LIMITED LIABILITY PARTNERSHIP
Varun Juneja[*]
Limited liability partnership (here after LLP) concept was introduced in order to adopt a corporate form, which combines the organizational flexibility and tax status of partnership with advantage of limited liability for its partners. LLP is a body corporate formed and incorporated under the LLP Act, which is a distinct legal entity separate from that of its partners. It has perpetual succession. The word "Body Corporate" is defined in the Bill to include LLPs registered under the LLP Act, LLPs incorporated outside India, and Companies incorporated outside India. Any change in the partners will not affect the existence, rights or liabilities of the LLP. The Bill provides for entry of new partners in accordance with LLP agreement and exit of existing partners both with due notice to the Registrar. The provisions of the Indian partnership Act, 1932 has no application to LLPs.
A limited liability partnership (LLP) has elements of partnerships in combination with the desired features of corporations. The liability of partners is limited, a situation similar to the shareholders of a corporation, and in fact one of the reasons for the evolution of the corporate form of organization. At the same time, the partners have the right to manage the business directly, and (in many areas) a different level of tax liability, compared to a corporation.
LLP is a hybrid of a limited liability company and a partnership firm is a body corporate with legal personality separate from its members, which is formed by being registered at companies’ houses. LLP’s are governed by the LLP Act 2000 and also by the LLP Regulations, 2001 in England which may be apply many parts of the Companies Act 1985. For example- the rules governing accounts and audits, with appropriate modifications. or more persons are associated for carrying a lawful business with a view to profit can register an LLP. An LLP does not have any shareholder so there is no share capital. There must be two designated members who are responsible for signing and delivering accounts to the registrar of companies. The constitution of the LLP, the members, internal agreement dealing with such matters as a decision of management power and profits need not be registered. So that, in this way, partners is competent to retain their privacy. However, an LLP is required to maintain annual accounts and annual returns. At the time of return the liability of partners are limited to such amount as they have agreed internally to contribute to the debts of a the LLP. If the situation of insolvency arose than all the corporate insolvency regimes are available and applicable to an LLP which remains liable to its creditors to the full amount of its creditors.
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Limited Liability Partnership (LLP) shares many of the features of a normal partnership - but it also offers reduced personal responsibility for business debts.
Unlike members of ordinary partnerships, the LLP itself is responsible for any debts that it runs up, not the individual partners.
Unlike members of ordinary partnerships, the LLP itself is responsible for any debts that it runs up, not the individual partners.
Origin
Major accountancy firms, wanting to limit the liability of an individual partner to acts specifically related to that partner, launched a campaign for the creation of the LLP vehicle in the UK in the 1980s. As a result, the UK Companies Act, 1989 was amended to allow accountancy firms to work as limited liability companies. The joint and several liabilities of general partners, however, remained.
The concept of Limited Liability Partnership originated in 1991 in Texas largely in response to the liability that had been imposed on partners in partnership sued by government agencies in relation to massive savings and loan savings and loan failures in the 1980’s. The Texas statute protected partners from personal liability for claims related to a co-partner’s negligence, omission, in competency, errors or malfeasance. In 1996 all other states acclaimed the concept by the Uniform Partnership Act, 1996.
Similarly in U.K. in 1990’s, the accountancy firm campaigned to secure proportional liability in the LLP. This led to the passing of Limited Liability Partnership Act, in 2000. Under the LLP Act of 2000 of UK, a LLP has been defined as a body corporate, with a legal personality independent of its members without restriction on the number of partners, and with each partner’s liability limited to the contribution made and liability accepted by that partner to the LLP. The law relating to general partnerships was made inapplicable to LLPs. An LLP is required to register the deed of incorporation with the Registrar. The subscribers to the incorporation documents are the initial members/partners; any other person may become a member by entering into an agreement with the existing members. Any changes in the agreement, or indeed in the partnership, have to be duly intimated to, and registered with, the Registrar.
In India, some bodies of professionals have been prohibited from practicing under any incorporated form. The ‘general partnership’ has traditionally been the entity of choice to provide services by professionals such as lawyers, accountants, doctors, architects, and company secretaries. There are several disadvantages attaching to the general partnership form. The larger implications of unlimited liability firms responsibilities were first seen in the 1990s, when many US law firms went insolvent in the wake of a $980 billion Loan and Savings scandal as a result of suits decreed in malpractice litigation. Not only were the firms’ assets completely liquidated, under standard principles of partnership law, the partners were jointly and severally liable for the entire liabilities of the partnership. The prospect of being a partner in a partnership with unlimited personal liability is, as stated before, an unattractive proposition.
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 general partnership, and a private limited company, that is, an LLP. Such an entity would provide the flexibility of a partnership and limiting the owners liability at the same time. The fundamental difference between an LLP and a limited liability company lies in the internal structure (the management-ownership divide inherent in a company is not there in a partnership), and this difference does not impact on the issue whether to confer the privilege of limited liability on a partnership firm of professionals. Since LLPs are now accepted non-corporate entities in developed countries like the USA and UK, it is appropriate to enhance the global competitiveness of our professional firms by ensuring that India’s company law is flexible enough to provide mechanisms and instruments which foster growth of large professional firms.
