How to Raise Funds for an LLP in India

Raise Funds

It has been over ten years since the concept of LLP company registration in India was introduced (April 2009). There are quite a few exciting features of LLP that attract new entrepreneurs to choose it over the other structures. And since most of them are looking to raise funds in future, LLP offers many advantages as discussed hereunder. 

What makes LLP Different from other Business Structures?

LLP, as a business structure, enjoys a separate legal entity while being a body corporate which distinguishes between the business (LLP) and its partners.

  • Partners in LLP carry no liabilities for acts of other partners. 
  • LLP business structure has a perpetual succession. 
  • It can leverage the advantages of a Company and a partnership firm in terms of flexibility.

While LLP has a downside of not being able to raise funds from the public which is the primary reason why most startups opt for pvt ltd company registration India. Although, there are many other ways through which it is possible. Let’s explore those.

Ways how partner(s) can contribute an LLP

The contribution under LLP stands for the amount invested or brought in by partners. It can benefit from the provisions of section 32 (1) of the LLP Act, 2008, which define ways through which a partner can contribute to their LLP. It includes the following;

  • Movable or immovable tangible property;
  • Any intangible property;
  • Property contributions/cash agreements;
  • Service contracts performed;
  • Issuing promissory notes; or
  • Any monetary contribution.

These mentioned points include monetary and non-monetary contributions. There are a few provisions in the LLP Rules, 2009 that makes contribution disclosure mandatory. This means LLP is accountable to all the funding received in any form and should disclose each partners’ monetary contribution.

An appropriate value has to be accounted for in the LLP accounts when any partner makes a non-monetary contribution. Also, section 23 (2) of the LLP Rules states that the following professionals should evaluate such contributions:

  • A practising Cost Accountant;
  • A practising Chartered Accountant (CA)
  • Any approved valuer from a central government maintained panel.

Once any of the valuers, as mentioned above, determines the appropriate value of such non-monetary contribution, then it must go in the LLP accounts for the value considered.  

It is recommended to have the contribution agreement in LLP as a good practice of fundraising. Such a deal would contain the details regarding the contribution made by each LLP partners and the nature of such contributions. 

Requirement of Minimum Contribution

LLP partner contributions have some minimum standards to be followed as per section 33(1) of the LLP Act 2008. This section mentions the partners’ obligation in an LLP with regards to the monetary and non-monetary contribution must be according to the LLP agreement. Therefore, there is no minimum contribution requirement, as stated in the LLP law, which negates the contribution part in forming the LLP.

Profit-sharing and Contribution

Generally, the LLP agreement is the single-most document that defines the profit-sharing ratio. If the LLP agreement has no mention of such ratio then as per the LLP Act, it is done so by equally dividing the profits amongst the partners. But in reality, the profit-sharing ratio is determined by weighing in each partner’s contribution and the same partner take its equivalent share of profit.

Increasing Contribution Limit of a Partner

Partners bring in a particular share of their contribution initially at the time of LLP formation. An easy workaround to beef up the partners’ contribution in an LLP is by increasing each partner’s contribution limit. 

Condition #1

Uniform increase in total contribution: Here there is an increment in each partner’s contribution while overall contribution ratio stays the same.

Requirement #1

Need to pass resolution for amending LLP agreement that demonstrates a change in contribution. Also, one needs to file Form 3 with the registrar within 30 days of passing such resolution.

Condition #2

Non-uniform increase in total contribution: Changing the contribution of each partner. In other words, the contribution ratio changes.

Requirement #2

Amending LLP agreement by passing a resolution that reflects the change in partners’ contribution. One needs to file a Form 3 with the registrar within 30 days of moving such a declaration. In case of contribution ratio and profit-sharing ratio, being is the same, it is necessary to finalize the books of accounts before the date of ahead with the change of contribution ratio.

Adding a new partner for additional fundraising

One more way to infuse in funds for LLP is by adding a new partner in the LLP along with the contribution that the partner brings. Here is the three-step procedure to increase LLP funds by appending new partner;

  1. Resolution to be passed by the current/existing partners to add a new partner in an LLP.
  2. Amending LLP agreement that reflects new partner addition and changes in profit sharing contribution. 
  3. Intimating the registrar by filing Form 3 and Form 4.

Conclusion

There are many ways to get funds for LLP, albeit differing significantly from the other business structures. Unlike a Company, an LLP cannot raise funds from banks and funding agents or onboard investors or go public. But LLP partners can choose the best possible alternative that benefits everyone involved in business and the business itself.

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