Limited Liability Partnership

26th May 2009
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Limited liability partnership (LLP) is an alternative corporate business entity that provides the advantage of limited liability of a company. At the same time

this structure allows its members the flexibility of organizing their internal management on the basis of a mutual agreement like any partnership firm. Liabilities of its partners are restricted to the extent of their individual contributions to the LLP. They would not be held responsible for loss caused on account of fraud of other partners, of which they had no knowledge. This is different from a general partnership in which each partner is liable jointly as well as severally for the debts and obligations of the business. Section 25 of the Partnership Act, 1932 states : " Every partner is liable, jointly with all the other partners and also severally, for all acts of the firm done while he is a partner. " The LLP format would be propitious for small and medium enterprises (SME) .Professional involved in the knowledge based enterprises would be able take the advantages of both the Company as well as flexibility of the Partnership. 


In India several expert groups have examined the need for a concept like LLP .These include the Abid Hussain Committee 1997, the Naresh Chandra Committee on Private Companies and Partnerships 2003 and the Irani Committee for new Company Law, 2005. The Naresh Chandra Committee particularly analyzed the concept in detail under following parameters:

  • Application of the LLP Regime;
  • Incorporation, Registration and Number of Partners;
  • Limited Liability;
  • Financial Safeguards; and

Tax Treatment of LLPs.

 

Justifying the need to introduce LLP the Committee opines:

“The Committee feels that with Indian professionals increasingly transacting with or representing multi-nationals in international transactions, the extent of the liability they could potentially be exposed to is extremely high. Hence, in order to encourage Indian professionals to participate in the international business community without apprehension of being subject to excessive liability, the need for having a legal structure like the LLP is self-evident. Provisions which restrict the number of partners to twenty prevent the growth of professional firms to the large entities operating on an international scale. Such inhibiting conditions have to be removed. Otherwise, Indian professionals may well get excluded from taking their rightful place in the international community, that their skills otherwise entitle them to. The Committee believes that, to encourage greater professionalism and create commercially efficient, vehicles for providing service of the highest quality, it is essential to create a regulatory regime that would govern the formation of such a hybrid entity between the partnership simpliciter, or general partnership, and a private limited company, that is, an LLP. Such an entity would provide the flexibility of a partnership (allowing the owners to adopt whatever form of internal organization they prefer), and limiting at the same time, the owner’s liability with respect to the LLP. Given the wide acceptability of the limited liability company, a partnership of recognised professionals should be given the choice to opt for a more suitable legal entity, and conferred the privilege of limited liability, especially if sufficient safeguards are put in place.”

 

An earlier version of the LLP Bill was introduced in the Rajya Sabha around 2 years ago on 15th December, 2006 and was referred to the Parliamentary Standing Committee on Finance. The Standing Committee submitted its report on 27th November, 2007. Finally the Limited liability partnership Act was passed in 2008 with effect from 1 April, 2009.


In order to the appreciate the concept of LLP it is important to understand the broad differences between the Limited liability partnership and Company( under Company Act 1956) ;and Limited liability partnership and the Partnership under the Partnership Act,1932. The foremost difference between an LLP and a company lies in that the internal governance structure of a company and is regulated by statute (i.e. Companies Act, 1956) whereas for a Limited liability partnership it would be by a contractual agreement between partners. The dichotomy of management-ownership as prevalent in a company is palpably absent in a limited liability partnership. LLP will have lesser compliance requirements and will have more flexibility as compared to a company.


Talking about the differences between the general Partnership and the Limited Liability Partnership, it was abundantly clear the features of the traditional partnership as governed by the Indian Partnership Act, 1932 have increasingly become redundant. The main problems with this anachronistic Act are that

  • it does not recognize the distinction between a partnership and its members (i.e. the partners);
  • it imposes unlimited liability on each partner for acts committed by any other partner and by the partnership as a whole.

it restricts the maximum number of partners in a partnership to 20;


In case of general Partnership as per the Indian Partnership Act, 1932, each of the partners is jointly and severally liable for any liability arising out of or in respect of the partnership. The LLP is a separate legal entity with unlimited capacity where no member or partner is liable on account of the independent or unauthorized actions of one’s partner, and whose liability is limited to the respective stake of each in the LLP. The members of an LLP would have the option to have a general partner or more with unlimited liability, but it would not shield the partners from legal liability arising out of their own personal acts which are not done for and on behalf of the LLP, that is, any act done beyond the acts and powers of the partners as laid down in the incorporation document. Also the main benefit in an LLP is that it is taxed as a partnership, but has the benefits of being a corporate, or more significantly, a juristic entity with limited liability.


Now let me briefly talk about the salient features of the LLP Act , 2008:-

  • The LLP will be, as already mentioned, an alternative corporate business vehicle that would give the benefits of limited liability but would allow its members the flexibility of organizing their internal structure as a partnership based on an agreement.
  • The Act does not restrict the benefit of LLP structure to certain classes of professionals only and would be available for use by any enterprise which fulfills the requirements of the Act.
  • The LLP will be a separate legal entity.
  • It will have perpetual succession.
  • The rights and duties of partners in LLP, will be governed by the agreement between partners and the partners have the flexibility to devise the agreement as per their choice. The duties and obligations of Designated Partners shall be as provided in the law.
  • Indian Partnership Act, 1932 shall not be applicable to LLPs and there shall not be any upper limit on number of partners in an LLP unlike an ordinary partnership firm where the maximum number of partners cannot exceed 20.
  • An LLP shall be under obligation to maintain annual accounts reflecting true and fair view of its state of affairs. Since tax matters of all entities in India are addressed in the Income Tax Act, 1961, the taxation of LLPs shall be addressed in that Act.
  • LLP shall maintain annual accounts. However, audit of the accounts is required only if the contribution exceeds Rs. 25 lacs or annual turnover exceeds Rs.40 lacs.

Should be ‘for profit’ business.


The economic downturn has adverse affects in the economies of most of the countries, including India. In such a situation, availability of LLP as an alternative business vehicle to our trade and industry will be an important step. Service industry has grown considerably in India. The concept of LLP has assumed a high significance due to today’s borderless economies, the growing role of service and knowledge based enterprises and emerging international competition. Indian entities also need to have the requisite choice in corporate organizations to compete and survive internationally. 


Syed Burhanur Rahman, Attorney, New Delhi. E mail-syedburhanurrahman26@gmail.com


Syed Burhanur Rahman is an alumnus of St. Stephen’s College and Campus Law Center, Delhi University. A Quiz aficionado, he has featured in premier T.V Quiz shows including Mastermind India(BBC),University Challenge Quiz(BBC) and Nat Geo Genius Quiz (National Geographic Channel).An Attorney working with INDUS G & D Law(Delhi),his practice areas include Corporate Law, IPR and Taxation Law .

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