This article is written by Ashutosh Singh, a student at Amity Law School, Amity University, Kolkata. The article explains the features of a Limited Liability Partnership, its advantages and its legal framework citing relevant case laws as examples.

This article has been published by Sneha Mahawar.

Introduction

The Indian economy is growing with leaps and bounds. With its growth, the role played by its entrepreneurs has been acknowledged globally. Entrepreneurship, knowledge and risk capital pool provide a further stimulus to India’s economic growth. In this scenario, a need was felt for a new system of the corporate that could deliver an alternative to the traditional partnership which had unlimited personal liability and statute-based governance structure of the limited liability.

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Limited Liability Partnership (LLP) is a form of business enterprise in India but different from other business organisations such as sole proprietorship, company and partnership, etc. LLP is an incorporated partnership registered and formed under the Limited Liability Partnership Act, 2008 in India. It has limited liability as the name suggests, has a separate legal entity, and perpetual succession. It is the most suitable form of business organisation for small and medium enterprises. This form of enterprise amalgamates the characters of both traditional partnership firms and limited liability corporations. A change in the partners doesn’t affect its existence, rights or liabilities.

Meaning of a Limited Liability Partnership

In a partnership firm, the partners have unlimited liability for their total debts and the legal consequences thereof. In a partnership firm, the assets are prone to get attached to fulfil the debts and liabilities of the firm, the limited liability partnership solved this problem. This means that a limited liability partnership is a kind of business partnership where all the liabilities of a partner are restricted only to the money he/she invests. In other words, in case the partners are unable to make a profit in the business, creditors cannot confiscate their personal assets. LLP has a legal existence though, and its identity is separate from the partners. 

The limited liability partnership structure is mainly based on the UK LLP Act, 2000 and Singapore LLP Act, 2005. One can find LLPs in countries like the United Kingdom, the United States of America, some Gulf countries, Australia and Singapore.  

The legal framework of a Limited Liability Partnership

Any two or more persons conjoining to carry out a lawful business with an aim to make a profit may set up an LLP. The Companies Act, 2013 is not well-matched for the liability and governance structure wished-for for LLPs. The general focus of the legislation to standardise widely-held companies is distinctive. Therefore, in harmony with the proposals of the Irani Committee, it was felt that separate legislation should be enacted for LLPs. 

The organisation and administration of partnership firms are at the state level under the Indian Partnership Act, 1932 where a partnership firm involves full joint and several liabilities on the partners. This is the reason for many enterprises employed in fields such as Biotechnology, Intellectual Property, Information Technology, and other knowledge-based fields, find traditional partnerships incompatible. Even for multi-disciplinary combinations, traditional partnerships are considered inappropriate that comprise a large number of partners that are looking for a flexible working environment but with limited liability. 

The LLP structure, however, would stimulate growth and facilitate such enterprises to expand their trade and business across different states in India as well as abroad.

On 2nd November 2005, the Ministry of Corporate Affairs cited a concept paper on LLP Law on its website. This was to enable all interested stakeholders to express their opinions and suggest constructions for the Ministry to consider on various aspects of LLP Law. The concept paper was also spread to other concerned departments, autonomous bodies and ministries for their comments like:

  • Securities and Exchange Board of India (SEBI),
  • Comptroller and Auditor General of India (C&AG), 
  • Insurance Regulatory Development Authority (IRDA), etc. 

Many suggestions and comments were sent to the Ministry of Corporate Affairs on the concept paper after which these were examined in the context of international practices in this area of law. The Indian Act, however, has been prepared while keeping in mind the Indian requirements. 

Finally, the Limited Liability Partnership Act, 2008 was passed by the Parliament for governing the LLP and its businesses in the country. Section 2 of this Act defines that the LLP is a type of partnership that is registered under this Act and the LLP agreement states the written agreement between the LLP partners themselves or the LLP itself and its partners. This agreement is supposed to define the duties, liabilities, rights and powers of the partners in the LLP.

From the inputs received by the Ministry of Corporate Affairs, it was also proposed that the framework should not be restricted to only professional services as recommended earlier by Naresh Chandra Committee and thus the LLP Act does not restrict the advantage of LLP structure to some classes of professionals only. Now that the Limited Liability Partnership Act governs the LLPs, the Indian Partnership Act, 1932 is not applicable to these partnerships.

