By: Kartik Dawar – Associate Advocate, Kaden Boriss Legal LLP

Partnership is one of the oldest forms of business relationships that continues to be relevant in the present era as well. In India, even though limited liability companies have substituted partnership firms in large businesses, partnership continues to be the dominant business model for professionals and small business enterprises, often due to legal necessity and implications rather than choice.

The Indian Partnership Act, 1932 provides for a traditional form of partnership which is simple to form and easily dissolved and requires very little regulatory compliance. An important feature of this kind of partnership is the unlimited liability of the partners for the acts of the firm; in fact the firm does not have a separate legal identity from the partners and for this very reason it is also difficult to induct and retire partners as any change in the constitution of firm gives rise to a new firm. To overcome the shortfalls of this kind of traditional partnership, a need was felt by both the legislators and the business community to create an alternate business structure that would combine the positive points of traditional partnership and the limited liability company; and such a structure has come to be known as the Limited Liability Partnership (LLP). A Limited Liability Partnership is a hybrid between a company and a partnership that, as the name suggests, provides the benefits of limited liability and allows its members the flexibility of organizing their internal structure as a partnership based on a mutually arrived agreement.

LIMITED LIABILITY PARTNERSHIP: INTERNATIONAL PERSPECTIVE

Limited Liability Partnership has already been accepted as a business structure in many countries like US, UK, Japan, Singapore etc. In US, Limited liability partnerships emerged in the early 1990s: while only two states allowed LLPs in 1992, over forty had adopted LLP statutes by the time LLPs were added to the Uniform Partnership Act in 1996. Each state of US has its own law governing the formation of LLPs. The liability of the partners varies from state to state. In UK, LLPs are governed by the Limited Liability Partnerships Act, 2000 (in England and Wales and Scotland) and the Limited Liability Partnerships Act (Northern Ireland) 2002 in Northern Ireland. A UK Limited Liability Partnership is a Corporate body – that is, it has a perpetual succession. The feature of LLP in UK is that it combines the organizational flexibility and tax status of a partnership with limited liability for its members. In Japan, LLP is not a corporation, but rather exists as a contractual relationship between the partners. In Singapore, LLPs are formed under the Limited Liability Partnerships Act, 2005. This legislation draws on both the US and UK models of LLP and establishes LLP as a body corporate. However for tax purposes it is treated like a general partnership.

THE LLP LAW IN INDIA

The Indian Legislature, keeping in view, the international business trends where a range of services is being offered by professionals and businesses in the form of Limited Liability Partnerships, has enacted the much awaited Limited Liability Partnership Act. The Limited Liability Partnership Bill, 2006, was approved by the Cabinet on Dec 7, 2006 and was introduced in the Rajya Sabha on 15^th Dec, 2006. It was later referred to the Department Related Parliamentary Standing Committee on Finance for examination. The Committee submitted its report to both Houses of Parliament on 27^th Nov, 2007, recommending some changes along with some suggestions regarding the LLP Bill, 2006.[1] On 12^th Dec 2008, the Parliament passed the Limited Liability Partnership Bill, 2008. The Limited Liability Partnership Bill, 2008 received the assent of the Hon’ble President on 7^th January, 2009 and has now become a legislation to be called as 'Limited Liability Partnership Act, 2008’.

The Limited Liability Partnership Act, 2008

An LLP under the Limited Liability Partnership Act, 2008 is a body corporate having a distinct legal entity separate from that of its partners and has perpetual succession i.e. any change in the partners will not affect the existence, rights or liabilities of the LLP.

The Limited Liability Partnership shall be required to have at least two partners but there will be no limit on the maximum number of partners. If at any time the number of partners of an LLP is reduced below two and such LLP carries on business for more than six months, the person who is the only partner of the LLP during the time it carries on business after those six months shall be liable personally for the obligations of the LLP incurred during that period.[2] Any individual or body corporate may be a partner in an LLP.[3] Further, the provisions of the Indian Partnership Act, 1932 shall not be applicable to an LLP.[4] Further, an LLP, will by its name has the power to sue and being sued, hold and dispose property, have a common seal and to do and suffer such other acts as bodies corporate may lawfully do and suffer. Every LLP is required to have either the words limited liability partnership or the acronym LLP as the last words of its name.

