LCI Learning

Share on Facebook

Share on Twitter

Share on LinkedIn

Share on Email

Share More

LLP in India

17 February 2009  
     Share   Bookmark

The number of companies in India has rise tremendously due to various reason primarily being industrial revolution and the implementation of 5 yr plans. According to an estimate there were 30,000 companies in 1956 but now they are close to 7 lakhs. Indian companies were also mobilizing resources at a scale unimaginable even a decade ago, continuously entering into and bringing new activities into the fold of the Indian economy. A limited liability partnership is a new form of legal business entity with limited liability. The rise in the number of companies has put India on the international front competing with the international counterparts; this has made India providers of a wide range of goods and services while increasing employment opportunities at home. One very important feature of a new age company is limited liability partnership (abbreviated as LLP). In an LLP one partner is not responsible or liable for another partner's misconduct or negligence. This is an important difference from that of a limited partnership. In an LLP, all partners have a form of liability for each individual's protection within the partnership, similar to that of the shareholders of a corporation. However, unlike corporate shareholders; the partners have the right to manage the business directly. As opposed to that, corporate shareholders have to elect a board of directors under the companies act. The board organizes itself (also under the laws of the various state charters) and hires corporate officers who then have as "corporate" individuals the legal responsibility to manage the corporation in the corporation's best interest. An LLP also contains a different level of tax liability than a corporation. LLP is more suited for businesses where all investors wish to take an active role in management.

Difference in LLP of U.S and U.K
There is considerable confusion between LLP as constituted in the U.S. and that introduced in the UK in 2001 and adopted elsewhere. In UK LLP is, despite the name, specifically legislated as a corporate body rather than a Partnership. LLP is a corporate form that enables professional expertise and entrepreneurial initiative to combine, organize and operate in an innovative and efficient manner.

Need for LLP
For a long time, a need has been felt to provide for a business format that would combine the flexibility of a partnership and the advantages of limited liability of a company at a low compliance cost. The Limited Liability Partnership format is an alternative corporate business vehicle that provides the benefits of limited liability of a company but allows its members the flexibility of organizing their internal management on the basis of a mutually arrived agreement, as is the case in a partnership firm. This format would be quite useful for small and medium enterprises in general and for the enterprises in services sector in particular. Internationally, LLPs are the preferred vehicle of business particularly for service industry or for activities involving professionals. An LLP is similar in some ways to a standard Partnership, except that the individual members have lower liabilities to any debts which may arise from running the business. There are more administrative duties involved compared to the Partnership business structure.

In fact, an LLP is more similar to operating a Limited Company. In terms of liability, the Limited Liability Partnership is itself liable for debts run up in running the business, rather that the individual members of the LLP. As a result, LLP's are only recommended for profit running businesses. Individuals or existing businesses can be members of a Limited Liability Partnership, and the LLP must have at least 2 members. The rights and responsibilities of all members would usually be laid out in a "Deed of Partnership”. The LLP would typically select a "Designated Member" (or members) who would be responsible for maintaining communications with Companies House, preparing accounts and acting for the LLP if for some reason it is dissolved further down the line.

Who is a designated member and what are there responsibilities?
Designated members have the same rights and duties towards the limited liability partnership as any other member. These mutual rights and duties are governed by the limited liability partnership agreement and the general law. The responsibilities given to designated members are as follows-
# appointing an auditor (if one is needed);
# signing the accounts on behalf of the members;
# delivering the accounts to the Registrar;
# notifying the Registrar of any membership changes or change to the registered office address or name of the limited liability partnership;
# acting on behalf of the limited liability partnership if it is wound up and dissolved

Various steps have been taken in order to implement LLP in India, these include the Abid Hussain Committee 1997, the Naresh Chandra Committee on Private Companies and Partnerships 2003 and the Irani Committee for new Company.

The salient feature of LLP bill 2008 is -
(i) The LLP will be an alternative corporate business vehicle that would give the benefits of limited liability but would allow its members the flexibility of organizing their internal structure as a partnership based on an agreement.

(ii) The proposed Bill does not restrict the benefit of LLP structure to certain classes of professionals only and would be available for use by any enterprise which fulfills the requirements of the Act.

(iii) 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 un-authorized actions of other partners, thus allowing individual partners to be shielded from joint liability created by another partner’s wrongful business decisions or misconduct.

(iv) LLP shall be a body corporate and a legal entity separate from its partners. It will have perpetual succession. Indian Partnership Act, 1932 shall not be applicable to LLPs and there shall not be any upper limit on number of partners in an LLP unlike an ordinary partnership firm where the maximum number of partners can not exceed 20.

(iv) An LLP shall be under obligation to maintain annual accounts reflecting true and fair view of its state of affairs. Since tax matters of all entities in India are addressed in the Income Tax Act, 1961, the taxation of LLPs shall be addressed in that Act.

(v) Provisions have been made in the Bill for corporate actions like mergers, amalgamations etc.

(vii) While enabling provisions in respect of winding up and dissolutions of
LLPs have been made in the Bill, detailed provisions in this regard would be provided by way of rules under the Act.

Generally limited liability partnership is not applicable for all activities such as non-profit-making activities. Before the concept being introduced in India it has been accepted in countries like U.S.A, U.K, Australia, and Germany. 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. These professionals may also form multi-disciplinary LLPs to meet the changing economic environment. The introduction of LLPs in India is a good beginning towards a long journey. 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. The passing of LLP bill 2008 will definitely bring a remarkable difference in the existing law related to company laws in India. The LLP is supposed to be introduced in India from the next financial year starting from 1st April 2009.

"Loved reading this piece by Abhishek?
Join LAWyersClubIndia's network for daily News Updates, Judgment Summaries, Articles, Forum Threads, Online Law Courses, and MUCH MORE!!"

Tags :

Category Others, Other Articles by - Abhishek