Summary: Article explains the concept, legal framework, features, governance, and liability structure of a Limited Liability Partnership (LLP). It states that an LLP combines features of a partnership and a company by providing limited liability while allowing partners flexibility through an LLP agreement. It outlines that the LLP Act, 2008 governs LLPs, with different provisions becoming effective from March 31, 2009, May 31, 2009, and July 10, 2012. The article describes key features, including administration by the Registrar of Companies, absence of a maximum limit on partners, and eligibility of individuals and body corporates to become partners. It explains the role, eligibility, and identification requirements of designated partners, including the use of DIN in place of DPIN from July 9, 2011. It also covers admission and cessation of partners, LLP agreements, transfer of profit-sharing rights, agency principles, liability of the LLP and partners, circumstances in which liability becomes unlimited due to fraud, and the requirement that partners’ contributions be recorded in the LLP’s books of account and financial statements.
Introduction to Limited Liability Partnership
As most of us are aware, the Limited Liability Partnership, or LLP, is an alternative form of business that combines the features of both a partnership and a company. It not only provides the benefit of limited liability but also allows partners or members the flexibility to organize their internal affairs as a partnership firm, with terms mutually agreed upon in an agreement between the partners. However, the liability of the partner remains limited, but not to the extent of a shareholder in case of any private limited company limited by shares.
The liability of the partners or the members shall be unlimited only when the partner or the member commits any act that is termed as fraud under any law or any default that mandates the liability to be unlimited for the partner or the member even though the status of the entity is Limited Liability Partnership.
In an increasingly challenging and ever-changing business environment, the need for having a corporate structure that bridges the void between the traditional partnership form of entity consisting of unlimited personal liability for the partner, and the rigid, statute- and compliance-driven governance framework of a company with limited liability. Such a structure was introduced to provide professionals and entrepreneurs with the flexibility to operate effectively and efficiently, fostering innovation, professional expertise, and entrepreneurial innovation while benefiting from limited liability.
Legal governance for the LLP
The Limited Liability Partnership or the LLP is governed by the Limited Liability Partnership Act, 2008. Except for certain sections, the LLP Act, which was introduced in 2008, was effective from March 31, 2009, and the rules made thereunder were notified on April 01, 2009.
As far as our knowledge, the very first incorporation of an entity as an LLP was on April 02, 2009, named Handoo and Handoo, a Delhi-based legal consulting firm which was earlier known as R K Handoo and Associates.
Later on, provisions enacted under sections 55 to 58 relating to conversion of a partnership firm or a Company into an LLP, and rules pertaining to such sections were made effective from May 31, 2009.
Provisions enacted under sections 51, 63 to 65 relating to winding up or liquidation of an LLP were effective from July 10, 2012.
Features of an LLP
1. Hybrid form of entity of a Partnership firm governed by the Indian Partnership Act, 1932 and a Company governed under The Companies Act,2013.
2. LLP’s are administered by the Registrar of Companies
3. The liability of the partners remains limited unless the partner acts with an intent to commit fraud.
4. A body corporate with similar features to a Company
5. No maximum limitation on the number of Partners
6. An individual or a Body Corporate may become a Partner in an LLP.
Designated Partners of an LLP
Every LLP that is incorporated must have at least two individuals as the designated partners and at least one designated partner must be resident in India, which means any person who has stayed in India for not less than 182 days in the immediately preceding one year qualifies to be a resident in India.
A body corporate may appoint any individual associated with such body corporate as a designated partner, and such incorporation document shall specify the names of such designated partners being enrolled with the LLP.
A person who is named as a designated partner must obtain a Designated Partner Identification Number or DPIN. With effect from July 09, 2011, any person who shall be appointed as a designated partner must obtain a Director Identification Number or DIN by filing Form DIR 3 with the Ministry of Corporate Affairs under the Companies (Director Identification Number) Rules, 2006. Individuals having both DIN and DPIN: their DPIN gets automatically cancelled, and the DIN remains a valid identification number for such individuals.
In a case where there is no designated partner, or there is only one designated partner in the LLP, then each partner is deemed to be a designated partner.
Designated Partners are those individuals who are responsible for doing all the acts and matters that are required to be performed in compliance with the provisions of the LLP Act, and if any such individual defaults in some matter, they shall be liable for heavy penalties that are imposed by the regulating authority on the LLP.
Partners and the relation
Individuals who subscribe their names to the incorporation documents of the LLP shall be termed as the First Partners of the LLP, and any other person may become a partner in such LLP in accordance with the provisions mentioned in the agreement.
As per the provisions enlightened in Section 5 of the LLP Act, 2008, only an individual or a body corporate may be a partner in the LLP. A Hindu Undivided Family or HUF cannot be treated as a body corporate for the purposes of the LLP Act, 2008, therefore a HUF or its Karta cannot become a designated partner in the LLP.
The mutual rights and duties of the partners amongst themselves, the LLP and its partners are governed by the LLP agreement between the partners or between the LLP and its partners.
The agreement so entered, or any changes to the said LLP Agreement, shall be filed with the Ministry of Corporate Affairs or MCA in Form 03 of LLP. In case the LLP agreement remains silent in any matter or remains undefined, the provisions of the Act shall prevail in such cases.
