 2013, in the LLP, internal governance is dictated by a contractual agreement between partners. There is no divide between the management and ownership. LLP has more flexibility compared to the company. An individual body corporate can also be a partner in LLP.

What the banks missed Every LLP shall have at least two “designated partners” mandatorily. These partners shall be accountable for regulatory and legal compliances, besides their liability as ‘partners, per-se'. Every designated partner must obtain a “designated partner’s identification number” (DPIN) from the corporate affairs ministry.

Partner’s contribution may consist of both tangible and/or intangible property and any other benefit to the LLP. Every partner would be, for the purpose of the business of the LLP, an agent of the LLP but not of the other partners. The liabilities of the LLP shall be met out of the properties of the LLP.

A ‘Statement of Accounts and Solvency’ in prescribed form shall be filed by every LLP with the registrar every year. The accounts of every LLP shall be audited in accordance with Rule 24 of LLP, Rules 2009. It is strange that banks see undue risk in these businesses that have well-built regulatory architecture.

The fact that the ministry’s website contains only data of registrations till 2012 indicates either its lack of seriousness in this form of enterprises or that there were no registrations at all later. At a time when inclusive growth is talked about and Make in India making headlines, it is time to look at our structures and ensure that they get due recognition.

The writer is a risk management specialist

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