Advent of Limited Liability Partnerships in India

Introduction

LLP i.e., Limited Liability Partnership can be defined as a corporate business vehicle which helps the companies’ members to get the benefit of limited liability on the company and allows the members to manage their internal management on the basis of a mutually arrived conclusion as in the case of a partnership firm. It contains elements of both ‘a partnership firm structure’ and ‘a corporate structure’ and thus that’s why it is called a hybrid between a partnership and a company. The company is liable for the losses and debts arising out in future business of the company and the partners have lower liability to any debt arising out of the company’s business. The Limited Liability Partnerships have a separate legal entity. In today’s corporate scenario India is witnessing an upward movement in LLP registrations and conversion of traditional unlimited partnerships into LLP’s.

History of LLPs in India

The first time the consideration of LLP was introduced in India was in the form of a recommendation in the 7th Law Commission of India in 1957. In this law commission it was recommended that the partnerships with limited liability should be recognized in India either by a special enactment or as a part of the existing Partnership Act. However, the recommendations were not taken into consideration by the law commission.

Mr. Abid Hussain in the Report of the Expert Committee on Small Enterprises in the year 1997, said that “if Limited Partnership Act was crated, it would also enable access to an additional source of funds and skills brought forth by management partnerships. At the time, a law for governing small businesses was being recommended by various Government committees without much avail.”

In 2003, in the Naresh Chandra Committee Report on Regulation of private companies and partnerships, emphasized on the need of introduction of Limited Liability Partnerships in India and showcased the concrete suggestions on how this new form of business should work efficiently.

It was suggested that this LLP form should be initially made available to only those who provide defined professional services like company secretary, lawyers, accountants etc. the eligibility to fill this form was that the profession should be registered under a regulatory act which adequately controls and disciplines the conduct of the profession. The Department of Company affairs must be notified about such professions from time to time. Further, the LLPs must be expanded once they gain movement in the corporate sector and should be available to other services and business activities once the LLP form of organization has been evaluated and tested.

In 2005 the J.J Irani Committee, suggested enabling of new business vehicles such as Limited Liability Partnerships through a separate legislation. In January 7, 2009, the LLP Bill, received the accent of the President and was thereafter published in the Official Gazette and the LLP Act came into force on March 31, 2009 by the Central Government. The LLP Act, 2008 thereby makes provisions for the regulation and formation of Limited Liability Partnerships and the matters related to it. The governance of the law is done by the Limited Liabilities Partnership Act, 2008, Limited Liabilities Partnership Rules 2008, Registrar of Companies and by the LLP agreement. The essential clauses in an LLP Agreement are; Competitive Clause, Vesting Clause, Interest on Capital and loan taken by Partners or the limit of loan, Liability of LLP for the acts of Partners and Amendment in LLP Agreement.

The Ministry of Corporate Affairs explained the need of LLP Act in following words:

“With the growth of the Indian economy, the role played by its entrepreneurs as well as its technical and professional manpower has been acknowledged internationally. It is felt opportune that entrepreneurship, knowledge and risk capital combine to provide a further impetus to India’s economic growth. In this background, a need has been felt for 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.”

The corporate nature of LLP and its mode of functioning makes it a unique structure of business which combines the advantages of a company and a partnership. LLP is a body corporate and a separate legal entity from its partners. It has a perpetual succession which implies that LLP can continues irrespective of the changes in existence of partners. LLP is capable of holding properties in its own name and can also enter into contract.

The partners of the LLP are considered LLPs agent rather than each other’s. they are responsible for managing day to day business and other statutory compliances. Moreover, one partner is not liable for the actions of the other partner, thus they are shielded from joint liability arising out of the actions of another partner like misconduct or wrongful business decisions. Further, the mutual rights and duties among the LLP partners are governed by an agreement between the partners or between the partners and the LLP as may be required.

Conclusion

The LLP structure in India has been proven to be particularly of advantage for providing such professional services in the era of satisfying the customer need with utmost productivity. It is suitable vehicle for partnerships among professionals such as company secretary, cost accountants, lawyers, engineers, doctors, architects etc. particularly accountants and auditors who are not legally entitled to operate a company.  

The primary reasons of introducing LLP included the risk factor and the enhanced global competition to the Indian professionals. In the event of failure of business, the liability would come up on the partner responsible. There would be no inclusion of personal assets of the other partners. This reduced the risk factor of unlimited liability in a partnership and introduced the concept of Limited Liability of company law to make such bodies more adaptive to international competition around the world. Also, the foreign entities having business in India consider reducing risk by employing LLP structure.

To sum up, the regulation of the LLP corporate structure has been a boon to Indian business interests and the business companies.

Bibliography

  1. iPleaders- https://blog.ipleaders.in/need-know-limited-liability-partnership-llp-india/
  2. Linkedin- https://www.linkedin.com/pulse/llps-india-all-you-want-know-bhumesh-verma?trk=pulse_spock-articles?utm_source=Mondaq&utm_medium=syndication&utm_campaign=LinkedIn-integration
  3. https://www.mondaq.com/india/corporate-and-company-law/552322/llps-in-india–all-you-want-to-know#:~:text=The%20first%20time%20the%20concept,of%20the%20existing%20Partnership%20Act.

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