Certain other committees, which made proposals for legislation on LLPs in India are as follows:

Extent of liability of a Limited Liability Partnership and its partners 

Section 27 of the Limited Liability Partnership Act, 2008 describes the extent of liability of LLP. According to this section, an LLP is not bound by anything that is done by a partner if in dealing with a person because the partner in fact has no authority to act on behalf of the LLP in doing a particular act and in such a case the partner’s act is considered void and the LLP is not liable for the partner. Only the concerned partner is responsible for the liability and not the LLP itself.

An LLP is also not bound by anything if the person that the LLP is dealing with has knowledge that the LLP has no authority or does not know or believe him to be a partner of the LLP. However, the LLP is liable if its partner, for the wrongful doing or omission on the part of the partner, is liable to any person in the course of business dealing with the LLP or its authority thereof. An obligation of the LLP that arises as a result of a contract or otherwise shall be the sole obligation of the LLP and these liabilities of the LLP shall be met out of the property owned by the LLP.

Section 28 of the Limited Liability Partnership Act, 2008 describes the extent of liability of a partner. A partner is not liable personally, either directly or indirectly for an obligation just because of being a partner of the LLP.  However, for any wrongful doing or omissions by the partner in the course of doing business, the partner is liable but other partner/partners shall not be personally liable for the wrongful act or omission of one partner of the LLP.

Section 29 of the Limited Liability Partnership Act, 2008 states that a person is liable if he/she by words spoken, written or by his/her conduct represents as one of the partners of the LLP and an outsider in the belief of this person’s representation of the LLP, extends him/her credit, but the Section does not make a mention of the extent of the liability.

Section 30 of the Limited Liability Partnership Act, 2008 is actually an exception to the limited liability position of an LLP because it has provision for the instance in which an LLP and even its partners can end up having unlimited liability. Section 30 of the said Act is very broad in its coverage of fraud committed against the creditors of the LLP or against any other person for a fraudulent purpose in the course of business. It also covers all or any of the debts or other liabilities of the LLP. This Section generally takes away the limited liability characteristic of an LLP if any fraud committed is established and creates the risk of an LLP retaining its limited liability position.

Features of a Limited Liability Partnership

A hybrid form of organisation

The Government of India has facilitated a business environment for entrepreneurs, service providers and professionals by creating a hybrid business structure to meet the global competition such as limited liability partnership. An LLP can be said to be a hybrid form of organisation because it has features of a partnership firm governed by the Partnership Act, 1932 and a company governed by the Companies Act, 1956 / 2013. The LLPs however, are administered by the Registrar of Companies.

Limited Liability Partnership is a body corporate

A body corporate can be a partner to an LLP as per Section 5 of the Act.  As per Section 2(1)(d) of the LLP Act, 2008 a “body corporate” means a company that is incorporated/registered outside India, but does not include a corporation sole, a co-operative society that is not registered under any law for the time being in force, and any other body corporate that is not a company according to Section 3 of the Companies Act, 1956. It includes the following: 

  • An LLP registered under the LLP Act;
  • An LLP incorporated outside India;
  • An Indian company that is either private or public;
  • An individual.

Perpetual succession

Section 3(2) of the LLP Act provides that an LLP is a body corporate that has a legal entity of its own and is separate from its partners hence, it has perpetual succession. In other words, an LLP is capable of acquiring, owning, holding, disposing of property, shares, securities etc., in its own name be it movable/immovable or tangible/intangible. An LLP can therefore sue and even be sued. Also, it is capable of doing and undergoing other acts as a body corporate would do or undergo.

The separate legal entity of an LLP

The LLP is a separate legal entity with unlimited capacity, meaning that an LLP can do anything that a natural person can do. It has the power to hold property in its name, enter into contracts, any change in the partnership doesn’t affect its existence. LLP is a legal entity separate from that of its partners. The LLP’s existence as a separate legal entity makes it more like a company than a partnership firm. The liability of the partners of an LLP is limited only to their contribution and a partner is not liable for another partner’s misconduct,  negligence or commitment to an act of fraud. All the assets and liabilities of an LLP are it’s own and no partner is permitted to claim any exclusive right in the property or assets owned by the LLP during its continuance or at the time of its dissolution/winding up. Likewise, the creditors also cannot bring any action against the partners personally.

