Introduction To Limited Liability Partnerships Law Company Business Partnership Essay

Published Date: 02 Nov 2017

INTRODUCTION TO LIMITED LIABILITY PARTNERSHIPS

With the increasing pressure due to the market forces, it has been considered imperative for a legal vehicle that combines the best aspects of two or more entities resulting into a newly formed entity that is not only pro- industry but also in keeping with the market conditions. Such an entity is a Limited Liability Partnership (hereinafter "LLP").

An LLP is a hybrid legal vehicle that combines the limited liability attribute of a Company and a small number of people operating through it to carry on business or professions i.e. partnership. Its features such as organizational flexibility and taxation methods are in tune with the latter, whereas the term limited liability makes its origins closer to the former, irrespective of the addendum of the word partnership. This is further noticeable as LLP are basically body corporate having perpetual succession and a separate legal entity.

The existence of LLP which has its genesis in general partnership is now a reality in India with the enactment of the LLP Act, 2008, from March 31, 2009. [1] 

Limitations of the Project:

A major chunk of the project has been prepared on the basis of official circulars and discussion papers released by the Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce and Industry, Government of India since no commentary was available on the topics. Kindly consider the same.

Further, as the subject matter of Limited Liability Partnerships is relatively new to the Indian Scene, therefore there is a dearth of litigious matters and cases on the point. Please take into consideration the same as well.

Chapter I: Historical Background [2] 

The legal concept of LLP originated in 1991 in Texas, mainly in response to the liability that was imposed on partners in partnership sued by Government agencies in relation to massive savings and loan failures in 1980. The Texas statute protected partners from personal liability for claims related to a co-partner’s negligence, error, omission in competency, or malfeasance. It also permanently limited the personal liability of the partners for the errors, omissions, incompetence, or any negligence of the partnership’s employees or other agents. In 1996, all other states adopted the concept by the Uniform Partnership Act, 1996. Similarly in UK in the 1990s, accountancy firms advocated to secure proportional liability in the LLPs. This led to the passing of the Limited Liability Partnership Act, in the year 2000.

The issue of LLP has been a matter of discussion in India for over a decade now. The Abid Hussain Committee recommended legislation on LLP way back in 1997. Later, the concept of LLP and the need to introduce it in India was recommended in the report of Naresh Chandra Committee (2003) set up for suggesting regulation of private companies. JJ Irani Expert Committee on Company Law (2005) recommended introduction of LLP law. While Naresh Chandra Committee preferred the application of the LLP to the service industry, Irani Committee recommended that small enterprises should also be included within the scope of LLP. The need for introduction of a LLP legislation was felt for a long time but the process gained momentum only when the second Naresh Chandra Committee submitted its report in July 2005. Consequently, the Limited Liability Partnership Bill 2006 was introduced by the Ministry of Corporate Affairs on 15 December 2006 in the Rajya Sabha on 22 October 2008 for the formation and regulation of limited liability partnerships and for matters connected therewith or incidental thereto.

Applicability of the LLP Concept in India [3] 

According to the concept paper on limited liability partnership prepared by the Government of India in 2005, in view of the increasing role of service sector in the Indian economy, a need was recognized for introduction of a new corporate entity- Limited Liability Partnership that would combine the characteristics of corporate and non-corporate entities.

In India, some bodies of professionals have been prohibited from practicing under any incorporated form. The ‘general partnership’ or partnership simpliciter (General Partnership) has traditionally been the entity of choice to provide services by professionals such as lawyers, accountants, doctors, architects, and company secretaries. Moreover, a partnership firm cannot expand beyond 20 partners and as per S.11 of the Companies Act 1956, any association of more than 20 persons with a profit motive cannot exist unless it is incorporated under the Companies Act.

Limited Liability Partnership (LLP) is a form of business entity which permits individual partners to be shielded from joint liability created by another partner’s business decision or misconduct. In an increasingly litigious market environment, the prospect of being a member of a partnership firm with unlimited personal liability is, to say the least, risky and unattractive. Indeed, this is the chief reason why partnership firms of professionals, such as accountants, have not grown in size to successfully meet the challenge posed today by international competition. This makes an LLP a most suitable vehicle for partnerships among professionals such as lawyers and accountants. A LLP enters into contracts in its own name in the same way as a limited company, but its members have the advantage of limited liability similar to the shareholders of a company. Thus, in the event of a business failure or a tortuous complex of disputes and claims, the liability would be limited to the partner responsible. There would be no recourse to attach the personal assets of the other members, except the member who was personally responsible to negligent. Similarly, a partner’s liability is not limited when the misconduct takes place under his supervision or control. In other words, an LLP only protects a partner from liability arising from the incorrect decision or misconduct of other partners or any of its employees not under his control. The partnership is not relieved of the liability of its other obligations as a partnership.

