Limited Liability Partnership: A Need of Professional Firms

By Vikram Kumar*

Limited Partnership (LP) and Limited Liability Partnership (LLP) are both businesses with more than one owner, but unlike general partnership, the Limited Liability Partnership (LLP) provides all of its owners with limited personal liability. The concept of LLP is particularly well-suited to professional groups, such as lawyers, company secretaries, chartered accountants etc. The professionals prefers LLP to general partnership, corporations or limited liability companies, because they don’t want to be personally liable for another partner’s problems particularly those involving malpractice claims.

Under general partnership the concept of ‘mutual agency’ operates, under which, each partner acts as the agent of the firm and of other partners for the purpose of the business of the firm. Further every partner is held liable jointly and severally with all the other partners for all acts of the firm done, while he is a partner. This unlimited liability of partners has become an increasing cause for concern in light of increase in the incidence of litigation for professional negligence, the size of claims and the risk to a partner's personal assets when a claim exceeds the sum of the assets of the partnership. The ‘unlimited liability’ of partners has been one of the main hurdles before the partnership of professionals to cope with the challenges posed by international competitions. The concept of LLP though gives some relief by allowing the partners to adopt whatever form of internal organization they prefer while at the same time limiting their liability with respect to the LLP to their individual contributions.

Some features which induce the professional firms to adopt the concept of LLP are as follows:
▪ The LLP is a body corporate formed and incorporated under a separate enactment and it is a legal entity separate from its partners. It will have perpetual succession.
▪ There is no limit on the maximum number of partners in a LLP.
▪ In LLP, a partner would not be liable for the independent or unauthorized actions of other partners. In this way it protects a partner from joint liability created by wrongful business decisions or misconduct of other partner.
▪ The liability of a partner in LLP is limited to his agreed contribution, which may be in the form of tangible or intangible assets.
▪ The merger and amalgamation of LLP is possible.

LEGISLATIVE RESPONSES:

United Kingdom – In United Kingdom the LLP is introduced by the enactments i.e.- the Limited Liability Partnerships Act 2000, applicable in England, Wales and Scotland and the Limited Liability Partnerships Act (Northern Ireland) 2002 applicable in Northern Ireland. Herein, members of a LLP have a collective responsibility up to the extent they may agree in the ‘LLP Agreement’, but no member is responsible for other’s action. Likewise a limited company or corporation, the member of a LLP cannot loose more than his investment, unless there is fraud or wrongful trading from his end. Upon the Tax matters the LLP in UK is similar to partnership and it is not subject to taxation rather its member pays tax in respect of income or gain received through LLP.

United States – In United States each individual state has its own law regulating the affairs of LLP. The Uniform Partnership Act, 1996 is the standard statute and laws in majority of states regulating LLP are corollary of this. One common feature of laws in U.S. States is the limited liability of partners of LLP like that in corporation. Likewise partnership or company with limited liability, the profits or gains of LLP are allocated among the partners for the purpose of tax payment. In United States the LLP is prevalent in various business fields, but it is especially popular among professionals. In some U.S. States namely - California, New York, Oregon and Nevada, the LLP is formed only for professional uses.

India – In India the LLP is to be implemented by the Limited Liability Partnership Act 2008, which has been published in the Official Gazette of India on January 9, 2009 but has not yet notified. The relevant rules are also in the stage of preparation. The first LLP in India is expected by 1st April 2009 but delay is inevitable because of general elections scheduled in April and May.

The important features of LLP in India under the Limited Liability Partnership Act 2008 are as follows:
(1) The LLP shall be a body corporate and a legal entity separate from its partner. It will have perpetual succession.
(2) Minimum two persons, out of which one has to be an Indian resident, are required for incorporating the LLP by registering it before Registrar of Companies. There is no limitation on the maximum number of partners and this enables it to grow like a company and to take on global competition.
(3) There is provision for conversion of existing partnership firm, private limited company and unlisted public company into a LLP by registering the same with the Registrar of Companies (ROC)
(4) The Registrar of Companies is empowered to strike off defunct LLP.
(5) Electronic filing of returns by LLP is allowed.
(6) The Central Government is empowered to make rules for effectively applying the Act.

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* The author has completed his LL.B. (Gold Medal) & LL.M. from B.H.U. He qualified the UGC-NET exam in December, 2003. Presently, he is working with Legal Department of Sahara India at Lucknow.