Limited Liability Partnershipas an artificial legal person

To appreciate LLP as an artificial person one should know that the law finds it necessary to give an entity, such as a firm, certain rights and responsibilities that are generally held by humans. When that entity is founded, it is known as an artificial person that exists independently of its partners and is treated as a separate person.  An LLP is considered an artificial legal person because it is formed through a legal process and is cloaked with all the rights of an individual. Although an LLP is invisible, intangible, immortal, it is not fabricated because it really exists. 

Number of partners in a Limited Liability Partnership

As per Section 6 of the LLP Act, 2008 any individual or body corporate can become a partner in an LLP. However, an individual will not be qualified for becoming a partner of an LLP, if:

  • The person is of unsound mind certified by a court of competent jurisdiction, or
  • The person is undischarged. 

According to this Section, every LLP should have at least two partners. In the instance that the number of partners of an LLP reduces below two and the LLP still continues to do business for more than six months then the only partner of the LLP after those six months and who has the knowledge of this fact, becomes personally liable for the obligations of the LLP encountered during that period. Section 7 of the said Act talks about designated partners of an LLP and states that the LLP should have at least two designated partners who are individuals and sets the condition that at least one of them should be a resident in India.   

Any partner of the LLP may become a designated partner by giving prior consent according to the LLP agreement and a partner may conclude being a designated partner in compliance with the LLP agreement. Every LLP should have at least two partners, but there is no limit on the maximum number of partners in the LLP Act, 2008.

Common seal

Common seal means a stamp used for stamping documents generally having the name of the company to show that they have been approved officially. An LLP being an artificial person does not have a body like a natural being. Accordingly, it acts through its partners and designated partners. Having a common seal for an LLP is not mandatory.  However, if it decides to have one as per Section 14(c) of the Act, then the common seal of the LLP should have its name engraved along with the place and date of its incorporation. It should at all times remain under the custody of some responsible official and it should be used in the presence of at least two of its designated partners.

An investigation by a competent authority

Section 43 of the Act, provides that the Union Government has powers to investigate the dealings of an LLP by appointing a competent inspector or authority for the purpose. However, an investigation of the LLP can be carried out even if the Central Government has information that the plan of the business was to commit fraud against its creditors, partners, or any other person for an unlawful purpose. Investigation can also be carried out if the administration of the LLP is not as laid out in the LLP Act. An LLP is subject to investigation even if the registrar or any other investigating or regulatory agency submits a negative report about the functioning of the said LLP.

Profit motive

The indispensable ingredient for forming an LLP is having lawful business with an objective to make a profit. Thus, an LLP cannot be incorporated for non-economic or charitable purposes. An LLP offers flexibility for profit sharing differently to each partner. In other words, if the partners agree then the profit-sharing, as well as the loss-sharing ratio, may be different for the different partners of the LLP.  The partners of the LLP even have the flexibility that one or more partners would share profits only and no losses at all if it is mutually agreed by them.

Limited Liability Partnership agreement

An LLP agreement must be prepared in detail and very carefully as it provides the foundation of the LLP, the obligations and mutual rights of the partners. The LLP Act offers a great degree of flexibility in terms of contribution of capital by the partners, profit/loss sharing ratio between the partners, admission of a partner, the retirement of partners, dispute resolution, and the management of affairs of the LLP, etc. As a result of all the aforementioned details, the LLP agreement becomes an important document.

Section 23 of the LLP Act, has provisions regarding the LLP agreement. It provides that the mutual rights and duties of the LLP and its partners should be as per the LLP agreement between the partners or between the partners and the LLP. The LLP agreement and any changes made in the agreement should be filed with the Registrar of LLP in case there is no agreement between the partners of the LLP, then their mutual rights and duties and the mutual rights and duties of the LLP and the partners should be governed by the provisions given in the first schedule of the LLP Act.

Conversion into a Limited Liability Partnership

A firm or a private company or an unlisted public company can be converted into an LLP in agreement with the provisions of the LLP Act, 2008. After the conversion, on and from the date of the certificate of registration acquired by the entity the effects of the conversion should be as specified in the LLP Act, 2008. The provisions for the conversion of a firm into an LLP is listed in clauses 2 and 3 of the Second Schedule of the LLP Act, The eligibility of a private limited company to be converted into an LLP are listed in clause 2 of the Third Schedule of the Act. The conversion from an unlisted public company to an LLP is provided in clauses 2 and 3 of the Fourth Schedule of the LLP Act, 2008. 

