What is the concept of Limited Liability Partnership?

ABSTRACT

This paper is aimed at explaining the concept of “Limited Liability Partnership”. As it is clear from the name i.e. the liability of the partners is limited which is different from the old one as in the case of loss the liability of all the partners was not limited. The key factor of LLP is that it has benefits of company as well as partnership. To know more about this, first of all we must know about what is company and partnership. According to the Indian Partnership Act, 1932 it is a relation between two or more person who consented to share the profits of a business which will be carried by them. It has no separate legal entity which is different from its members whereas if we talk about company it has a separate legal entity which is different from its members. It has a perpetual succession which means the company will go on forever and the members may come and go.

BACKGROUND

It is first grown up in United States and the concept arises in India through Limited Liability Partnership, 2008. However, if we talk about its history then it is entirely interesting. In the late late 1980s and early 1990s there were more than hundred saving and loan firms which were proclaim insolvent at the time of financial crisis. Due to this many firms of accounts and legal fall in and also have to face huge legal claims which are put in motion by the government of US. After this, there were many partners who were not responsible and even though they are held liable to repay compensation of millions of dollars. Then, in the year 1991 a new idea of LLP was established in Texas City which got popularity in majority of United States and afterwards it was passed. In India it is just a newly established legal entity which is beneficial for business of small and medium size. As there is a universal truth i.e. Need is the mother of all the inventions and because of this India acquired the idea of LLP which was tested by many countries like China, UK, US etc. Therefore, to deal with the hitch of firm and company there was an urge of a legal entity which can have the features of both of them i.e. partnership and company.

GENESIS OF THE BILL

In India there were various committees and expert groups i.e. Bhat Committee (1972), Nayak Committee, 1992 and a group of Dr. S.P. Gupta which is for the development of Small scale Enterprises, 2001 which has done various efforts to mention the urge of LLP. In the past the need for a individual legislation for LLP has been put forward by a committee which works on regulation of Private companies and partnerships which is managed by Shri Naresh Chandra (2003) and Dr. J.J. Irani.

INTRODUCTION

It is a type which provides protection of personal liberty to all the partners.. Limited Liability Partnership is a type of partnership in which the liability of the partners is limited. Under this partnership if any one partner does any misconduct or negligence then the other partner will not be liable for his misconduct. This is the main difference between the unlimited liability partnership and limited liability partnership. A LLP have different tax liability than other corporations. The extent of single partner’s liability depends on the condition of the state’s LLP rules. As there are many states which provides protection only against the claims of the tort and it do not extend their limit to the partner’s own negligence who supervise in wrongful conduct or something else while the other states provide wide protection which includes the claims which is made by the contract and taken by the partnership’s creditors.

To form an LLP it must be registered with the appropriate authority and the various requirements is fulfilled. As different states have their own criteria where some states require proof whether that the partnership has sufficient liability insurance or not. All the states after paying the required fees will give a registered LLP and it also require that the partnership includes LLP abbreviation in its name. A partnership which provides some professional services can form a PLLP i.e. Professional Limited Liability Partnership.

TYPES OF BUSINESS ORGANIZATION

There are various types of business organization which has their own conditions to be fulfilled are as follows:-

SOLE PROPRIETORSHIP – These types of business are small in size which is owned, controlled by single individual i.e. sole proprietors. Under this business the individual have full control over his business.

PARTNERSHIP – It is regulated by the Partnership Act, 1932. In this type of partnership two or more persons agreed and form a partnership deed and share the risk in the equal ratio. The main disadvantage of this partnership is the liability of partners is unlimited for the firm and if any partner does some misconduct then firm is liable for all this on behalf of that partner.

JOINT VENTURE – This is a type of partnership which is generally formed to complete a project or a particular project for a specified period of time. It is not done for indefinite period of time.

COOPERATIVE SOCIETY – In this type of organization there is association of individual who form together to earn collectively.

COMPANY – Prior it is regulated by the Companies Act, 1956  but now it is amended and regulated by the Companies Act, 2013. The company and its members are separated from each other. Members may come and go but the company goes on forever which is called as perpetual succession.

CHARACTERISTICS OF AN LLP

Ø It is governed by the Limited Liability Partnership Act, 2008 which has come into force with effect from April 1, 2009.

Ø It is a separate entity and separate from its partners which has perpetual succession and can be sued in its own name.

Ø  No partner will be liable for the misconduct of the other partner.

Ø  The minimum limit in an LLP is 2 and maximum there is no limit.

Ø  The purpose of this partnership should be for profit.

Ø  The rights and duties are governed by the agreement which is made at the formation of an LLP.

Ø  There is no personal liability of the partners except in the cases of fraud.

Ø  The structure of management is versatile.

Ø  The provisions of partnership will not be applied in LLP.

