In this article, Mansi Bathija of UPES Dehradun discusses Extent and limitation of Limited Liability Partnership and partners.
The need for limited liability partnership act 2008 is pronounced by the Ministry of affairs as “a new corporate form that would provide an alternative 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”
To comprehend a LLP, it is best, to begin with, the general partnership. A general partnership is a profit driven organization that is made by a common understanding between at least two parties. A general partnership can be very casual. All it takes is a mutual interest, maybe a composed contract (however not really), and a handshake.
Obviously, with the casual way of a general partnership, there is a drawback. The most evident hazard is that of legitimate liability. In a general partnership, all partners share liability for any issue that may emerge.
Formal Structure of A Partnership – Limited Liability Partnership
Limited liability partnerships offer similar tax-favorable circumstances as a general partnership yet offer some assurance for partners’ personal assets by constraining their liability to that of their enthusiasm for the organization as it were. All partners are permitted to deal with the systematic in a general partnership; in any case, a formal understanding is required for this business sort. This structure shields all partners from subjecting their personal assets to the business liabilities.
A limited partnership varies by requiring no less than one general accomplice to oversee and go for broke, while uninvolved limited partners appreciate no liability. For investment purposes, a limited partner is a judicious position in a partnership on the grounds that, only the partnership interest is liable to liability.
Difference between partnership and limited liability partnership
Who can be a partner?
Any Indian citizen residing in India can be a partner to general as well as LLP.
What is the maximum limit of the number of partners in both?
The maximum number of partners in a general partnership can be 20 however there is no limit in the LLP.
What is the Minimum number of partners?
To start off a partnership firm, the minimum number of partners should be two in the case of general as well as
Status of minor partners.
Minors can be a partner in general partnership on the other hand, in limited liability partnerships, a minor cannot be a partner.
Limited liability partnerships are to be registered under the ministry of corporate affairs whereas a partnership is to be registered with the registrar of firms. The registration process of a LLP and a private Limited Company is very similar.
The Registration Process of a LIMITED LIABILITY PARTNERSHIP
The first step is to obtain a Digital Signature Certificate and then the designated partner identification number for partners is to be approved. Next step is to check the name availability and then the limited liability partnership agreement is drafted. The incorporation document is to be filed and then the certificate of incorporation is obtained
Why is limited liability partnership considered to be better than a partnership?
A partnership is easy to start but it comes with a high risk and that is the risk of unlimited liability. So if the partnership firm is in debt, the partners might have to sell off their personal assets to cover the debts. This is not the case in limited liability partnership. Limited liability partnership, as the name suggests, provides limited liability on each partner so the personal assets of the partners do not come into the picture and the amount of liability is limited to the amount of capital contributed by them.
A partnership is not a separate legal entity and if one of the partners dies or retires or in any other case if he has to leave the firm, the partnership ceases to exist and so a new partnership has to be formed but this is not the case in limited liability partnership. Limited liability partnership is a separate legal entity.
Limited liability partnership more trustworthy than partnership because it is registered under the ministry of corporate affairs.
Exception to the limited liability rule
As per section 30 of Limited Liability Partnership Act, if a limited liability partnership or any of its partner is indulged in fraudulent activities with its creditors, the law shall come into the picture and the liability can be extended to be unlimited to cover the debts.
However, if the limited liability partnership is able to prove that the firm was not aware of the partner being involved in such practices, it can avoid the liability.
Every person who is proved guilty of being involved in the fraud being carried out can be punished by the way of imprisonment of two years or less and a fine or fifty thousand rupees or more up to five lakh rupees.
Advantages of a Limited Liability Partnership.
- A limited liability partnership is easy to be registered
- It is easy to maintain
- The cost of formation is low.
- Every partner’s personal obligation for another partner’s acts is limited to the partnership’s assets.
- One major advantage is the capacity to get new partners and let partners out. Since a partnership deed exists for a limited liability partnership, partners can be included or resigned as illustrated by the agreement. This proves to be useful as the limited liability partnership can simply include partners who carry existing business with them. Normally the choice to include requires endorsement from all the current partners.
- It offers a range of benefits to the promoters.
- The formation and compliance cost of a limited liability partnership is more flexible and cheaper
Limitation in the formation of Limited Liability Partnership
- Partners attempt to make some contribution towards limited liability partnership firm while executing the limited liability partnership agreement. When money or resources are added to limited liability partnership, it can’t come back to the partners of a limited liability partnership unless there is a particular arrangement specified in limited liability partnership agreement.
- Consent of all partners is mandatory to be acquired for the transfer of ownership rights. To transfer some portion of the ownership, the partner has to take the consent of all the partners of the Limited liability partnership firm.
- The Government of India is vested with powers to investigate into the affairs of a limited liability partnership, if required, by appointment of Inspectors as competent authorities for the purpose.
- If a new partner is to be admitted, an agreement where all the details of the new partner are mentioned has to be created and accordingly the existing parties are revised or changes are made. These revisions are to be asserted by the concerned registrar of companies
- Limited liability partnership is not allowed to raise external commercial borrowing (“ECB”). Thus limited liability partnership cannot take commercial loans from its foreign partners, FII’s (foreign institutional investors), banks from outside India, any financial institution outside India or any other entity outside India.
- Under some cases, liability may extend to personal assets of partners
Limited liability partnership is a new step taken forward in the commercial sector of India. It is a better form of business organization as it minimizes the possibilities of malpractices carried out in the context of business terms. Each person is responsible for his own deeds or negligence. It is termed as an “alternative corporate business vehicle” as the functioning is same as any other general partnership but it comes with a special provision of the limited liability rule. In this way, the limited liability partnership (LLP) turns into another corporate frame that empowers proficient skill and entrepreneurial activity to join, arrange and work in a creative and productive way.