From the Dawn of the era of liberalization and globalization there has been a surge in economic growth of our country. Various amendments have been made in our legislations to attract foreign investment and capital inflows. If we glance at the history of any prosperous civilization one of the reasons that can be attributed to is the economic structure of that civilization. There are ample references that can be cited in this context where the growth and prosperity of a civilization was solemnly rested on the economic sphere which is in the form of trade and commerce and did not involve the complexities of the present generation. But with the advent of the global economy it was largely felt among the economic pundits to device ways for encouraging and developing entrepreneurship skills of an alternate corporate venture to the traditional partnership, with unlimited personal liability on the one hand, and, the statute-based governance structure of the limited liability company on the other, in order to enable professional expertise and entrepreneurial initiative to combine, organize and operate in flexible, innovative and efficient manner.

The Limited Liability Partnership (LLP) is viewed as an alternative corporate business vehicle that provides the benefits of limited liability but allows its members the flexibility of organizing their internal structure as a partnership based on a mutually arrived agreement. The LLP form would enable entrepreneurs, professionals and enterprises providing services of any kind or engaged in scientific and technical disciplines, to form commercially efficient vehicles suited to their requirements. This format would be quite useful for small and medium enterprises in general and for the enterprises in services sector in particular, including professionals and knowledge based enterprises. Owing to flexibility in its structure and operation, the LLP would also be a suitable vehicle for small enterprises and for investment by venture capital. Keeping in mind the need of the day, the Parliament enacted the Limited Liability Partnership Act, 2008 which received the assent of the President on 7th January, 2009.

As proposed in the Bill, LLP shall be a body corporate and a legal entity separate from its partners. It will have perpetual succession. While the LLP will be a separate legal entity, liable to the full extent of its assets, the liability of the partners would be limited to their agreed contribution in the LLP. Further, no partner would be liable on account of the independent or unauthorized actions of other partners, thus allowing individual partners to be shielded from joint liability created by another partner’s wrongful business decisions or misconduct.

Every partnership firm has its own advantage and disadvantage. The advantage of LLP is that it does not have the corporate procedures of annual meetings and minutes. With regard to taxes, the LLP is not a separate taxable entity but instead the profits past through to the partners who pay for them as income tax. In other words, a LLP is indeed advantageous because of comparatively lower cost of formation, lesser compliance requirements, easy to manage and run and also easy to wind-up and dissolve, no requirement of minimum capital contributions, partners are not liable for the acts of the other partners and importantly not minimum alternate tax (as of date).
On the other hand the disadvantage is that, any partner without the other may bind the LLP. Money and property contributed to the LLP becomes owned by the partnership unless otherwise stated and the contributor is not entitled to its return except as stated in the partnership agreements. LLP’s vary in legal requirements and liabilities by state, are not recognized in many states, do not have the easy of transfer and investment that a corporation structure provides and therefore are regarded as less preferable to other business.

 Main Features of an LLP

LLP is a separate legal entity separate from its partners, can own assets in its name, sue and be sued.

Unlike corporate shareholders, the partners have the right to manage the business directly.

One partner is not responsible or liable for another partner’s misconduct or negligence.

Minimum of 2 partners and no maximum.

Should be ‘for profit’ business.

Perpetual succession.

The rights and duties of partners in LLP will be governed by the agreement between partners and the partners have the flexibility to devise the agreement as per their choice. The duties and obligations of Designated Partners shall be as provided in the law.

Liability of the partners is limited to the extent of his contribution in the LLP. No exposure of personal assets of the partner, except in cases of fraud.

LLP shall maintain annual accounts. However, audit of the accounts is required only if the contribution exceeds Rs. 25 lakhs or annual turnover exceeds Rs.40 lakhs.

LLP a variant of General Partnership-divergent from the legal realms of General partnership. The crux of the discussion among the legal fraternity is the mutual existence of the two bodies. Keeping in mind the pros and cons of both the bodies a questions which arises and needs to be answered is the modus operandi of the two, whether they will successfully operate in their own plane or one will be kept in abeyance in near future?

A Limited Liability Partnership is essentially a General Partnership but each partner is not to liable for certain acts of other partners. State registration is required and some states require proof that the partnership has obtained adequate liability insurance or have adequate assets to satisfy potential claims. State law typically limits LLP’s to formation by accountants, lawyers, architects and/or similar professionals.
An LLP also limits the personal liability of a partner for the errors, omissions, incompetence, or negligence of the partnership’s employees or other agents. State laws vary regarding LLP’s and only about half of the states recognize them. Each of the partners (there can be more than 2) shares in the profits and shares in the debts of the LLP, including losses, unless the partner is a limited partner. A LLP is considered an association of co-owners for tax purposes, and each co-owner is taxed on his or her proportional share of the LLP profits. Like other businesses, a LLP needs to have a license to do business in towns in which it has offices and may use an assumed name, so that Blow LLP could operate as Blow Holes. All partners must consent in sale of the assets of the partnership. A partner’s interest in a LLP is considered personal property that may be assigned to other persons, but if so transferred the transferee only receives the financial benefit and does not become a partner. The death of a partner terminates the LLP, and filing dissolution of the partnership with the state also terminates the LLP.

Conclusion

The Limited Liability Partnership is a form of business structure which combines best elements of partnership and corporate structures of caring out the business and provides considerable flexibility in management and for conducting businesses, especially to small and medium firms. The recommendation of Naresh Chandra Committee for Limited Liability Partnership in India is a step further to modernization and recognising the needs of changing times. The government has accepted the recommendations with applause. But, it remains to see what the government will do next. The recommendations for LLP is very sketchy and it remains to be seen what changes will be brought forth in future. Until then it will be difficult to predict the future of LLP in India. But if the government goes ahead and implements the suggestion it would be the beginning of a new era in India. The introduction of a tax regime will provide a road of certainty in relation to the tax costs associated with carrying the business via the LLP mode. LLP, a legal form available world-wide is now introduced in India and is governed by the Limited Liability Partnership Act 2008, with effect from April 1, 2009. It combines the advantages of ease of running a Partnership and separate legal entity status and limited liability aspect of a Company.

By LawZ Bureau,