understanding loans and investments that are made in a LLP by partners

By Simran Setia

Posted on June 17, 2017

Limited liability partnership is a form of an organization where the firm is a separate legal entity from the partners and the partners are not liable for the unauthorized actions of the other partners or their misconduct, in simpler words they are insulated from ‘joint liability’. They also have perpetual succession just like any other organization form. Also, and most importantly the liability of the partners would be limited to their agreed contribution. In a layman’s language: no personal assets of the partners are exposed to the risk, except in the case of fraud on the part of the partner.
LLP, which is a recognized form of business organization was introduced in India by the way of Limited Liability Partnership Act, 2008 and the LLP Rules, 2009. A limited liability partnership (LLP) is a kind of partnership in which all the partners have limited liabilities. It is an alternative corporate form of business organization which gives the benefits of limited liability of a company and the flexibility of a partnership. Its existence continues irrespective of the changes in the partners and ownership. It is also capable of entering into the contracts and holding property in its own name. It is a particular legal entity which is liable to the full extent of its assets but the liability of the partners is limited to their agreed contribution in the LLP. In an LLP, the single partner is not responsible or is not liable for another partner’s misbehavior or for negligence. Also, all the duties and mutual rights of the partners within the LLP are regulated by an agreement between the partners. However in the absence of such agreement, the LLP would be governed by the framework which is provided in Schedule I of the Limited Liability Partnership Act, 2008, which describes the matters relating to the mutual rights and the duties of the partners of the LLP. Further any other form of business such as a partnership which is set up under the provisions of the Indian Partnership Act, 1932, a private limited company or an unlisted public limited company can convert itself into an LLP under the LLP Act, 2008 by following the due procedure of law.
The purpose of this article is to make the reader aware as to how are the loans and investments that are made by an LLP to the partners and the directors treated.
A partner can give a loan to the LLP and also have the same rights as the other outside creditors.
Since the LLP has a distinct legal identity apart from its member thus making the partners and the LLP two different persons. Although the LLP’s MoA and AoA may not put any kind of restrictions on loans made by partners to keep the transactions fair and genuine, nevertheless the loan should be granted at an interest rate which is not higher than that for a loan from outsiders.
Accounting for the partners’ interests in an unincorporated partnership is very simple. All the amounts that are due to a partner are included in a single capital account and along with a note which shows the movement on the account which is broken down into the profit share (including notional salaries), capital introduced and the drawings made by partners. It is thus more complicated for an LLP. In an LLP, the credit balances with the members must be divided between loans and other debts which are due to the members (e.g. debt) and the Members’ other interests (e.g. equity). Each of these must be further analyzed as follows:
Loans and other debts due to members Rs
Members’ capital which is classified as a liability X
Loans from the members X
Amounts that are due to members in respect of profits X
Other amounts X
Members’ other interests Rs
Members’ capital which is classified as equity X
Revaluation reserve X
Other reserves (typically unallocated profit) X
X
However, an LLP can also make investments or grant loans, but the fact is that it must not cross a level whereby it can be classified as an NBFC.

This article has been contributed by Shruti Kakkar, Content Writer, LegalRaasta- an online platform for legal services such as LLP Registration, GST Software, TDS Return, ITR Filing, GST Return Filing etc.

understanding loans and investments that are made in a LLP by partners