Compromise or arrangement

Any compromise or arrangement including merger and consolidation of LLPs should be in agreement with the provisions of the LLP Act, 2008. Sections 60 and 61 of the LLP Act, 2008 deal with ‘Compromise and Arrangement’ respectively of an LLP. Section 60 states that an LLP or any of its partners/creditors/liquidator under winding up can vote for a compromise or arrangement through the Tribunal as per the directions given by the Tribunal. Section 61 on the other hand, provides that the Tribunal has powers to oversee that the compromise or arrangement ordered by it is carried out. If the Tribunal is content that the compromise or arrangement ordered cannot work properly then it may order for the LLP to wind up.

Absence of mutual agency

The fundamental principle of mutual agency of partners in a partnership is not present in an LLP, and its partners are the agents of LLP alone and not of the other partners. Thus, lack of mutual agency makes no partner liable on account of the independent/unauthorised actions of other partners. Hence the individual partners are not liable for the liability that is incurred by another partner’s wrongful acts.

Case laws

Mohammad Ibrahim v. Mr Nikhilesh Mittal (2016)

The plaintiff, in this case, asserts that he entered into a sale agreement with the defendants for purchasing a suit property for a consideration of Rupees eight crore.  The plaintiff also claims that he paid a sum of Rupees fifty lakhs in cash to the defendants as earnest money. In spite of the acceptance of the earnest money, the defendants are taking steps for transferring the suit property to a stranger purchaser. Therefore, the plaintiff has filed the aforesaid suit. The High Court of Calcutta, on examination of the title deed relating to the suit property, found that the defendants are not the actual owners of the said property. 

Onex Projects LLP is a registered LLP and it is the actual owner of the said suit property according to the title deed annexed to the injunction application. The defendants, in this case, are some of the partners of the said LLP. The High Court of Calcutta observed after reading the plaint and the injunction application by the plaintiff that they did not ever claim to have entered into an agreement for sale with the LLP for purchase of the suit property. 

The Court did not find any privity of contract between the plaintiff and the LLP which is the owner of the suit property. Although the defendants are some of the partners of the said LLP firm, the plaint does not say that these defendants had the authority on behalf of the LLP firm to enter into any transaction with regard to the suit property as their agents. No case of fraud was made out against the defendants for attracting Section 30 of the Limited Liability Partnership Act, 2008.  The High Court of Calcutta on deliberating on the facts and circumstances presented before it held that the plaintiff failed to make out a strong prima facie case to go for trial. 

Jayamma Xavier v. Registrar of Firms (2021)

In this case, the petitioner claims to be the nominated partner of Sleeplock LLP which is LLP as the name suggests and is registered under the Limited Liability Partnership Act, 2008. The Sleeplock LLP, then formed a partnership firm along with Gourav Raj. A partnership deed was executed and the said deed was submitted for registration before the respondent. The respondent dismissed the application for registration on the ground that an LLP cannot be a partner of a firm. The petitioner said that the partnership was formed for processing, manufacturing, trading, importing, exporting, distribution and sales of foam, coir and other rubber products, through retail outlets and through online platforms. The petitioner submitted that a partnership along with an LLP is not barred under the Partnership Act since an LLP is a legal entity having perpetual succession and a common seal and it is separate from its partner as provided under the LLP Act. Also, under Section 14 of the LLP Act, an LLP is capable of suing and being sued, once it is registered. Thus, the petitioner claims that an LLP has the right of acquiring, developing or disposing of movable or immovable properties and hence an LLP is liable to be treated as a person.  The respondent cannot have any objection therefore to register a partnership with an LLP which is a person. The LLP was also given a Certificate of Incorporation.

