Limited Liability Partnership- A Convenient Business Vehicle

A Limited Liability Partnership (LLP) has the best of both partnership and company. It has the features of a partnership, vis-à-vis, agreement, to carry lawful business, and motive to make profit, as well as features of a company, vis-à-vis, perpetual succession ( coming and going out of members do not affect the continued existence of the company), and legal personality separate from its partners. Thus, LLP is a hybrid of a company and a partnership. But the main attraction of LLP which makes it a popular mode for conducting business is the limited liability of its partners. The liability of the partners is limited to their agreed contribution in the LLP i.e. the partners will be liable only to the extent of their contribution. No partner would be liable on account of the independent or unauthorized acts of other partners. On the other hand, in a partnership originating from the Partnership Act 1932, every partner is liable individually as well as jointly for all acts of the firm, thereby tethered with unlimited liability. As the firm cannot, literally, act on its own, act of the firm means those acts done through its human agents. Section 2(a) of the Partnership Act 1932 defines “act of the firm” as such-

2(a) an "act of a firm" means any act or omission by all the partners, or by any partner or agent of the firm which gives rise to a right enforceable by or against the firm.

Indian partnership firms are mostly family-owned and there’s lack of trust in having outsiders, but with the introduction of LLP, things will change because the liability here is limited.

Earlier, where two or more persons were desirous of carrying on joint business enterprises, their choices were to either form a company or a partnership. The advantage of trading with limited liability was elaborated by Buckley J in London and Globe Finance Corporation[1]as follows:

“The statutes relating to limited liability have probably done more than any legislation of the last fifty years to further the commercial prosperity of the country. They have, to the advantage of the investor as well as of the public, allowed and encouraged aggregation of small sums into large capitals which have been employed in undertakings of great public utility largely increasing the wealth of the country.”

Though he said this in relation to incorporating a company, it is applicable to Limited Liability Partnerships as well.

In order to make Indian businesses more conducive to growth and development and to tide over the shortcoming of unlimited liability, the Parliament enacted the Limited Liability Partnership Act 2008 whereby individual partners are detached from the joint liability created by another partner’s wrongful acts or misconduct. In India, we recognize several forms of business entities like sole proprietorship, Hindu Undivided Firms, partnership firms and companies and the latest to join the bandwagon is Limited Liability Partnership. Handoo and Handoo, a legal consulting firm in New Delhi, is the first firm to register under the new Act. The new business form will be beneficial to professionals like chartered accountants and company secretaries and will allow them to come together and form an LLP and provide a single platform to all people wanting to avail themselves of professional services. It was the Committee headed by Naresh Chandra that came up with the framework for introducing LLP in India. The Committee stated thus-

“With Indian professionals increasingly transacting with or representing multi-nationals in international transactions, the extent of the liability they could potentially be exposed to is extremely high. Hence, 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 the partnership simpliciter, or general partnership, and a private limited company, that is, an LLP. Such an entity would provide the flexibility of a partnership (allowing the owners to adopt whatever form of internal organization they prefer), and limiting at the same time, the owner’s liability with respect to the LLP.”

It must be noted that within a year of the Act coming into effect (the LLP Act came into force on April 1, 2009), the number of LLP’s in India is 976 (as registered until 18 March 2010)[2]. This is a clear indication of its popularity and the reasons being-

· Low cost of formation
· Easy to establish
· Easy to manage and run
· No requirement of any minimum capital contribution (contribution by partners may be tangible, intangible, movable or immovable)
· Easy to dissolve

With the enactment of the LLP Act 2008, it has provided the much needed impetus for entrepreneurial and commercial growth in India.

1. A LLP has a distinct personality. It is a legal entity separate from its partners having perpetual succession. By being a legal entity, it can sue and be sued in its name. It has perpetual succession just like a company meaning it will continue to exist so long as it is not wound up or dissolved. The death or insolvency of the partners does not affect the continued existence of the LLP. Any change in the partners does not affect the existence, rights or liabilities of the LLP. To form a LLP, there has to be a minimum of two partners and the upper limit in membership is not fixed. This Act permits foreign nationals to be partners in LLP formed in India. Also, LLP’s can be formed without even an Indian citizen. All that the Act requires is that at least one must be a resident in India meaning a person who has stayed in India for a minimum period of 182 days during the immediately preceding one year. As the name suggests LLP comes with limited liability. And this limited liability is conferred on its partners. According to Section 28, a partner is not personally liable, directly or indirectly for an obligation of the LLP. It is the LLP as a whole that carries the burden of liability. Section 27 states that the LLP is liable if its partner is liable to any person as a result of a wrongful act or omission on his part in the course of the business of the LLP or with its authority. Also, the obligation of the LLP is solely its liability and nobody else’s and these liabilities are met out of the property of the LLP. However, the LLP is not bound by anything done by a partner in dealing with a person if the partner is not authorized to do that particular act and the person knows that he has no authority or does not know or believes him to be a partner of the LLP. Yet another distinguishing feature of LLP is the protection for whistleblowers. By virtue of Section 31, the Act has incorporated the concept of whistle blowing which finds no mention in the Partnership Act 1932 or the Companies Act 1956. This Act protects those individuals who are bold enough to disclose the corruption or irregularities in the administration of the organization. This is indeed a thoughtful and apt section incorporated by the legislators in the light of what had happened to Satyanendra Dubey. He had exposed the corruption in the National Highway Authority of India and in consequence met with a tragic end. It specifically provides that no partner or employee shall be discharged or demoted or suspended or threatened or harassed or in any other manner discriminated against merely because of his providing useful information.
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[1] Re [1903 ] 1 Ch 728, 731
[2] As per the information available on www.llp.gov.in

The  author can be reached at: marina@legalserviceindia.com