The Article ‘Overview of the Limited Liability Partnership, Act 2008’ deals in a comprehensive manner with the Limited Liability Act, its purpose, objective, and its importance in India. The article further explains the difference between the Limited Liability Partnership and a Company. The main feature of this Act is that each partner’s liability is limited to the amount… Read More »

The Article ‘Overview of the Limited Liability Partnership, Act 2008’ deals in a comprehensive manner with the Limited Liability Act, its purpose, objective, and its importance in India. The article further explains the difference between the Limited Liability Partnership and a Company. The main feature of this Act is that each partner’s liability is limited to the amount he/she put in the business which was not available in the Indian Partnership Act, 1932. The Limited Liability Partnership, Act 2008 brought a radical change as we find that LLP is such a body corporate that has got more credibility and thus smoothly enables it to raise funds from financial institutions.

Introduction: Limited Liability Partnership

India has seen a steep growth in the service sector along with the Information Technology sector and Indians are being recognized internationally and being acknowledged for their considerable contribution not just in the service sector but also in the IT sector worldwide. Now, to provide a further push to the economic growth of the nation as well as of an individual, it is important that entrepreneurship knowledge and risk management are together balanced for a better outcome.

While people are providing their services worldwide like enterprises in new knowledge and technology-based fields, or the ones engaged in any scientific, technical, or artistic discipline, for any activity relating to research production, design, and provision of services, professionals like CA, CS, and CWAs, Small Sector Enterprises like that of handloom and handicrafts, etc, they need a framework that reduces their liabilities and allows them to focus more on their actual work. So, here comes into play the LLP i.e. Limited Liability Partnership.

What is an LLP?

Section 3(1) of the Limited Liability Partnership Act, 2008 defines LLP as

“a body corporate, formed and incorporated under this act and is a legal entity separate from that of its partner”. [1]

So, LLP shall be a body corporate and a legal entity separate from its partners. It will have perpetual succession. While the LLP is a separate legal entity liable to the full extent of its assets, the liability of partners would be limited to their agreed contribution. Mutual rights and duties of the partners within an LLP are governed by an agreement between the partners or between the partners and the LLP as the case may be.

LLP in India

Prior to India, there have been many countries that already had accepted the concept of the Limited Liability Partnership in function. Most of which are based on or we can say that the legislations have been borrowed from the UK LLP Act, 2000 and Singapore LLP Act, 2005.

LLP is present in countries like the United Kingdom, the United States of America, various Gulf countries, Australia, and Singapore, and thanks to the Dr. J.J. Irani Committee that the Limited Liability Partnership Act came to India as well.

So does it mean that prior to this committee no one thought of it? No. There were several committees that were set up prior to the J.J. Irani committee, like the Bhat Committee in 1972, the Naik Committee in 1992, and the Expert Committee on Development of Small Sector Enterprises chaired by Sh. Abid Hussain in 1997 and Study Group on Development of Small Sector headed by Dr. S.P. Gupta, 2001. And immediately before the J.J. Irani committee, the Ministry of Company Affairs had also set up a Committee on Regulation of Private Companies and Partnerships headed by Sh. Naresh Chandra in 2003.

In the making of this LLP, the country witnessed true democracy wherein, the Ministry of Corporate Affairs put forth a Concept Paper on LLP Law on its website in 2005, for all the interested citizens to give their opinion on all possible aspects of LLP law. Along with making it public, the Concept Paper was also sent to concerned Ministries/Departments and other bodies like the Comptroller and Auditor General of India, Securities and Exchange Board of India, Insurance Regulatory Development Authority, etc. for their opinions.

The Limited Liability Partnership Bill was passed by the Lok Sabha on 13 December 2008 and thereafter it received the assent of the President on 7 January 2009 after which it gained recognition as the Limited Liability Partnership Act, 2008.

Purpose of the Act

When already there are laws like Contract Act, Companies Act, and Partnership Act, which served in the corporate world, then why was there a need to make LLP Act?

The intention behind the enactment of this statute was to provide an alternative corporate business vehicle that contains provisions for the formation and regulation of limited liability partnerships and the matters connected to them. Through limited liability, it becomes easy for professionals and entrepreneurs to make a structure that suits their requirements owing to the fact that there is flexibility in the nature of LLP.

Objectives of the Act

As mentioned earlier that India has become a hub for highly skilled budding entrepreneurs and professionals and to serve them better the LLP Act had to come into force with the following objectives.

