In this article, Sujit Bhargav Shelar pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, discusses the difference between responsibility and rights of a partner and a designated partner in an LLP.
Earlier the business was being conducted mainly by forming three business entities mainly,
- A company registered under the Indian companies act.
- A partnership firm registered under the Indian partnership act/ unregistered partnership firm.
- Proprietary business handled by a sole individual.
Out of all the three business entities mentioned above a company was the most preferred and safe choice. The reason being a company enjoys a separate legal entity which is distinct from its members who form it. Generally speaking forming a company to conduct the business is found to be safe and reliable as the liability of the persons running the company is very limited. In case of winding up of a company the liability of the company does not pass on to its director is in their personal capacity. Therefore this aspect of limited liability was considered to be very attractive as the persons running the said company are protected by the corporate veil. However, there are various compliances to be made in case of a registered company with the Registrar of companies and other authorities. Such compliances do tend to be tedious at times.
Though not riddled with lot of compliances and statutory limitations the major drawback of a partnership was the unlimited liability of its partners. In case, after dissolution of partnership firm it is found that the assets of the said firm are not enough to meet the creditors demand then the personal property of the partners is also liable for attachment towards the satisfaction of the creditors. Therefore, partnership business carried a certain risk factor in it.
Limited Liability Partnership
To more effectively conduct business by partnership firms without the risk of unlimited liability and to promote business in a more professional manner like a company the limited liability partnership act 2008 was enacted by the Parliament. The LLP firm is a body corporate and a separate legal entity from its partners which has perpetual succession similar to company. Under the LLP act 2008 any written agreement between the partners of the LLP or between the LLP and its partners which determines the mutual rights and duties of the partners and their rights and duties in relation to that LLP. It is not necessary to enter into an LLP agreement as per LLP Act, 2008. In the absence of LLP agreement, the mutual rights of partners & in relation to LLP will be determined as per schedule I of the LLP Act, 2008. Unlike the partnership under partnership act which may or may not be registered, every LLP has to be registered with the registrar.
Section 4 of the Indian Partnership Act defines partnership as the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Persons who have entered into partnership with one another are called individually “partners” and collectively of “firm”.
Under the LLP Act 2008 as per section 2 (n)
“Limited liability partnership” means a partnership formed and registered under this Act;
Sec 2(q) “partner”, in relation to a limited liability partnership, means any person who becomes a partner in the limited liability partnership in accordance with the limited liability partnership agreement;
Sec 2(j) “designated partner” means any partner designated as such pursuant to section 7;
Responsibilities and Rights of a Partner under the Partnership Act
- The very definition of partnership suggests that it is the relation between persons who have agreed to share the profits of a business. Therefore the first and foremost responsibility of a partner is to conduct the business of the firm to the greatest advantage, to be just and faithful to each other and to render true accounts and full information of all things affecting the firm to any partner.
- Is since it is the foremost responsibility of a partner’s to conduct the business to the greatest advantage of the form it is just and right that there is also a responsibility on the partner of indemnifying the firm for any losses caused to it by the fraud in the conduct of the business.
- Usually, any contract in restraint of a trade is void under section 27 of the Indian contract act, however, is how exception is made so far as the Indian partnership act is concerned. Under section 11(2) of partner can be restrained from carrying on any other business than that of the form while he is a partner in the said firm.
- Usually, the rights of a partner are predefined by the contract between the partners however the general rights of a partner are as under.
- every partner has a right to take part in the conduct of the business.
- Every partner is bound to attend elegantly to his duties in the conduct of the business.
- Any difference arising as to ordinary matters connected with the business may be decided by a majority of the partners and every partner shall have the right to express his opinion before the matter is decided, but no change may be made in the nature of the business without the consent of all the partners.
- Every partner has a right to have access to and to inspect and copy any of the books of the firm.
Responsibilities and Rights of a Designated Partner under LLP Act
- The definition of a designated partner under section 2 of the LLP Act merely states that it is a partner as designated under section 7 of the act. Therefore a reference to section 7 has to be made to understand the exact nature of a designated partner. Section 7 of the act states that every LLP shall have a minimum of two designated partners out of which one shall be a resident of India. A partner can also become a designated partner by virtue of the incorporation document. Further, the consent of such partner to act or become the designated partner is essential and such consent has to be filed with the registrar. Similar to the companies act wherein every director has to obtain a direct identification number (DIN) from the ROC, every designated partner of LLP has to obtain designated partner identification number (DPIN) from the central government. A reading of section 3 of the act clearly suggests that since LLP is a body corporate formed and incorporated under the act it is a separate legal entity than that of its partners. Since it is a body corporate formed and incorporated by an agreement, the mutual rights and duties of the partners are governed by the said agreement.
- Every partner of a LLP is an agent of the LLP and not of the other partners. Therefore, his acts bind the LLP provided that he has acted within his authority.
- Every designated partner of the LLP is liable for punishment with fine which shall not be less than ten thousand rupees but which may extend to one lakh rupees for non-compliance of section 34 of the LLP act. Therefore, it is but obvious that it is the responsibility of a designated partner to maintain proper books of accounts of the LLP as prescribed under section 34 of the said act.
- Similarly, under section 35 of the LLP act every designated partner must ensure that the LLP shall file an annual return duly authenticated with the Registrar within sixty days of closure of its financial year in such form and manner and accompanied by such fee as may be prescribed.
- Every designated partner shall also ensure that he does not make statement-
- Which is false in any material particular, knowing it to be false; or
- Which omits any material fact knowing it to be material;
Such act or omission by the partner is punishable under section 37 of the act for a term which may extend to 2 years and also a fine which may extend to Rs. 5 lakhs but shall not be less than Rs. 1 lakh.
- It is also the responsibility of a designated partner to answer any question or make any declaration or supply any details or particulars in writing to within a reasonable period to the registrar if so requisitioned by him under section 38 of the said act.
- Every partner under the LLP has a right to apply for investigation of the said firm if he has good reasons to believe that an investigation is required by the inspector under section 44 of the act.
- Under section 47 of the act it shall be the duty of the designated partner and partners of the limited liability partnership-
- To preserve and to produce before an inspector or any person authorised by him in this behalf with the previous approval of the Central Government, all books and papers of, or relating to, the limited liability partnership or, as the case may be, the other entity, which are in their custody or power; and
- Otherwise to give to the inspector all assistance in connection with the investigation which they are reasonably able to give.
The structure of LLP, broadly speaking, is based on the company module to bring in more accountability and structured working of a partnership on the lines of a body corporate like a company. The limited liability similar to a company makes an LLP more beneficial to the partners and conducive for business.