LIMITED LIABILITY PARTNERSHIP ACT, 2008 – AN OVERVIEW

Much awaited and talked about “Limited Liability Partnership Act, 2008” ultimately received the assent of the President of India on 7 th January 2009. This piece of legislation is especially useful and beneficial to small traders, businessmen and professionals. It has opened up an altogether new vista for the small entrepreneurs, service providers and professionals who are afraid of various compliances of the bulky Companies Act, 1956.

As far as professionals are concerned (Lawyers, Chartered Accountants, Company Secretaries, Cost & Works Accountants), it has really opened a new arena as almost all the professional bodies restrict conducting of the professional practice in corporate umbrella, though partnership form of organization is not prohibited. Thus, with the enactment of the LLP Act such professionals and small entrepreneur, can take almost all the major benefits of Corporates but at the same time will not be subject to the vagaries of various compliances of the Companies Act, 1956.

The Limited Liability Partnership Act, 2008 has all the tapping of a Corporate Entity i.e., all the benefits of Private / Public Limited Company (except to approach the Capital market and also issuance of various corporate debt and equity instruments ) are available to a Limited Liability Partnership Firm ( LLP Firm).

Benefits and Advantages

The major characteristics and benefits of LLP Firm are as under:

Unlike a Traditional Partner-ship f irm (TP Firm) ( i.e. Partnership Firm under the Partnership Act, 1932 ) whose constitution changes with every incoming or outgoing partner ( i.e. whenever a partner is inducted or retires), LLP Firm is a corporate entity and incoming and / or outgoing of a partner does not affect its existence. This provision is of great relevance for all practical purposes, as with every change in the constitution of TP Firm various licenses / approvals issued by the various authorities and departments to TP Firm technically need to be re-approved as TP Firm has ceased to exist and a new one consisting of almost the same partners comes into existence. Whereas since an LLP Firm is a corporate entity, all these exercises need not to be done. [Section 3(1)]

LLP Firm can acquire / dispose of property in its own name, and can sue and be sued in its own name. Whereas in a TP Firm, since the Firm is not an entity, all these activities have to be done in the individual name of partners and not in the name of the TP Firm. [Section 14]

As the name itself suggests, the liability of partners in an LLP Firm is limited, unlike in TP Firm where the liability of partners is unlimited and their personal properties are also liable for the debts of the firm, irrespective of their share in the Partnership Firm. This feature is a unique feature, which was found only in the case of Private / Public Limited companies / Societies / Co-operative Societies. [Sections 3(2), 27(3)(4), 28(1) ]

To ensure that the basic feature of partnership is retained and the LLP f irm after incorporation does not convert itself to a sole proprietorship firm, the Act provides that LLP Firm should continue to have only two partners, and if the business is carried out for more than 6 months with only one partner, the liability of LLP f irm should become unlimited. [Section 6]

The Act also provides a procedure for the formation of LLP Firm. Any two or more persons can incorporate LLP Firm by applying the same with the Registrar, along with Incor-poration Document, Prescribed Fees and a certificate that the various formalities under the Act have been complied with. Interestingly, such certificate is also required under the Companies Act for the incorporation of a Private / Public Limited Company where the same may be issued by a professional or the proposed Director of the said company. But this provision is more stringent in LLP Firm where it is required from a professional i.e. an Advocate, CA, CS, ICWA and also by one of the subscribers to the incorporation document. [Sections 11 and 12]

However, unlike in a partnership firm where there is no restriction on the choice of name, LLP Firm's name needs to be approved from the Registrar. The Registrar will not approve the name if (1) it is similar / identical with the name of another LLP Firm; and (2) undesirable. Besides, if by mistake, an LLP Firm is registered by the similar / identical / undesirable name, the Central Government may direct for the change of name of the LLP Firm which needs to be complied with within 3 months. [Sections 15, 16 and 17]

It is difficult to find out from the name of a firm as to whether it is a partnership firm or sole proprietorship firm, as the Partnership Act, 1932 does not provide for addition of any specific word in case of TP Firm. But an LLP Firm can be easily distinguished from other forms of organization as it is compulsory for the LLP Firm to include the words “LLP” or “Limited Liability Partnership” at the end of its name. [Section 15]

In case of an LLP Firm, any partner can retire from the partnership after giving 30 days' notice to the other partners of his intension to retire. But if the notice of his retirement is not delivered to the Registrar, the liability of the outgoing partner towards the third party who has entered into contract with the LLP Firm while he was a partner, does not cease, until and unless the said third party has the notice of his retirement. Since practically it is impossible for an outgoing partner to give such a notice to all the third parties, it is specifically provided under the Act that if such a notice is delivered to the Registrar, the obligations of the outgoing partner cease. [Section 24 ]

The basic and cardinal principle of the TP Firm is “Mutual Agency” i.e. a concept in which every partner is the agent as well as the principal of the other partners. By the applicability of this principle, a debt taken / payment made to a partner in the capacity of the partner or a contract entered into by a partner in the capacity of the partner, not only binds the firm but also other partners individually and personally. E.g. bank debt in the name of firm, based on the documents signed by Mr. X can be recovered by Mr. A (another partner) even from his personal property, even though he has not signed the document. This concept of “Mutual Agency” is not available to an LLP Firm and the partners are agents only of the Firm and not of other partners. [Section 26]

However, to prevent the corporate façade from being instrumental in corporate frauds and the wrongdoers escaping their personal liability under the shield of corporate entity, the Act specifically provides that in case of any act being carried out either by the LLP Firm or of any of its partners with an intent to defraud its creditors, the liability of the LLP Firm / partners will become unlimited for all or any of the debts of the LLP Firm. [Section 30]

Another marked distinction between the TP Firm and the LLP Firm is whereas there is no requirement of any compulsory audit of accounts of TP Firm (except under the Income Tax Law and that too after crossing of minimum prescribed turnover), LLP Firm needs to get its accounts audited compulsorily in accordance with the rules framed thereunder, irrespective of any minimum turnover. [Section 34]

Though the LLP Act has tried to incorporate many basic characteristics of corporate entity, but nonetheless, the very concept of Traditional Partnership has been retained. The basic concept is the partnership agreement which is based on the mutual trust and confidence and therefore in a partnership firm an outsider cannot be permitted to be inducted as a partner even if any one of the partners opposes the same. This concept has been incorporated in the LLP Firm also. The LLP Act though empowers transfer by a partner of the whole / part of his / her rights in the LLP Firm to an outsider, but by retaining the basic characteristics, it restricts the purchaser of such rights of a partner in participating in the management or conducting the partnership business or availing any information concerning the transactions of the LLP Firm. Whereas in a Private / Public Limited Company any shareholder who purchases the shares of the Private / Public Limited Company has the right to take part in the management of the said company to the extent of his shares and there is no restriction on it. [Section 42]

To ensure that the regulations of the LLP Firm are in order, the Act empowers the Central Government to apply the various provisions of the Companies Act, to the present Act after a notification. [Section 67]

Keeping in view the changing technological scenario, the Act empowers for the filing of various returns and documents via internet. [Section 68]

The most important piece of the whole Act is the First Schedule which provides for the mutual duties and liabilities of the partners. Where there is a partnership agreement, the same will prevail. But where there is none, the provisions of First Schedule of the Act will apply which provides for equal sharing of profits and losses of the company and the compulsory reference to arbitration in case of inter se partners' dispute. [Section 23 read with First Schedule]

By the enactment of this piece of legislation, a new era in the business organization has been established by the Government. Now, even a small entrepreneur can take all the advantages available to the corporate without any stringent compliances. A welcome step, in any case!