The respondent in the filed statement maintained its stand of the impugned order reasoning that some of the provisions relating to liability were inconsistent in the Limited Liability Partnership Act, 2008 and the Indian Partnership Act, 1932. Section 25, 26 and 49 of the Indian Partnership Act, makes the partners become jointly and severally liable with all the other partners.  It also makes them severally liable for the acts of the firm, of which such a person is a partner. However, under Section 28 of the LLP Act, the provisions with respect to the liability of the partnership firm is limited to the contents (extent provided in the agreement) of the LLP agreement. The respondent added that such a provision runs contrary to Section 25 and 49 of the Indian Partnership Act. Therefore, the issue before the court was whether an LLP can be considered a person that can be allowed to form a partnership with an individual.

The Kerala High Court said that to examine the contentions raised by the learned Government Pleader it was vital to have a look at the applicable provisions contained in the Indian Partnership Act, 1932 as well as in the LLP Act, 2008.

The Court said in its judgement that Section 4 of the Partnership Act permits establishing a partnership between one or more persons. In this instant case, the partnership deed was implemented between an individual and an LLP which is a body corporate having a legal entity of its own and coming within the definition of “person”. The separate individual liability of the partners of the said LLP would not be relevant because the LLP itself would have liability that was independent of the liability of the partners. The Court elaborated that the difference in the provisions under the Partnership Act and LLP Act relating to the liability of the firm or the individual partners would not come in the way of entering into a partnership with an LLP. Hence the Court directed the respondent to reconsider the request of the petitioner for registration.

SRL Advisors LLP v. Delhi II (2021)

This case is about a refund of the erroneous payment of service tax in an appeal to the Custom, Excise & Service Tax Tribunal, Delhi. The appellants have submitted that they were incorporated as an LLP under the LLP Act, 2008 for delivering the main power supply service up to the end of March 2013. For this service, they got a project to supply manpower to V. Search HR Consultancy Services, a partnership firm up to February end 2013 after which they used the services of their own employees.

The range officer after verification said that the refund claim of the erroneous payment of service tax by the appellant was inadmissible. In the personal hearing of the dispute, the appellant said in support of his claim that they were an LLP and hence not covered in body corporate and they were not liable to pay service tax under reverse charge.

The adjudicating authority relied on the following for the definition of body corporate, company and an LLP:

Thus, it was concluded that an LLP is a body corporate having perpetual succession and is a legal entity separate from its partners. The tribunal after studying all the definitions of a body corporate concluded that a partnership includes an LLP for the purpose of giving concessions as to periodicity of payment of service tax, filing of returns etc. The tribunal further held that Rule 2(cd) of Service Tax Rules, 1994  does not mention that LLP is not a body corporate, and hence it is liable to pay service tax under the reverse charge mechanism. Consequently, the refund claim of the appellant was disallowed.

M/S Diamond Nation v. Deputy State Tax Commissioner (2019)

In this case, the petitioner filed two petitions under Article 226 of the Constitution of India against the orders passed by the respondent. The impugned orders the respondent had refused the application filed by the petitioner which was to add ‘Go Green Diamonds LLP’ as a partner in the petitioners’ firm. Since both the aforesaid petitions were arising out of identical facts they were taken up for joint hearing and disposal.

The petitioner’s side submitted that they being a registered firm under the Indian Partnership Act, 1932, wanted to introduce ‘Go Green Diamonds LLP’, a firm registered under the LLP Act, 2008 as a constituent partner of petitioners firm and this was the reason  ‘Form-E’ came to be filed with the respondent- Registrar of Firms in accordance with Section 63 of the Indian Companies (Amendment) Act, 1930. However, the respondent rejected the application.

The issue for consideration before the Gujarat High Court was whether a partnership firm registered under the provisions of the LLP Act can be accepted as an integral partner of a partnership firm registered under the Companies Act. Citing the English as well as the Indian laws, the Court said that both the laws relaxed rigid notions and extended limited personality to a firm however, the general notion is still that a firm is not an entity or person in the eyes of law, but is just an association of individuals and a firm name is a combined name of those individuals who comprise the firm. In explaining the concept further, the Court referred to the following: 

  • Section 4 of the Partnership Act, 1932;
  • Section 25 of the Partnership Act, 1932;
  • Section 49 in the Partnership Act, 1932;
  • Section 63 in the Partnership Act, 1932;
  • Section 4 of the LLP Act, 2008;
  • The LLP Act, 2008.

