A limited liability partnership (LLP) is a corporate entity that integrates the organizational flexibility of a partnership with the limited liability protection along the lines afforded to a limited liability company. While this form of business model is available in countries such as the US, the UK and Singapore, the model is currently not recognized in India. However, such entities are now likely to find their way into the Indian legal system by means of the Limited Liability Partnership Bill, 2008, which aims to introduce LLPs in India.

Jayachandran / Mint

The committee made several recommendations that were examined and considered by the government, and were found to be necessary.The 2006 Bill was withdrawn and a fresh Bill incorporating the changes was reintroduced in 2008. It has been passed by the Rajya Sabha but is pending consideration by the Lok Sabha.

An LLP allows its partners to adopt an internal organization similar in form to that of a traditional partnership while limiting their liability to the extent of their individual capital contributions. LLPs are projected to fill the lacuna between sole proprietorship/partnership firms under the Indian Partnership Act, 1932, and companies incorporated under the Companies Act, 1956, by making available an alternative business conduit where members can freely govern their business, i.e., without the corporate governance rigours of a company and without being exposed to personal liability for other members’ acts and omissions.

As per the Bill, an LLP can be created by registering a new LLP entity or by converting an existing partnership firm or company into an LLP. An LLP may be incorporated with a minimum of two partners.

Unlike partnerships under the Partnership Act, where the number of partners is restricted to 20, the new Bill does not set any upper limit on the number of partners in an LLP.

Further, every LLP is required to have at least two designated partners who are to be responsible for ensuring compliance with the provisions of the Bill and the LLP agreement entered into between the LLP and its partners and among the partners themselves.

Of the two designated partners, at least one is required to be resident in India. The Bill also permits foreign limited liability partnerships to establish a place of business in India, in accordance with rules which are to be separately framed and notified by the government.

The Bill structures an LLP as a body corporate having perpetual succession and a legal entity separate from its partners, thus allowing a change in partners without distressing the existence, rights and liabilities of the partnership. Upon registration, an LLP can sue and be sued, acquire, own and dispose of property and have a common seal like a corporate body.

LLPs can also be wound up, either voluntarily or by the tribunal (currently not in existence) that is to be established under the Companies Act.

The relationship between an LLP and its partners and among partners themselves is to be regulated by a mutually-arrived-at LLP agreement. In the absence of such an agreement, what will be applicable is the First Schedule of the Bill.

Importantly, every partner is the agent of the LLP in respect of the business of the LLP but is not considered the agent of other partners. In terms of capitalization of LLPs, the Bill does not lay down any minimum capital requirement that an LLP is required to satisfy; partners are only obliged to contribute money or other property as agreed to in the LLP agreement. Moreover, the rights of a partner to share profits and losses of the LLP are transferable and may be transferred either in whole or in part by any partner. It should be noted that the transferee of such rights does not acquire any management rights or any right to conduct the activities of the LLP.

One of the unique selling points of an LLP is that, similar to a limited liability company, the partners of an LLP cannot be made personally liable in respect of any liability arising out of a contract or otherwise.

The Bill puts such liability as the sole obligation of the LLP. This, however, is not without exceptions. The protection is not available to the partners in an LLP in respect of their own wrongful acts or omissions.

Further, if the LLP and its partners have acted with the intent to defraud creditors or have acted in a fraudulent manner, then the liabilities of the LLP and such partners are unlimited for such debts or other liabilities. In such circumstances of fraud, there are provisions in the Bill which require the Union government to appoint one or more inspectors to investigate the affairs of the LLP.

Seeking to augment financial disclosure, the Bill requires every LLP to maintain proper books of accounts and make the prescribed filings with the relevant registrar of companies every fiscal.

The accounts of the LLP are also required to be audited. The Bill, however, remains silent on the tax position of LLPs, which understandably are expected to be addressed separately through amendments to the Income-tax Act, 1961

The need for a new corporate organization that would provide an alternative option to taking recourse to a partnership under the Partnership Act with unlimited personal liability on the one hand, and the rigid statute-based governance of a company on the other hand, had been felt for a long time. LLPs appear to enable professional expertise and entrepreneurial initiative to organize and operate in a flexible, novel and efficient manner.

Owing to flexibility in its arrangement and operation, it is expected that LLPs would also be a suitable vehicle for small enterprises and for investment by venture capitalists. But what remains to be seen is whether the legislature thinks the same way and translates the Bill to legislation.

This column is contributed by Esha Pruthi of AZB and Partners, Advocates and Solicitors. Send your comments to lawfullyyours@livemint.com