The issue of Limited Liability Partnership (LLP) has been recommended by the Abid Hussains Committee in 1997. Later on, concept of LLP and the grave need to introduce in India and it was recommended in the report of Naresh Chandra Committee (2003), set up on regulation of private companies and finally JJ Irani Expert Committee on Company Law (2005) recommended introduction of LLP. While Naresh Chandra Committee preferred the application of the LLP to the service industry, Irani Committee recommended that the small enterprise should also be included in the scope of LLP. In India need for introduction of LLP legislation was felt for a long time but the process gained force when Naresh Chandra Committee submitted its report.
Consequently, Limited Liability Partnership Bill, 2006 was introduced by Ministry of Company Affairs on 15 Dec 2006 in Rajya Sabha.
Limited Liability Partnership, A New Beginning in India :-
Recently, on 29 august, 2008, the proposed amendment to Companies Bill are carried out and cleared by the cabinet. The proposed amendment would enable incorporation of single person companies and allow up to 100 partners in partnership firms compared to 20 now but this amendment is only for general partnerships not for Limited Liability Partnership. The amendments mandate that at least 33% of the members on the board of companies should comprise independent director. The new company law will apply to all companies while SEBI (Security Exchange Board of India) Act will be applicable to listed companies in matters such as issues and trading of shares and payment of dividend of shareholders. The bill also provides setting up special courts to deal with various company law offences.
The Indian Government may allow a new form of Legal Entity in India called as Limited Liability Partnership and the proposed change may be one of the key features in the forthcoming budget Limited Liability Partnership (LLP) has element of Partnership and Corporations. A limited partnership is a form of partnership similar to a general partnership, except that in addition to one or more general partners (GPs), there are one or more limited partners (LPs). The GPs are, in all major respects, in the same legal position as partners in a conventional firm, i.e. they have management control, share the right to use partnership property, share the profits of the firm in predefined proportions, and have joint and several liabilities for the debts of the partnership.
As in a general partnership, the GPs have actual authority as agents of the firm to bind all the other partners in contracts with third parties that are in the ordinary course of the partnership's business. Professionals and Investors across the world are initiating business via Limited Liability Partnership due to the following numerous advantage.
As in a general partnership, the GPs have actual authority as agents of the firm to bind all the other partners in contracts with third parties that are in the ordinary course of the partnership's business. Professionals and Investors across the world are initiating business via Limited Liability Partnership due to the following numerous advantage.
- Easy to Form
- Liability of all partner are Limited
- Beneficial Tax planning
- Partner’s has the right to manage business directly
- Easy to dissolve
- Little Compliances as compared to Corporate i.e. Non maintenance of Statutory records and Minutes
- Flexible Management Structure
- Flexible Capital Structure
Mainly LLP is the most favoured business model among professionals in law, accounting and financial services in the developed world.
Large number of professional partnerships would be provided a platform for a wide range of business activities to garner greater resources and talent, face competition from multinational firms including foreign law firms (their entry is expected within a legal framework which is presently under process) and participate in the process of globalization in a meaningful manner. The introduction of LLP is necessary in many cases:
A). Service Sector:- In India, general partnershiphas traditionally been the entity of choice to provide services by professionals such as lawyers, accountants, doctors, architects, and company secretaries. But in general partnership, the maximum number of partnership is restricted up 20 which prevent the growth of professional firms. This amendment is yet pending before parliament which suggests enlarging the number of members to 100. It is necessary to fill the gaps in business structure which is possible only by the introduction of LLP for encouraging high growth in service sector on India. Since LLPs are accepted non-corporate entities in developed countries like the USA, it is appropriate to enhance the global competitiveness of professional firms by ensuring that India’s company law is flexible enough to provide mechanisms and instruments which foster growth of large professional firms.
B). Small Scale Industries:- the small scale industries are facing a problems of inadequate finance, especially availability of capital. LLP is a very useful vehicle for small scale industries in foreign countries and it catered the needs of small scale sectors and venture capital funds. LLPs merge the advantage of the traditional corporate (company) structure and partnership structure. The LLP will help more “marriages between brains and bank balance” take place within the small enterprise or business sector. The ministry of Small Scale Industries (SSI) is also inclined for bringing small enterprises in the ambit of the proposed Limited Liability Partnership Act. The enactment of the Bill will help more small enterprises to get organised either as companies or limited liability partnerships or improve their capability to access institutional credit as the LLP system combines the advantage of traditional corporate structure and partnership structure.
Conclusions:
LLPs have been in development in various other countries such as UK, USA, Australia, Singapore etc. It is a form of business entity, which allows individual partners to be restricted from joint liability of partners in a partnership firm. At present, this LLP bill is in form of mini companies act. The Liability of the partners incurred in the normal course of business is that of LLP and it does not extend to the personal assets of the partners. This is a great relief to the partners, particularly professionals like Company Secretaries, Chartered Accountants, Cost Accountants, Advocates and other professionals. The hybrid structure of LLP will facilitate entrepreneurs, service providers and professionals to organize and operate in an innovative and efficient manner for effectively competing in the global market.
With the liberalisation and globalisation of Indian economy since 1990s, the LLP, as an alternate mode of carrying business, will encourage joint ventures and would make Indian service sectors globally competitive. The issues raised by the writer during the analysis of the Bill needs to be addressed so that proposed law become more comprehensive in tune with requirement of the modern business environment.
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