After perusal of the above-mentioned provisions and law the court said the following:

  • Section 4 of the Partnership Act explains the concept of ‘persons’ who have entered into a partnership with one another. These persons can only be individuals and cannot be considered as a body of persons.  A body of persons like a firm cannot be a partner with other individuals. 
  • The basic distinction in the Partnership Act and the LLP Act is relating to the ‘liability’. The Partnership Act holds the partner to be jointly and severally liable with all the other partners as well as the acts of the firm where the person is a partner.
  • Under the LLP Act, the liability of the partners is as per the contents of the LLP agreement. The Court added that this was against the purpose for which Section 25 of the Partnership Act was enacted.

Thus, the Gujarat High Court opined that this conflict was not a purport of the legislation as it was clearly mentioned under Section 4 of the LLP Act that the Indian Partnership Act, 1932 was not applicable to the LLP Act. In view of the aforesaid non-compliance, in some of the provisions of the two aforementioned Acts, the Court held that it was not inclined to accept the argument of the petitioner that a partnership firm under the LLP Act is merely a person or body corporate and hence it must necessarily be accepted as a partner in a partnership firm constituted under the Partnership Act.

Advantages of a Limited Liability Partnership

  • An LLP is a legal entity that is separate from its partners. Therefore, it can sue or be sued by a third party. Again, a partner can’t be held accountable for the misconduct or carelessness of the other partner. 
  • Partners of an LLP can actively participate in the management of the business of LLP. There is no separation of management from ownership. 
  • There is no minimum capital investment specified for an LLP. A partner’s contribution consists of both tangible, movable and immovable or intangible property.
  • In an LLP, the partners have the flexibility to draft the agreements of an LLP which defines the responsibilities, roles, powers and rights of the partners in an LLP and to each other. 
  • The liability of partners in an LLP is limited to the extent of the amount that they have agreed to contribute.
  • If a fraud has been committed by a partner and it is so proved, only then that partner is held accountable for his/her actions.
  • The LLP has to comply with only three annual requirements that are, annual returns filing, filing of the statement of accounts, income and tax returns filing. 
  • All companies, private or public, regardless of their share capital, are required to get their accounts audited, but this is not mandatory for an LLP. This is recognised as a significant benefit. 
  • An LLP has to get a tax audit done only in cases when: 
  • The contributions of the LLP exceed Rs. 25 Lakhs, 
  • The annual turnover of the LLP exceeds Rs.40 Lakhs.
  • For income tax purposes, an LLP is treated at par with a partnership firm. Therefore, an LLP is liable for paying income tax but the share of its partners in LLP will not be liable to tax. 
  • The ‘deemed dividend’ provisions under income tax law, will not be applicable to an LLP. 
  • An LLP can be wound up very easily within two to three months, unlike a private limited company.

Disadvantages of a Limited Liability Partnership

  • As compared to a partnership firm an LLP has a separate legal status which requires extensive legal paperwork.
  • Unlike a company, an LLP does not have the concept of equity or shareholding. Venture capitalists are reluctant to make investments in an LLP because in order to make investments they would have to become partners in an LLP and eventually have to take some responsibility as partners. 
  • There are higher penalties that an LLP has to pay if it fails to comply with the requirements as per law, as compared to a private limited company.
  • An LLP is required to file an income tax return each year even if it is not active or does not have any activity. Irrespective of the turnover, the LLPs are taxed at 30%.
  • For an LLP to get formed, it requires at least two partners. An LLP will have to be terminated if for any reason the number of partners is reduced to one.

Comparison of some features of an LLP, a private/public company and a partnership firm

Governing law

The governing law in the case of an LLP is the Limited Liability Partnership Act, 2008. Public and private companies are both governed by the Companies Act, 2013 and a partnership company is governed by the Partnership Act, 1932.

Registration

An LLP, public and private company have to get registered with the Registrar of Companies but registration for a partnership firm is optional.

Number of partners

It is mandatory for all of them to have at least two partners. However, an LLP and a public company can have as many partners as they want and there is no maximum limit on it. A partnership company can have a maximum of 20 partners while a private company can have a maximum of 200 partners. 

Minimum capital

There is no specific requirement for the minimum capital investment in an LLP and partnership company. There is a minimum requirement of Rs One Lakh in a private company and Rs Five Lakhs in a public company.

Suffix used in the name

The name of the LLP should have ‘Limited Liability Partnership’ or ‘LLP’ as their suffix. The name should have ‘Public Limited’ in the case of public company and ‘Private Limited’ in the case of private company as a suffix.

