DECODING THE NEW BUSINESS VEHICLE OF INDIA: THE LIMITED LIABILITY PARTNERSHIP

Sahil Singhal & Vishal Nair

Considered to be a convenient hybrid between a partnership and company, the Indian limited liability partnership is a business association that merges certain advantages of a partnership with those of a company. This paper traces the evolution of this business vehicle from its genesis in the American state of Texas to the form in which it has been adopted in India. The paper also attempts to give a detailed analysis of the statutory provisions and concepts employed in the Limited Liability Partnership Act, 2008 as well as the tax status of limited liability partnerships under the Finance Act, 2010. The paper tests the usefulness of this new business form for professional service providers as well as small and medium size business concerns, which are widely perceived to be the primary beneficiaries of the LLP Act. The paper concludes that the LLP Act is a welcome addition to the family of business laws in India providing multiple advantages to its targeted beneficiaries. With the example of an association of lawyers, however, it is evident that certain glaring omissions prevent it from travelling the void between companies and partnerships.

INTRODUCTION

The limited liability partnership (‘LLP’) is viewed as an ‘alternate corporate vehicle’ which seeks to attain the principal benefits of both forms of business organization- partnerships and companies. This is achieved by granting, to the members of the LLP, the edibility of organizing their internal managerial structure as a partnership based on mutual agreement, while limiting the liability of the partners to the extent of their interest in the partnership, which is akin to the separate legal personality of a company.

Advantages of the LLP over such similar business forms. It is as a result of these very advantages that LLPs, as business vehicles, have been allowed in several jurisdictions and multiple pieces of legislation have been enacted to regulate them.

A general partnership is a partnership in which the partners share equally in responsibility and liability. The primary distinction between an LLP and a general partnership is that a general partnership has no legal existence separate from the partners who constitute it, while an LLP exists as a legal entity separate from its partners.

In a general partnership, every partner is liable jointly along with the other partners of the rm, and also severally, for all acts of the rm done while he is a partner.

In an LLP, however, no partner is made liable for the actions of another partner beyond his/her share in the partnership. Further, unlike a partnership, members of an LLP are not agents of each other.

In the separate case of a limited partnership, at least one of the partners is required to be a ‘general partner’. As a consequence, the benefits of limited personal liability is not available to all partners, and the ‘general partner’ who is in control of the ordinary day-to-day business of the rm has unlimited personal liability.

An LLP, on the other hand, has no general partners and thus every partner in the LLP is endowed with limited personal liability for business debts.

A company has a corporate regulatory regime for most purposes, except in the case of taxation, for which it is treated as a partnership. An LLP is treated as a company, inter alia, with respect to the extent of liability of the partners. For other purposes, the LLP has a partnership regulatory regime, which permits the partners the edibility of internal organization based on mutual agreement.

An LLP also has a simpler and less expensive process of formation as compared to a company.

The concept of LLP initially emerged in the US and the UK. With growing litigation against law ems and accounting in those jurisdictions, the need arose for a device to limit the liability of partners in such rm, especially in cases where professionals including lawyers and accountants were being exposed to large amounts of money in liability.

BASIS OF THE LLP STRUCTURE IN INDIA

The LLP Act is broadly based on the UK LLP Act, 2000 and the Singapore LLP Act, 2005. Although this new business form carries the designations ‘partnership’ and ‘limited’, an LLP in the UK is governed neither by the Partnership Act, 1890 nor the Limited Partnership Act, 1907, which were already in force at the time of formation of LLPs. In general, therefore, the law of partnership will not be applicable to LLPs in the UK. Nevertheless, for taxation purposes, an LLP is treated as a partnership, so as to ensure that the choice between an LLP and a partnership is a tax-neutral one. Further, an LLP in the UK can be formed by two or more persons with a view to make pro ts lawfully; it is not restricted solely to the largely professional partnerships such as those of law and accounting. An LLP, in the UK, is a body corporate with a separate legal entity under the LLP Act, 2000.28 The registration of LLPs is to be done with the Companies House. There should be a minimum of two members to form the LLP,29 and further at least two of the members should be designated members. These designated members are responsible for carrying out the day-to-day business and statutory compliance. An LLP can borrow money in its own name. Foreign nationals can be partners of an LLP. The cost of formation of an LLP in the UK is less as compared to the cost of formation.

CRITICAL OVERVIEW OF THE LLP ACT

There are two basic models of LLPs witnessed around the globe as explained above. The est is the Texas LLP model. Under this model, the partners’ vicarious liability is limited to the wrongful acts of the partnership and not for liability arising in the ordinary course of business. The second model, known as the Delaware model, is one where all obligations of the LLP are solely the liability of the LLP and the partners are not personally liable for any action arising in tort, contract, etc. The LLP Act draws greater inspiration from the Delaware model than the Texas model,of the LLP Act Clarice that an LLP is a body corporate having a separate legal existence distinct from its partners. It has all the incidental characteristics of a body corporate including that of perpetual succession, ability to sue and be sued, and a common seal.51 Any such partnership mandatory needs to incorporate the term “limited liability partnership” or “LLP” at the end of its name.The LLP Act was drafted to ensure transparency in the regulation of LLPs and to prevent defrauding of creditors while also giving partners the edibility to conduct internal affairs. In a sense, the Armagnac for an LLP is the LLP agreement drafted by the partners. To act as a watchdog, however, the LLP Act provides for a comprehensive investigation mechanism, empowering the Registrar to call for information before incorporation, and empowering the Central Government to appoint inspectors to inquire into the affairs of the LLP. Furthermore, disclosure of the nancial statements of the LLP is compulsory and any contravention with the relevant provisions attracts severe penalty.

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