A person may cease to be a partner of the LLP by providing a notice in writing of not less than thirty (30) days. In the following cases, a person shall cease to be a partner
1. The agreement specifies the provisions wherein the person shall cease to be a partner
2. Death of the partner
3. The partner is declared to be of Unsound Mind
4. The partner is declared insolvent or adjudged insolvent.
The partner of an LLP holds the right to share the profits and losses, which is transferable at his discretion, provided the LLP agreement allows such transfer of profits and losses. However, the transferee, on account of transfer of such rights, will not be entitled to participate in the management of the LLP or have the right to access information of the LLP. The transfer itself does not result in the dissociation of the partner from the LLP or dissolution of the LLP.
Extent of Liability – for the LLP and its Partners
Every partner of the LLP is an agent of the LLP but not the other partners. Obligations of the LLP remain the sole obligation of the LLP, and such obligations and liabilities are to be met out of the assets or the properties of the LLP.
The LLP shall not be held liable for the acts wherein the partner performs without any proper authorization to perform on behalf of the LLP. It shall only be held liable where the wrongful act or omission of a partner was in the due course of the business of the LLP with the authorization to perform any such act on behalf of the LLP.
A person who represents himself or holds out himself to be a partner knowingly permits himself as a partner shall be liable to any person who, based on such representation, has given a debt or credit to the LLP or entered into a transaction not so authorized by the LLP. The LLP receiving such credit shall also be held liable up to the amount received as a debt or credit.
If an LLP or any of the partners of such LLP act with an intention to defraud the creditors of the LLP or any other person for any fraudulent purpose, then the liability of the LLP and the concerned partners is unlimited. However, in cases wherein the act was carried out by a partner without any knowledge of the LLP or authorization by the LLP, only the partner in default shall be held liable and have unlimited liability.
If the business is established and carried out with a fraudulent intent or for a fraudulent purpose, every person who was a part of the act, knowingly, shall be held accountable, and imprisonment and fine shall be imposed. Also, the LLP and its partners and designated partners, along with its employees conducting its affairs in a fraudulent manner, are liable to pay compensation for such acts.
Contributions
The obligation of any partner to contribute shall be as per the conditions stated in the LLP Agreement. It may consist of tangible or intangible, movable or immovable property or any other kind that benefits the LLP. The contribution of each partner along with the nature of the contributions has to be properly disclosed in the books of accounts maintained by the LLP and in the financial statements prepared by the LLP.
Key Takeaways
- A Limited Liability Partnership (LLP) combines the operational flexibility of a partnership with the benefit of limited liability.
- LLPs are governed by the Limited Liability Partnership Act, 2008 and administered by the Registrar of Companies (ROC).
- Every LLP must have at least two designated partners, with at least one being resident in India.
- The mutual rights and obligations of partners are primarily governed by the LLP Agreement.
- A partner is an agent of the LLP but not of the other partners.
- The liability of partners generally remains limited, except in cases involving fraud or fraudulent conduct.
- Contributions may be in cash, tangible or intangible assets, or other benefits and must be appropriately recorded in the LLP’s books of account and financial statements.
- Profit-sharing rights may be transferred in accordance with the LLP Agreement, but such transfer does not confer management or information rights on the transferee.
Conclusion
A Limited Liability Partnership has emerged as a preferred business structure for professionals, start-ups, and entrepreneurs by combining the flexibility of a traditional partnership with the protection of limited liability. The LLP Act, 2008 provides a comprehensive legal framework governing incorporation, management, partner relations, liability, and compliance requirements. While partners generally enjoy limited liability, the law also ensures accountability by imposing unlimited liability in cases involving fraud or fraudulent conduct. A properly drafted LLP Agreement, adherence to statutory compliances, and transparent disclosure of partner contributions are essential for the efficient functioning of an LLP. Understanding these legal provisions enables partners to manage their affairs effectively while enjoying the commercial advantages offered by this hybrid business structure.
Frequently Asked Questions (FAQs)
Q1. What is a Limited Liability Partnership (LLP)?
An LLP is a business structure that combines the flexibility of a partnership with the benefit of limited liability for its partners.
Q2. Which law governs LLPs in India?
LLPs are governed by the Limited Liability Partnership Act, 2008 and the rules made thereunder.
Q3. How many designated partners are required in an LLP?
Every LLP must have at least two designated partners, of whom at least one must be resident in India.
Q4. Can a body corporate become a partner in an LLP?
Yes. Both an individual and a body corporate may become a partner in an LLP in accordance with the LLP Act.
Q5. Is the liability of partners always limited?
Generally, yes. However, liability becomes unlimited where the LLP or its partners act with intent to defraud creditors or for any fraudulent purpose.
Q6. Can a partner transfer his profit-sharing rights?
Yes, subject to the LLP Agreement. However, such transfer does not entitle the transferee to participate in the management or obtain information relating to the LLP.
Q7. What forms can partner contribution take?
Contribution may consist of tangible or intangible property, movable or immovable property, or any other benefit to the LLP, as agreed in the LLP Agreement.
Author’s Note
This article provides an overview of the legal framework governing Limited Liability Partnerships under the Limited Liability Partnership Act, 2008 based on the provisions discussed above. Readers should refer to the Act, applicable Rules, notifications, and professional advice for guidance on specific situations or compliance requirements.
