MF distributors are converting their partnership and sole proprietorship firms into Limited Liability Partnerships (LLP). According to AMFI data, there are currently 55 LLPs operating across India.
One of the main reasons why distributors are adopting Limited Liability Partnership (LLP) structure is because the structure limits their liability if there are any client litigations. By turning LLP, advisors liability is limited to the capital infused by them. An LLP exists as a spate legal entity which means that liability for repayment of debt and lawsuit is on LLP and not the owner. Also, if one of the partners is found guilty of misconduct, the second partner in LLP would not be held liable automatically. According to Ministry of Corporate Affairs, “No partner is liable on account of the independent or un-authorized acts of other partners, thus allowing individual partners to be shielded from joint liability created by another partner’s wrongful acts or misconduct.”
Distributor concerns have escalated ever since SEBI notified mis-selling as a fraudulent practice in December 2012.
Prachi Manekar, Advocate, Bombay High Court and author of the author of ‘Insights into the new Company Law had told Cafemutual earlier in an interview that the LLP structure shields distributors from hefty penalties in case of litigation. “In the Company Act there is no upper limit on the quantum of penalty that can be levied against a person. If it is a proprietorship, an unlimited company or a partnership then the individual or entity may have to cough up to three times the wrongful loss incurred by the investor from their personal assets. On the contrary if it is a LLP, then it is the LLP which has to pay. The assets of LLP will be taken into consideration to pay off the fines. In LLP, personal assets of distributors are not taken into consideration. If there are several financial advisors working as partners then the wrongful act of one partner does not affect other partners.”
Pawan Mehar who runs My True Value Capital Advisory LLP says that LLP offers a lot more flexibility as compared to a partnership firm. “As a sole proprietorship or partnership firm, I can’t launch alternate investment fund or PMS. Also LLP model offers flexibility. If I want to pass on my legacy or sell my business it is lot easier in LLP structure. Foreign direct investment is also permitted in LLPs.”
Pawan says that LLP can be floated with a minimum of two partners with minimal capital. “One can expect to get LLP license in a maximum of one month,” adds Pawan.
Distributors having a partnership firm can also covert their practice into LLP. A private limited company can also convert itself into LLP.
Krishnan Rajesh, a Chennai based advisor who turned his sole proprietorship firm into LLP last year says that LLP structure gives a corporate image to advisors. “I wanted to portray myself as a company which is why I decided to convert my practice into LLP. Also, LLP has several other benefits. One of the main benefits is that your liability is limited to the amount infused by you which saves us if there is any litigation.”
Further, advisors operating as partnership firms or sole proprietor have to face a lot of difficulty when the partner in whose name ARN is registered dies. On the other hand, the LLP can continue its existence irrespective of change in partners. LLP has a perpetual succession which means that the company will continue even in the absence of a partner. According to some experts, registering a LLP and the regulatory compliance associated with LLP is a lot easier as compared to a private limited company.
The LLP structure is also prevalent in United Kingdom, United States of America, Gulf countries, Australia and Singapore.
