Who pays the debts of an LLP?
Who pays the debts of an LLP?
Limited Liability Partnerships (LLPs) are a famous business structure in India. They offer little liability protection to the partners and allow them to share profits and losses. However, when it comes to debt, who is responsible for paying debt? LLP is a legal entity separate from its partners. Therefore, it offers limited liability to its partners whereby the assets of the LLP will bear any debts and obligations of the LLP. In this article, we will look at who pays the debts of an LLP in detail.
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Paying off the debts of a Limited Liability Partnership (LLP)
A limited liability partnership (LLP) is a business structure that combines a partnership’s benefits with a corporation’s little liability protection.
- When it comes to debts, an LLP is responsible for its obligations, which means that the partners are not personally liable for any debts incurred by the LLP. If the LLP can’t pay its debts, it is solely responsible for those debts and not its partners.
- If one partner incurs a debt, the other partners are not responsible for paying it off. This can be beneficial in protecting personal assets, as the partners cannot be held liable for any debts incurred by another partner.
Limited liability of the partners
As mentioned above, partners in an LLP are not personally liable when the business cannot pay its debts; their liability is limited to their contributions. As a result, they are only responsible for their contributions and are not personally liable for business losses.
In the event of an LLP’s insolvency at the time of winding up, only the LLP’s assets are responsible for clearing its debts. There are no personal liabilities for the partners, so that they can operate as credible businessmen.
Winding up of an LLP
The Limited Liability Partnership winding up can be initiated voluntarily or by a tribunal.
Winding up of an LLP by the Tribunal – If the LLP is not in a position to pay debts, the Winding-up of the LLP is initiated by a tribunal.
Voluntary winding-up of an LLP – The LLP winding-up process can be quickly initiated with the approval of 3/4th of the partners. To begin with the liquidation process for the LLP, the designated partners need to make a declaration that the LLP does not have any debt or that the LLP will pay the debts totally within not more than one year from the process of winding up an LLP.
Only the LLP assets are liable for paying off its debts if the LLP decides to wind up.
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If the partners owe debts, how will they be paid?
The LLP Winding Up Rules state that partners must pay the amount due to the LLP, including any outstanding from him, following an order of the Tribunal.
Legally, a limited liability partnership is an entity in itself. It has its own identity separate from the business owners. So if an LLP can’t pay its debts, the partners only have to pay out any money they’ve invested into the firm and nothing more. Their liability is limited. Unless the partner has put a personal guarantee on loan to the LLP or has been found to have traded wrongfully, the partner’s property and personal assets are safe.