A partnership is an arrangement between two or more people to engage collectively in business operations and share its profits and liabilities. [1] Partnership is the oldest form of business model for organization constituted by more than one person. There are various types of partnerships, to classify the types of partnership; there are four major types namely; Limited Partnership, General Partnership, Limited Liability Partnership and LLC Partnership. Along with its advantages, one cannot neglect its undeniable disadvantages of unlimited liability.
To overcome this drawback, Human Civilization inculcated a new form of business called a ‘company’ where the partners or stakeholders do not have unlimited liability over the losses of the organization. A Limited Liability Partnership can be called a hybrid of the traditional partnership and company, which constitutes of organizational suppleness and tax-requirement of a partnership. This article is aimed at understanding the rubrics of Limited Liability Partnership and the related legal concepts in the context of Indian Legal system.
Table of Contents
Overview of the Limited Liability Partnership
Limited Liability Partnerships are a flexible, dynamic legal and tax body that enables partners to benefit from economies of scale by operating together while also reducing their liability for the acts of other partners. It is viewed as an ‘alternate corporate vehicle’ which aims to gain the key advantages of both kinds of business organizations namely, a corporate structure and a partnership firm. Limited Liability Partnerships provide for a partnership structure where the liabilities of each partner are limited to the value they invest in the company. Under this structure of partnership, in case of bankruptcy, the creditors cannot go after partners’ personal assets to recover the debts. Limited Liability Partnerships are commonly seen in professional businesses like law firms, accounting firms and wealth management firms. Law has recognized the LLP as a separate legal entity and is capable of entering into contracts and holding property in its own name. [2]
LLP and a Company can be differentiated on some vital grounds, for the primary difference lies in the internal governance structure. LLP is regulated by the contractual agreement between the partners, thereby leaving more scope of flexibility in the terms functioning. Whereas on the other hand, a joint stock company is governed by legal Acts and statutes like the Companies Act, 2013, making the general structure of the company more rigid.
Need for LLP in India
The concept of Limited Liability Partnership was first introduced in the second Naresh Chandra Committee Report in 2002. However, that was not the first time the idea of limited liability for partnership was suggested by India. Back in 1932, a suggestion was made by Iron, Steel and Hardware Merchant’s Chamber of India to introduce a type of Partnership where the liability of the partners is limited under the ambit of Indian Partnership Act, 1932. [3] The regulations of the Companies Act had proven to be cumbersome for small businesses to comply with, if they registered as a private limited company. After the enactment of Companies Act, there were many restrictions on loans borrowed by directors or even shareholders. Hence it was the main reason why small businesses preferred to enter into a partnership rather than a company.
The suggestion for inculcating a new form of partnership was rejected in the seventh report of the Law Commission of India. [4] They anticipated that inclusion of Limited Liability Partnership in the Partnership Act is likely to result in rendering the provisions of the Indian Companies Act as ineffective which have been recently made stricter.
Later there were many committees which recognized the need of LLPs in the Indian scenario. The Naresh Chandra Committee Report highlighted the dire need to introduce LLPs in the service industry. After this report, finally the concept of LLPs was launched in India. The Naresh Chandra Committee Report discusses the enactment of the LLP Act in the United Kingdom and the impact of such partnerships in the UK. The strong contention of the Committee was that in the increasing competitive and dynamic business environment, there are significant disadvantages for the general partnership firm thus, LLP should be primarily made available to the firms providing professional services like lawyers, accounting firms etc., to constructively evaluate the advantages and risks. At a later stage it can be exposed to other businesses. Finally in the year 2008, the whole discussion was formalized in a statutory form under the Limited Liability Partnership Act, 2008. [5]
Introduction to the Limited Liability Partnership Act, 2008
As discussed in the previous section, the drawbacks of the partnership structure and the inflexibility of the companies have led to the formation of the new form of company, Limited Liability Partnership. The Limited Liability Partnership Bill was passed in Lok Sabha on 13th December, 2008 and after the assent of President, on 7th January, 2009, it was published in the Official Gazette of India as a Central Act. Enactment of this Act has provided a platform to the small businesses and medium enterprises to carry out their profession in a more effective manner, and thereby, providing them with global competitive standards. [6] This Act is comparatively more flexible than the provisions of the Companies Act, therefore, it gained ground in the entrepreneurship regimes.