Ø  The requirement of legal things and procedure is simple.

Ø  It provides a easy procedure for small scale business.

NATURE AND STRUCTURE OF LLP

It is a type of partnership which gives the benefit of the limited liability. It is a different entity which is basically liable to the assets to the full extent whereas the partner’s liability is limited to their contribution. The nature of LLP is perpetual succession which means the partnership will go on forever and it also has a common seal which is quite identical to company.  It can sue and be sued in its own name. However, nothing will change in the existence if there will be no change in the partner’s contribution. If we talk about the major benefit of LLP i.e. it can hold property in its own name as well as can enter into a contract.  Generally it operates on the agreement which is made by the partners.

DIFFERENCE BETWEEN LLP AND PARTNERSHIP

Ø  Both are administered by different act i.e. LLP is from LLP act and Companies Act and Partnership is from Indian Partnership Act, 1932.

Ø  It has a distinct legal entity whereas partnership does not have.

Ø  It has a characteristic of perpetual succession whereas partnership does not have.

Ø  It has a limited liability whereas in the partnership the partners have unlimited liability.

DIFFERENCE BETWEEN COMPANY AND LLP

Ø  In the case of company the minimum capital is 1 lakh in case of private company and in public it is 5 lakh whereas in LLP there is no minimum requirement which is needed.

Ø  Generally companies are preferred by those people who are doing their business on large scale whereas LLP is mostly preferable by professional person.

Ø  In case of LLP no audit is necessary if the turnover exceeds the amount of Rs 40 lakhs whereas in company audit is necessary.

HOW AN LLP IS FORMED?

To form a LLP there are some important steps which are discussed below:-

PARTNER

For becoming a partner in an LLP the basic requirement of an LLP is that there must be at least two persons whether artificial or natural. If in any case any Body Corporate is a partner then it will be required to nominate a natural person on the behalf of him.

These can become a partner in an LLP:-

·       A company which is incorporated in India and outside India.

·       An LLP which is incorporated in India and outside India.

·       The individuals who are the residents in India and outside India.

PROCESS OF FORMULATION OF AN LLP

·       Acquire DPIN , Acquire DSC

·       Register DPIN,DSC with LLP

·       Check name Availability

·       Download LLP forms

·       File Electronically

·       Track Status

·       Receive Certificate after

·       LLP ready to Function

LIABILITY OF THE PARTNERS

·       Liability of Partner falling below two

Under the act the minimum requirement of partners is two but if under some circumstances the number of partners is reduced below two and the partnership carries its business for a period of more than six months then at that time the only partner who is carrying business while aware about the fact of falling the number of partner below two will be personally liable for the operations which are done during that period.

·       Liability for Cheques

 If a partner signs or authorizes the signature of cheques, order, etc. on which the LLP’s name is incorrectly presented is liable to the holder of the instrument unless the amount is paid by the LLP.

Liability of Partner By Holding Out

“Holding out” means when a person himself said that he is a partner of the firm and actually not being so. Basically this situation comes when the partner is retired from the firm and the third party has no notice of this.

In a renowned judgment Seraf v. Jardine (1882) 7 A.C. 345  [1] - In this case a partner is retired from the firm and a creditor was giving advances to the firm. Then in this it was held that the retired partners as well as the firm are liable to repay the amount. However, a third party may also take an action against a partner by ‘holding out’ when he has acted as a partner in the firm..

EXCEPTION TO THE LIMITED LIABILITY OF AN LLP

Section 30(1) of LLP provides for unlimited liability of the LLP and if partners does any act with the intention to deceive any other person or to do any act which is fraudulent. Further, it says that if in any case the partner does any of the above acts the firm will be liable to the same extent unless the act was done without the knowledge and authority of the firm. In addition to this, it stated that if any partner or firm or employee performs the act in a fraudulent manner then they will be liable to pay compensation to the person who has suffered loss.

CONCLUSION

Through this article, the author wants to conclude that it is best to say that a limited liability partnership not only provides protection to the partners but also keeps all the benefits of a partnership. However, one of the major advantages is that it requires low cost of incorporation. It is a partnership in which the partner’s liability is liability is limited except in the cases of fraud. Nowadays, many developments have been done so there are many options which are available for businessman to choose for different types of partnership. The major benefit for the partners is that the liability is limited to the extent which is invested in the firm. As there are various people who want to do their business on small scale so it is the best option to be chosen by them.

Concisely, it has the ability to act as an engine which works for the economic development of the country and also for the professional services which are given in the country. It acts as a model of business which encourages the small scale businessman. Therefore, this new concept helps the small scale businessman as well as the other people.

Tag: Limited Liability Partnership 

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[1] Seraf vs. Jardine (1882) 7 A.C. 345