Incorporation of an LLP

An LLP is formed pursuant to a “limited liability partnership agreement” which means any written agreement between the partners of the limited liability partnership or between the limited liability partnership and its partners, which determines the mutual rights, and duties of the partners and their rights and duties in relation to that limited liability partnership.[5]

For an LLP to be incorporated, at least two persons must subscribe their name to a document called an incorporation document, which must then be submitted to the Registrar of companies. There is also a requirement of fling a statement in the prescribed form, made by either an Advocate, or a Company Secretary, or a Chartered Accountant or a Cost Accountant in whole time practice in India or by anyone who subscribed his name to the incorporation document that all the requirements under the Act and the rules made thereunder are complied with in respect of the incorporation, along with the incorporation document. The incorporation document must contain information such as the name of the LLP, its proposed business, address of its registered office, the name, address and photographs of the persons who are to be its partners on incorporation.

Upon receiving the incorporation document the Registrar will retain and register it. Once the documents have been registered, the Registrar will issue a certificate that the LLP is incorporated by the name specified in the incorporation document. The certificate issued by the Registrar is evidence that all the requirements have been complied with.

Extent and Limitation of Liability

An LLP being a separate legal entity is liable for an obligation arising in contract or otherwise and the liabilities of the LLP will be met out of its property. A partner will not be held personally liable, directly or indirectly for an obligation of the LLP, solely by reason of being a partner of the LLP. However, such liability shall not affect the personal liability of a partner for his own wrongful act or omissions and in the event of an act carried out by the LLP or any of its partners, with intent to defraud creditors of the LLP or any other person, or for any fraudulent purpose, the liability of the LLP and partners who acted with intent to defraud creditors or for any fraudulent purpose shall be unlimited for all or any of the debts or other liabilities of the LLP. Therefore, a partner will be held personally liable for his own wrongful act or omission, but not for the wrongful act or omission of any other partner of the LLP.

Safeguards to Prevent Misuse

Since there would be limitation on the liability of the partners and the LLP shall be a separate legal entity contracting with third parties in its own right, the Act has certain built-in features which shall lead to greater control over LLPs than what could be exercised over traditional partnerships. Some of these requirements include the requirement of every LLP to have a registered office in India to which all communications will be made and received. Any change in the registered office has be intimated to the Registrar. Every LLP is also required to have at least two designated partners and one of them should be resident in India.[6] The designated partners shall be answerable for all acts, matters and things as are required to be done by the LLP in respect of compliance of the provisions of the proposed legislation and be liable for penalties for non compliance.

The LLP shall be required to maintain proper books of accounts in the prescribed manner according to the double entry system of accounting at its registered office for the specified period of time. The LLP shall also be required, within a period of six months from the end of each financial year, to prepare a Statement of Account and Solvency for the said financial year, which report is then required to be signed by the designated partners of the LLP. Further, the LLP shall file an annual return duly authenticated with the Registrar within sixty days of closure of its financial year. Certain penal provisions have also been provided by the Act for the contravention of the Provisions pertaining to financial disclosures.

ADVANTAGES OF LIMITED LIABILITY PARTNERSHIP

In a nutshell, the Limited Liability Partnership has the following advantages:

·         It provides limited liability to its partners. Though personal Liability arises in case of wrongful acts or omissions, a partner is not personally liable for such acts or omissions of other partner.

·         LLP Business Structure also has the advantage of Internal Flexibility. As in traditional partnership, the internal structure of LLP can be organized as per mutual agreement.

·         The requirements as to Board Meetings, Resolutions, Annual meetings, etc. are not there in case of LLP. There is less paperwork in case of LLPs, even the formation of a partnership agreement is not mandatory; the Act provides for default provisions in its Schedule I. The filing requirements are also less as compared to a company.

·         Since LLP is a separate legal entity, its existence is not offered by the entry or exit of partners.

CONCLUSION

The passing of the Limited Liability Partnership Act, 2008 is a recognition of the changing needs of the businesses in today’s times. If it is implemented properly, the introduction of the LLP will provide a helpful new option for professional partnerships which are anxious about their exposure to liability. In view of the growth of Indian Service industry in recent times, LLPs would further contribute to the growth of the service industry and a large number of existing companies, public as well as private, are expected to convert into LLPs with a view to have access to the benefits of the LLP. The Government of India has made an endeavour to create a facilitating environment for entrepreneurs, service providers and professionals to meet the global competition; however it needs to be seen how far the change is useful.