Formation of Limited Liability Partnership by Foreign Entity, Incorporation of LLP By Foreign Companies in India, Limited Liability Partnership or LLP is a fairly new concept in India. An LLP is a corporate entity formed under the Limited Liability Partnership Act, 2008 and one of its important characteristics is that its partners have limited liability (unlike partnership firms registered under the Indian Partnership Act, 1932). Though a partnership, an LLP has perpetual succession and separate legal existence from its members. Thus, an LLP is a corporate structure that combines benefits of both, a company and a partnership firm.
As the compliance cost for a LLP is much lower than other forms of business and because of its greater flexibility, LLP can be a good option for foreign entities to start business in India. This form of business is best suited to service industry, as well as small and medium scale enterprises.
Formation of Limited Liability Partnership by Foreign Entity
Things to be kept in mind before incorporation:
Compliances under FEMA, 1999:
There are certain conditions subject to which foreign investment is allowed in LLPs. Foreign investment in LLPs is allowed only through prior government approval route and that too in sectors/activities where 100% foreign investment is allowed under automatic route. Therefore, an intending foreign investor must go through all the conditions subject to which a LLP can be formed in India
Scale of operations:
Carrying out business through an LLP is well suited for small or medium scale enterprises, particularly in service sector. If proposed foreign investor intends to set up business in India with limited operations, then LLP might be a suitable option.
Requirement of minimum number of partners:
An LLP must have at least two partners, who can be individuals or any body-corporate. Also, there must be atleast two designated partners, who should be individuals. At least one of designated partners must be resident in India. However, there is no bar on maximum number of partners
Foreign entity desirous of investing in India should consider the above mentioned requirements and other conditions before deciding to incorporate LLP in India.
Steps for incorporation:
Approving Authority: Registrar of Companies (RoC) and Reserve Bank of India (RBI)
Obtaining approval from FIPB (Foreign Investment Promotion Board):
As already mentioned, foreign investment in LLP is allowed through prior Government approval route and only in sectors where 100% foreign investment is permitted under automatic route. There are several other conditions also, as specified by Government, which needs to be fulfilled. Hence, proposed foreign investor shall make an application to FIPB seeking approval.
Obtaining DSC (Digital Signature Certificate) of proposed partners:
As mentioned in case of wholly owned subsidiary, DSC can be obtained from any licensed Certifying Authority
DIN (Director Identification Number)/ DPIN (Designated Partner Identification Number) of proposed partners:
It is mandatory for proposed partners to obtain DIN/ DPIN under the Companies Act, 2013. DIN/ DPIN can be applied electronically in Form DIR-3 on the website of Ministry of Corporate Affairs (MCA), along with required documents and filing fee
Applying for availability of name:
The fore most step in formation of an LLP is to apply for availability of name of the proposed LLP. Care must be taken to comply with the naming guidelines in this regard. Form 1 has to be filed with MCA for reservation of name of the proposed LLP.
Filing of incorporation documents:
Once the name of proposed LLP has been approved, incorporation documents, which include subscriber’s statement, details of partners and registered office, etc. are required to be filed in e Form 2.
Drafting and execution of LLP agreement:
LLP Agreement is one of the most crucial documents as it governs the rights and duties of partners. It may be drafted as per the convenience and mutual understanding among partners of LLP. Various aspects covered under the agreement may include amount and manner of contribution, rights and duties of partners, description of business of proposed LLP, etc.
Filing of LLP agreement:
LLP is formed once the Form 2 is approved by the Ministry. LLP agreement shall be then filed within 30 days of incorporation of LLP in Form 3.
Post incorporation compliances (immediately after incorporation)
Foreign Exchange Management Act (FEMA), 1999
Obtaining FIRC (Foreign Inward Remittance Certificate):
As soon as the amount of consideration from foreign investor is received in India, authorised dealer bank will issue FIRC.
Reporting to the Reserve Bank of India (RBI):
LLP is then required to report to RBI (through its authorised dealer) in Form FOREIGN DIRECT INVESTMENT-LLP(I), along with other documents, within 30 days of the receipt of amount of consideration.