Why Structure, Sequencing and Regulatory Discipline Matter More Than Speed
By CA Surekha S. Ahuja
Introduction: Why Most LLPs Become Problematic Before They Even Start
The Limited Liability Partnership has earned a reputation for being the “simplest” business structure in India. That reputation is misleading.
On the MCA V3 portal, LLP incorporation can be completed in a few clicks. In practice, however, most LLPs that face banking rejections, FEMA violations, partner disputes, or audit exposure were structurally compromised at the formation stage itself.
This article is written for promoters and professionals who want their LLP to survive not only MCA scrutiny, but also bank due diligence, FEMA reporting, and long-term operational reality — particularly where there are three or more partners or a non-resident partner involved.
LLP Formation Is Not a Filing Event — It Is a Legal Architecture
An LLP is not governed by a single law or regulator. Even before the business begins operations, it sits at the intersection of multiple legal regimes — the LLP Act, income-tax law, FEMA (where applicable), and state stamp legislation.
The most common mistake promoters make is assuming that MCA approval is the end of formation. It is not. MCA approval merely creates the LLP as a legal entity. It does not make the LLP compliant, operable, or bank-ready.
Every shortcut taken at this stage resurfaces later — usually when it is costlier and harder to fix.
The Thresholds That Quietly Change Compliance Obligations
Certain thresholds under the LLP framework operate silently but decisively.
Once the capital contribution crosses ₹25 lakh, or turnover exceeds ₹40 lakh, audit becomes mandatory. There is no discretion involved. Similarly, the introduction of even a single rupee of non-resident capital immediately pulls the LLP into the FEMA framework, irrespective of turnover or scale.
Equally important is the often-ignored trigger of any change in profit-sharing or partner composition, which compulsorily requires amendment of the LLP Agreement and filing with the MCA. Many LLPs continue operating for years without updating these changes, creating documentary contradictions that surface during audits or disputes.
The Three-Partner LLP Problem: Understanding the DIN Constraint
One of the least understood aspects of LLP formation under MCA V3 is the limitation built into Form FiLLiP.
The system allows DIN allotment for only two Designated Partners at the time of incorporation. This means that where three individuals — all new to the MCA ecosystem — intend to form an LLP together, it is not legally or technically possible to obtain three DINs in a single incorporation filing.
This is not a drafting issue. It is a system constraint.
In practice, this leads to two workable structures. The first, and most common, is to incorporate the LLP with two partners and induct the third partner immediately after incorporation. The second is where one of the proposed partners already holds a valid DIN from a prior company or LLP, allowing all three to be reflected at incorporation.
Attempts to bypass this through standalone DIN applications for a “proposed LLP” are theoretically discussed but practically discouraged by the portal. Experienced practitioners avoid this route.
How LLP Formation Actually Unfolds Under MCA V3
From a procedural standpoint, LLP formation still follows three broad steps — digital signatures, name reservation, and incorporation.
Digital signatures are mandatory for all Designated Partners, including NRIs. The system permits overseas applicants using passport-based identification and foreign address proofs, provided documentation is consistent.
Name reservation through RUN-LLP is straightforward, but promoters should remember that approval of name does not validate the structure, capital, or partner arrangement.
Form FiLLiP is where the LLP legally comes into existence. It captures registered office details, partner particulars, DIN allotment (limited to two), and an indicative capital structure. Once approved, the Certificate of Incorporation, PAN, TAN, and DINs are generated.
At this point, the LLP exists in law — but it is still incomplete in substance.
NRI as Partner: FEMA Compliance Starts Earlier Than Most Assume
Where an NRI is a partner, the LLP is permitted only under the automatic route and only in sectors without FDI-linked performance conditions. These are not post-facto checks; they must be evaluated before incorporation.
Capital contribution by an NRI must come strictly through permitted banking channels — either via inward remittance or through NRE/FCNR accounts. Routing funds through resident accounts, adjusting capital through journal entries, or introducing cash immediately renders the structure FEMA non-compliant.
What is often missed is the timing. FEMA reporting obligations arise the moment the LLP accepts non-resident capital, not when the bank raises a query or the auditor flags it. Forms LLP(I) and LLP(II) are statutory requirements, not procedural conveniences.
What Incorporation Achieves — and What It Does Not
Incorporation achieves legal recognition. It does not achieve operational legitimacy.
At the end of the FiLLiP process, the LLP still lacks:
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a legally executed LLP Agreement,
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stamp duty compliance,
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FEMA closure (where applicable),
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and bank onboarding readiness.
Treating these as “post-formation formalities” is the single biggest reason LLPs struggle later.
Closing Note
An LLP that is hurried into existence often spends years correcting foundational errors.
An LLP that is structured deliberately rarely needs correction at all.
This first part has focused on structure, thresholds, DIN constraints, and FEMA discipline at the formation stage.
The second part will address what truly completes the LLP — the LLP Agreement, stamp duty sequencing, bank onboarding, and post-formation compliance discipline.