Another contentious issues relating to the LLP’s is that of whether in presence of Companies and Partnerships, there is a need for LLP as a separate entity. However, the significance of LLP’s in the present system cannot be denied. LLP’s provide a new corporate form in the country, in keeping with the international scene and thus putting us on an even platform to compete internationally.

LLP’s are particularly advantageous in services industry due to the simple fact that they are made on the basis of agreement and thus provide the flexibility that Companies cannot provide, while their limited liability scenario provides for an advantage over regular partnerships. Thus it provides for financial risk taking capability in an innovative manner due to lack of detailed legal and procedural requirements. Further, the fact that no partner is liable for the unauthorized acts of the other partner shields them from the other’s wrongful acts. This is an improvement from the regular partnership, where partner irrespective of their stake and their knowledge are liable for the acts of the other.

The addition of LLP’s to the Indian scene is of particular advantage to the professional services such as lawyers and accountants as they can manage their businesses more efficiently employing large number of partners. Unlike the US, there is no restriction on the services that can be included under the ambit of LLP. The applicability of the LLP is huge and thus can be used for a variety of enterprises including small sector enterprises and CA, CS along with Venture Capital funds as well.

Chapter II: Comparative Aspect of LLP among different jurisdictions

An LLP, in its essence is an amalgamation of the features of a Company or Corporation along with features of the garden variety Partnership. While it differs from the former in the sense that the partners have the right to manage the business directly, it differs from the latter as some or all of its partners have limited liability as opposed to unlimited liability as seen in Partnerships.

In India, LLP’s are governed by the LLP Act, 2008 which recently came into force. In contrast, LLP’s have had been legally recognized and mechanized for more than two decades in the United States, where it was introduced in Texas in 1991 and subsequently incorporated into commercial law by the Uniform Partnership Act, 1996. However, each state has its own separate law governing the formation of LLP’s, and even the liability of partners varies from state to state. In the United Kingdom it was introduced by the LLP Act, 2000 for England Wales and Scotland, while for Northern Ireland, the governing Act namely Limited Liability Partnerships Act (Northern Ireland), 2002.

All the Acts provide for the minimum number of partners for such a partnership to be two, there being no restriction on the maximum number of partners. Under the Indian Law, the implications of transgressing this minimum limit is that if an individual carries on the business of an LLP for six or more months, then he shall be personally liable for the obligations of the LLP that may have arisen during that period. [4] While the UK and Indian Act conform in the fact that an LLP can be formed to carry on any business profession, the US Act provides restrictions in the form of specific professions that are allowed to form LLP’s.

While the LLP literally means that the liability of the partners only extends to the share or investment of each in the LLP, a breakaway from regular partnership norms, however this relaxation does not extend to deliberate frauds. Thus, in all the three jurisdictions, if a partner knowingly commits fraud, with the consent or knowledge of the other partners, then his liability will be unlimited.

Further, in matters of taxation in US and UK, profit is distributed among partners as individual income, and is taxed accordingly while the LLP does not pay any taxes. This relaxation is to help flourish the idea and business of LLP among professionals. While in India, there is nothing specific regarding taxation other than the fact that the Income Tax Act, 19 has been amended to the effect that LLP’s will be taxed as a Partnership Firm for the purpose of taxation. However, the Act also makes it clear that the provisions on the Indian Partnership Act, 1932 shall not be applicable to LLP’s. [5] 

UK LLP’s are not exactly partnerships, but instead is a Corporate body instead having perpetual succession thus combining the organization flexibility and tax status of a partnership along with limited liability. Similarly, in Singapore also, the governing Act Limited Liability Partnerships Act, 2005 establishes a model that amalgamates the features of both the US and UK model of LLP’s retaining the LLP as a body corporate for the latter while taxation is done in the same way as general partnership as introduced by the former. However, in Japan LLP’s are not corporations or a corporate body but instead are based on contractual relations between the partners. This is a marked difference in terms of other jurisdictions and has several implications on how issues and matters related to LLP’s will be handled in Japan.

Chapter III: Comparison between Private Limited Company/Public Limited Company/Limited Liability Partnership and Partnership Concern: [6] 

Private Limited Company

Public Limited Company

Limited Liability Partnership

Partnership Concern