Perpetual succession

A partnership firm ceases to exist on the change or death of a partner. Moreover, it does not have perpetual succession and this depends upon the will of the partners. On the other hand, perpetual succession exists in a public or private company and an LLP.

Legal identity

A partnership firm does not have a separate legal entity and has unlimited liability. Both private and public companies have a separate legal entity under the Companies Act, 1956. An LLP has also got a separate legal entity but under the Limited Liability Partnership Act, 2008.

Common seal

A partnership doesn’t have a concept of a common seal. For a company, private or public, it symbolises the signature of the company and every company should have its own common seal. The same goes for an LLP as the common seal denotes the signature but it is not mandatory. An LLP may have its own common seal, dependent upon the terms of the agreement.

Liability of partners/members

Every partner in a partnership firm has unlimited liability for all of the partnership’s debts. The partners are personally liable for debts accrued in the business, even if they personally had nothing to do with creating them. Partners in a partnership firm are severally as well as jointly liable for actions of other partners and the firm and their liability extends even to their personal assets. In a company, private or public and an LLP the liability is limited. In an LLP, the liability is to the extent of the contribution of the partners towards the LLP. For a company, it is limited to the amount required that has to be paid on each share.

Agreement

A partnership firm has to have a ‘partnership deed’ which provides the scope of operation and rights and duties of the partners. The agreement or charter document of a private or public company is the ‘memorandum and articles of association’ of the company. The LLP is bound by an LLP agreement which provides the rights and duties of the partners of the LLP.

Ownership of assets

In a partnership, the partners have joint ownership of all the assets belonging to the firm. A partnership firm cannot hold property in its own name. A private or public company is independent of the members and has ownership of its assets. So also for an LLP, it is independent of its partners and has ownership assets.

Principal/agent relationship

In an LLP, its partners act as its agents and not as other partners. In a private or public company, the directors act as agents of the company and not of the members. In a partnership firm, the partners are an agent of the firm and also of the other partners. Each partner in a partnership firm can be held responsible not only for the liabilities that result from a lawsuit but also for liabilities as a result of the contract signed by only one of the partners. This is because every partner is an agent of the partnership.

Compromise / arrangements / merger / amalgamation

Both the LLP and a company can enter into a compromise, arrangements, merger and amalgamation. On the other hand, a partnership firm cannot merge with other firms or enter into a compromise, arrangement, merger, and amalgamation with its creditors or partners. An LLP can be converted into a company, but a partnership firm, a private company, or a public company can all be converted into an LLP.

Dissolution

The dissolution of a company or an LLP can take place voluntarily or by order of a national company law tribunal. But in the case of a partnership firm it has to be by agreement, mutual consent, insolvency, certain contingencies and by court order only.

Admission as partner/member

A person can be admitted to a partnership firm as per the partnership agreement. A person can become a member of a company by buying its shares, by subscribing to the Memorandum of Association or by an agreement in writing. A person can become a partner in an LLP as per the LLP agreement. 

Cessation as partner/member

In a company, a member or shareholder can stop being a member by voluntary (transfer, surrender, forfeiture, buy-back of shares by the company, etc.) or compulsory termination (insolvency of the person, death of the person, etc.) of his shares and in a partnership firm, a person ceases to be a partner as per the agreement. In an LLP, also a person can stop being a partner as per the LLP agreement or in the absence of an agreement by giving 30 days’ advance notice to the LLP.

Conclusion

The concept of LLP came to India through the United States, which introduced it after the financial crisis in the period 1980-1990 first in the city of Texas. It soon gained popularity in the other states of the United States and ultimately enabled the passing of the LLP legislation. The concept of LLPs exists in many countries that look at an LLP as a tax flow-through entity intended for professionals enabling them to have an active role in managing the partnership. Generally, professionals who opt for an LLP are lawyers, accountants, consultants, and architects.

LLP helps to overcome the drawbacks of a company and partnership firm business model, where there is a need for a hybrid form of entity that can have the characteristics of both.  LLP although a newly introduced form of business partnership in India is finding favour with small and medium-sized businesses. Thus, the LLP Act also recognises the changing needs of the business environment in the current period in India, especially during the crisis created by the pandemic.

References

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