Objective of the LLP Act, 2008
With the growth of the Indian economy, there was a need for a new corporate structure that would provide an alternative to the conventional partnership, with unlimited personal liability, on the one hand, and a statutory governance framework for the limited liability company, on the other hand, to allow professional expertise and entrepreneurial endeavor to combine, coordinate and function in an efficient manner. The LLP is seen as an alternate corporate business vehicle that incorporates limited liability benefits but gives its participants the freedom to organize their internal framework as a partnership based on a mutually negotiated agreement. It would provide as an ideal framework for entrepreneurs and professionals to survive in the majorly large-scale business world and will also provide a doorway for investment by venture capitals. [7]
Overview of the LLP Act, 2008
The Act describes a Limited Liability Partnership as a ‘body corporate formed and incorporated under Chapter III of the Act[8] and categorizes LLP to have a status of ‘separate legal entity’ [9] having the nature of ‘perpetual succession’ [10] and a capacity to sue and being sued. [11] An LLP is required to necessarily maintain a minimum of two partners at all times. [12]. Minimum of two partners are required to be posted as ‘designated partners’ among whom, at least one should be an Indian individual. [13] Unlike general partnership or joint stock companies, a change in partners has no effect on rights and liabilities of the LLP [14].
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Extent of Liability of Limited Liability Partnership and its Partners under LLP Act, 2008
The Act specifies that any LLP partner is, for the purposes of the business of the LLP, an agent of the LLP, but not an agent of other partners. [15] This in itself is a stark difference from the general partnership where every partner is an agent of the company as well as other partners. It also seeks to provide that the LLP’s obligations are to be borne from the property of the LLP and that the LLP is responsible for any wrongful act or omission by the LLP partner in the course of the business of the LLP or with its authority. The partner is not personally liable, directly or indirectly, for a liability of the LLP simply on the basis that he is a partner of the LLP. After the death of the partner, the company is operated under the same LLP, the continued use of that title or the name of the deceased partner as part of that name shall not, on its own, make his legal representative or his estate accountable for any act of the LLP after his death.
Advantages of a Limited Liability Partnership
There are many advantages of an LLP but some of the stark ones which makes it a really profitable structure of business are:
- The organization of an LLP is decided on the agreement made on the terms and conditions agreed by all the partners.
- The cost of registering for an LLP is lower than the cost of incorporating a public limited or private limited company.
- No joint liability is created by the independent and unauthorized acts of another partner
- LLPs are treated at par with partnership firms for the purposes of income tax purposes.
Disadvantages of a Limited Liability Partnership
- No provision relating to redressal in case of oppression and mismanagement.
- Under certain cases, liability may extend to the personal assets of the partners, making it possible to seize personal assets for paying off business debts.
- LLP has lesser credit-worthiness than a company.
Conclusion
With the globalization and liberalization of the Indian economy, the LLP, as an alternative mode of corporate governance, would promote joint ventures and make Indian service sectors globally competitive. The LLP hybrid framework would make it easier for entrepreneurs, service providers and professionals to coordinate and function in a creative and productive way to compete successfully on the global market. The major reasons for implementing LLP included the risk factor and improved competitive edge in the global for Indian professionals. The LLP will serve as a catalyst of growth for the economic development of the country and will contribute to the growth of professional services in the country.
References:
[1] Partnership, available at: investopedia.com/terms/p/partnership.asp (last visited on November 5, 2020).
[2] Ministry of Corporate Affairs, Government of India, Need for the New Corporate Form – LLP, available at: http://www.llp.gov.in/aboutllp.htm. (last visited on November 6, 2020).
[3] The Indian Partnership Act, 1932.
[4] Law Commission of India, 7th Report on Partnership Act, 1932 (July, 1957).
[5] Government of India, “Report of the Committee on Regulation of Private Companies and Partnerships” (Ministry of Finance and Company Affairs, 2003).
[6] ‘Limited Liability Act Tabled in Parliament in India’, available at: http://epaper.timesofindia.com/Repository/ml.asp?Ref=RVRELzIwMDYvMTIvMTYjQXIwMTMwMg==&Mode=HTML&Locale=english-skin-custom (last visited on November 5, 2020).
[7] McGaughey, “Limited Liability Partnerships: Need Only Professionals Apply?” Creighton Law Review, 1997.
[8] The Limited Liability Partnership Act, 2008, s. 3(1).
[9] Ibid.
[10] The Limited Liability Partnership Act, 2008, s. 3(2).
[11] The Limited Liability Partnership Act, 2008, s. 14.
[12] The Limited Liability Partnership Act, 2008, s. 6(1).
[13] The Limited Liability Partnership Act, 2008, s. 7(1).
[14] The Limited Liability Partnership Act, 2008, s. 3(3).
[15] The Limited Liability Partnership Act, 2008, s. 18.
BY ZEEL GONDALIYA | SYMBIOSES LAW SCHOOL , PUNE