  • To form a commercially efficient structure of the corporate business.
  • To prove to be suitable machinery for small enterprises and for investment by venture capital.
  • To enable professional expertise and entrepreneurial initiative to combine, organize and operate in a flexible, innovative, and efficient manner.

Difference between LLP and Company

Under a ‘partnership’ i.e. the traditional partnership in a firm, every partner is jointly liable along with all the other partners and even separately for all the acts, the firm has committed while a person is an existing partner. However, the scenario is different in LLP as the liability of a partner is limited only to his agreed contribution. In case of a partner commits a crime, LLP saves the other partner from the unlawful acts of the former partner which is to say that an individual partner is shielded from joint liability created by the other partner’s unlawful and offensive act. Other than that, there are a few other differences as well:

  • The basic difference between the LLP and a company is that a company is governed by The Companies Act, 2013, and the LLP is regulated by the LLP Act as it is a contractual agreement between partners.
  • As the partners in the LLP are allowed to adopt an internal organization similar to that of a traditional partnership while limiting their liability, we can say that LLP is more flexible than a company.
  • When comes an LLP has lesser compliance requirements, be it in terms of obtaining a digital signature certificate, obtaining the designated partner identification number, incorporation compliance, compliance of filing statement of account and solvency, etc. Whereas, it is not the case with a company.
  • The system of management ownership divide, i.e. the percentage of equity shares held by the owners and their immediate family members is not applicable in LLP.

Prominent features of the Limited Liability Partnership Act, 2008

  • The LLP shall be a body corporate and a legal entity separate from its partners.
  • The mutual rights and duties of the partners of the LLP inter se and those of the LLP and its partners shall be governed by an agreement done among the partners subject to the provisions of the Act.
  • The Act gives flexibility to the professionals to devise the agreement as per their choice and comfort to which they can abide. In the absence of any such agreement, the mutual rights and duties shall be governed by the provisions of the Act.
  • The Limited Liability Partnership Act says that the LLP will be a separate legal entity, which shall take the complete liability for its assets.
  • As every partner will be limited to their agreed contribution in the LLP, no partner shall be liable on account of the unauthorized or unlawful act of other partner/partners. However, if the LLP and its partners who are together found to have acted with malafide intention to defraud creditors or for any other fraudulent purpose shall be jointly liable ed for all or any of the debts or other liabilities that remain with the LLP.
  • Every LLP must have a minimum of two partners and two designated partners other than the former ones. Out of the two designated partners, one has to be a resident of India.
  • The LLP shall be under the obligation to maintain annual accounts which show the true state of affairs that the LLP carries. It is mandatory for an LLP to file a statement of accounts and solvency every year with the registrar.
  • The accounts of LLPs shall also be audited, subject to any class of LLPs being exempted from this requirement by the Central Government.
  • The Central Government possesses the power to investigate the activities of LLP as and when required by appointing a competent inspector for the purpose.
  • The merger and amalgamation of LLPs shall be in proper accordance with the provisions of the Limited Liability Partnership Act, 2008.
  • This act also provides provisions to a firm, private company, or an unlisted public company in case they want to convert into an LLP.
  • The LLP Act, 2008 confers powers to the Central Government to apply the provisions of the Companies Act, 1956 as it thinks fit, by notification with such changes that it feels are necessary. However, such notifications shall be presented as a draft before both the houses of parliament for a total period of thirty days and it shall be subject to any modification as may be approved by both Houses.
  • The Act clearly mentions that the Indian Partnership Act, 1932 shall not be applicable to LLPs.

Conclusion

When the budding professionals capable of leaving their mark on a mass level opt for LLP, it will act as an engine of growth for India’s economic growth and would lead to the growth in the sector of professional services in the country. With the liberalization and globalization at their peak in the Indian economy, the LLP, as an alternate mode of carrying business, without actually forming a company, will encourage joint ventures and would make Indian service sectors globally competitive.

LLP structure will also encourage Small & Medium Enterprises and family partnerships to expand as it will allow them to involve skilled persons from outside having and they may join in as partners as well. 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.


References

[1] Ministry of Corporate Affairs, Government of India, Available Here

[2] Bhavesh Bhatia and Sukhada Wagle, Limited Liability Partnership Act, 2008, Available Here

[3] The Gazette of India, Available Here

[4] The Limited Liability Partnership Act, 2008, Available Here


Updated On 2022-05-09T07:53:51+05:30
Aayushi Tiwari

Aayushi Tiwari

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