Concept Of Limited Liability Partnership In India

Concept of Limited Liability Partnership

INTRODUCTION

These days the concept of limited liability partnership has become one of the most recognised ways of doing business in all countries of the world.  India is also among those countries where the business is carried on in the form of limited liability partnership. India introduced its Limited Liability Partnership Act in 2008. A Limited Liability Partnership also called as an LLP combines features of both the Partnership and the Company into one single organisation. In other words, LLP is a way of doing business that provides the advantages of limited liability of a company and at the same time gives flexibility to its members as in the case of partnership firm.

Thus, a Limited Liability Partnership (LLP) is a type of partnership in which the liability of the partners is limited unlike the partnership governed by the Indian Partnership Act, 1932. In an LLP, a partner cannot be held liable for the wrongful conduct or negligence of his co-partner. This is an important point which distinguishes it from the unlimited partnership. In an LLP, the partner’s liability is therefore limited like that of shareholders in a company. Thus, an LLP is a combination of both partnership and company and because of this very feature, it is appropriate for small and medium-sized enterprises.

ORIGIN OF LLP

The concept of Limited Liability Partnership emerged in the early 1990s in the United States in response to the sudden fall in real estate and early prices in Texas in the 1980s and the subsequent effect it had on the banks and other financial institutions. This collapse led to a large wave of bank and savings and loan failures. Because the amounts recoverable from the banks were small, efforts were made to recover assets from the lawyers and accountants who had advised the banks in the early 1980s. The reason was that partners in law and accounting firms were subject to the possibility of huge claims which would bankrupt them personally, and the first LLP laws were passed to shield innocent members of these partnerships from liability. Thus, the first ever law on LLP was enacted in Texas on 26th August 1991, which was then followed by other countries of the worlds. Many countries that have recognised the concept of Limited Liability Partnership include Canada, Germany, Japan, China, Greece, Singapore, etc., India being one of them.

LIMITED LIABILITY PARTNERSHIP IN INDIA

The recommendations of the J.J. Irani Committee and the Naresh Chandra Committee-II led the making of the draft bill for introducing LLP in India. The Cabinet approved the Bill on December 7, 2006, which was then tabled in the Rajya Sabha on December 15, 2006.  Subsequently, the Department Related Parliamentary Standing Committee on Finance recommended certain changes in the draft Bill, 2006.  The committee submitted its final report to the Ministry for Corporate Affairs.

Finally the Limited Liability Partnership (LLP) Bill, 2008 received the approval of the Cabinet on 1st May 2008. Both Houses of Parliament passed the bill without any changes. The Bill then received the assent of President on 7th January 2009. In India, The Limited Liability Partnership Act, 2008 was published in the official Gazette of India on January 9, 2009, and has been notified with effect from 31 March 2009. The LLP Act, 2008 thereby makes provision for the formation and regulation of limited liability partnerships and matters connected with it.

SALIENT

• The LLP is a body corporate having separate entity from its partners and perpetual succession.
• An LLP in India is governed by the LLP of 2008 and, therefore, the provisions of Indian Partnership Act, 1932 are not applicable to it.
• Every Limited Liability Partnership shall use the words “Limited Liability Partnership” or its acronym “LLP” as the last words of its name.
• An LLP is a result of an agreement between the partners, and the mutual rights and duties of partners of an LLP are determined by the said agreement subject to the provisions of LLP Act, 2008.
• The LLP being a separate legal entity is liable for all its assets, with the liability of the partners limited only to the amount of contributed by them just like a company. No partner will be individually liable for any wrongful acts of other partners. However if the LLP was formed for the purpose of defrauding creditors or for any fraudulent purpose, then the liability of the partners who had the knowledge will be unlimited.
• There must be at least two designated partners in every LLP of whom one shall be resident in India.
• Every LLP shall maintain annual accounts to show its true state of affairs. It must prepare a statement of accounts and solvency every year and filed with the Registrar.
• The Central Government may, whenever it thinks fit, investigate into the affairs of an LLP by appointing a competent Inspector.
• A firm, private company or an unlisted public company have the option to convert itself into LLP as per the provisions of the Act. Upon such conversion, the Registrar will issue a certificate to that effect. After issuance of a certificate of registration, all the property of the firm or the company, all assets, rights, obligations relating to the company shall be vested in the LLP so formed, and the firm or the company stands dissolved. The name of the firm or the company is then removed from the Registrar of Firms or Registrar of Companies, as the case may be.
• Like the company, an LLP can be wound up either voluntary or by the Tribunal to be established under The Companies Act, 1956.
• The LLP Act 2008 also enables the Central Government to apply the provisions of the Companies Act whenever it thinks appropriate and must issue notification to that effect provided such notification must be laid before each house of the Parliament for a total period of 30 days and shall be subject to any modification as may be approved by both Houses.

CONCLUSION

Though India recognised the concept of Limited Liability Partnership very late, LLP in India has finally found its space. LLP, which is a combination of both company and partnership, is beneficial to small and medium business enterprises. The concept of LLP is also encouraged by the Government as it provides various tax benefits and enables the entrepreneurs to focus on the core activities of the business. It is the type of organisation that is easy to maintain while at the same time providing limited liability to the owners. LLP is one of the simplest forms of business which is easy to incorporate and manage. Because of its nature, LLP has become very popular these days, and a number of firms and companies are now getting converted into the concept of Limited Liability Partnership.

(This blog was originally published on IPLeaders as  Overview Of Limited Liability Partnership In India  by Harsha Jeswani, National Law Institute University, Bhopal)

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