UNIQUE ID - GLE/15/T027

TOPIC-LIMITED LIABILITY PARTNERSHIP: BALANCE BETWEEN

PARTNERSHIP AND COMPANY.

ABSTRACT

Limited liability partnership entities, across the world wide recognized different form of the
business organisation has been introduced in India by way of Limited Liability Partnership
Act, 2008. A hybrid model of business that embraces to cover the flexibility of partnership
along with the advantage of the limited liability of a company at low compliance cost the
Limited Liability Partnership is intended to be created to supporting as well as making a
balance between the large scale industry and service sector enterprises. This essay attempts to
introduce the concept of the Limited Liability Partnership along with the need of setting up
the Limited Liability Partnership in place of partnership and Limited companies along with
the balance between the partners and the company. The essay covers up the various taxation
aspects in the view of the Limited Liability Partnership that covers sales taxes, value added
taxes, Wealth tax, Service tax and Income tax and in the years to come Indian professionals
would be providing accountancy, legal and various other professionals/technical services to a
large number of entities across the globe .such services would require multidisciplinary
combinations that would offer a menu of solutions to international clients .This essay
concluded that in the near future more Limited Liability Partners and company form of
organizations in India.

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INTRODUCTION

The Limited Liability Partnership (LLP) Bill, 2006 was introduced in the Rajya Sabha on 15th
December, 2006. The bill was referred to the Lok Sabha Standing Committee on Finance, for
examination. The said committee presented/submitted its report to the Parliament on
27thNovember, 2007.Based on such report by the Minister of Corporate Affairs revised the
LLP bill and the revised LLP bill, 2008 was introduced in the Rajya Sabha 0n 21st October,
2008.This was passed by the Rajya Sabha on 24th October, 2008. The bill was passed by Lok
Sabha on 12th December, 2008. The president gave an assent on 7th January, 2009.The Act
has been made operational W.E.F 31st May, 2009. Partnership has been oldest forms of
business relationships and this can be evidenced in the form that in terms of business
complex partners have been replaced by the limited liability Companies concepts but the LLP
is still preferred for the small scale industries, private sectors and business enterprises,
specially for professionals World Wide. With respect to country like India, the importance of
the subjects like LLP has been growing since day by day with the upward moving trend in the
Limited Liability Partnerships registration(sec-13,Registered office of LLP and change of it.)1
and conversions of the traditional unlimited partnerships to the LLP status.

So LLP is a growing hybrid model of the business organisations in India that combines the
positive aspects of both the company and the partnership.LLP is being managed as per the
LLP agreement2 however in the absence of such agreements the LLP would be governed by
the sections given in the schedule 1of LLP Act, 2008 which describes the matters relating the
mutual rights and the duties of the partner of Limited Liability partnership, In the LLP the
partners are not responsible for the each other misconduct or negligence; that makes a
difference from the unlimited partnership.

Limited Liability Partnership formed and registered under this act shall have the features of
the perpetual successions, Power to sue and to get sued, Capacity to buy and sell securities in
its own registered name and common seal. The Limited Liability (LLP) is viewed as an
alternative business vehicle that provides the benefits of limited liability but allows its
member the flexibility of organising their internal structure as a partnership based on a
mutually arrived agreement. The LLP form would enable entrepreneurs, professionals and
enterprises providing services of any kind or engaged in scientific and operation, the LLP
would also be a suitable vehicle for small enterprises and foe investment by venture capital.

The Limited Liability Company in the United States

In 1975, corporate lawyers advising Hamilton Brothers Oil Company lobbied for the
introduction of a new business form, the LLC. This business form bundled together limited
liability, a flexible governance structure and preferential tax treatment. The hybrid business

1
Any contravention of the provisions of the section makes the LLP and its every partner liable to fine of rupees
2000 extending upto 25,000
2
Limited Liability Partnership Act,2008[s.23]

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form required less ongoing paperwork than corporations. Also, it provided its members with
an almost total shield against personal liability without cumbersome formation and capital
maintenance rules. After a failed legislative effort in Alaska, corporate lawyers lobbied
successfully for the enactment of the LLC statute in Wyoming, another state with significant
gas and petroleum production facilities, in 1977. In 1980, the Internal Revenue Service (IRS)
issued a private letter ruling to the Oil Company securing the favourable partnership taxation
for its Wyoming LLC structure. Florida enacted LLC legislation in 1982 to attract foreign
investors, particularly from South and Central America. However, the uncertainties
surrounding the tax classification of LLCs in general severely hampered the rush to conduct
business under this new statute, and consequently did not lead to the expected upsurge of
economic activity in Florida. As late as 1988, the IRS clarified the tax treatment of the LLC
by issuing a ruling stating that the eligibility for partnership tax treatment is conditional upon
the business form’s corporate features. If the LLC lacked two of the four corporate
characteristics considered by the IRS to be crucial (continuity of life, centralization of
Management, limited liability and free transferability of interests), then the Treasury
regulations would treat the LLC as a partnership for tax purposes. After this ruling, other
states jumped on the LLC bandwagon, slowly and hesitantly at first. But, after 1990, LLC
legislation swept rapidly through the United States, largely because of competitive pressures
and domestic interest groups, more specifically corporate lawyers expecting additional clients
and work from the LLC. LLC provisions have been adopted in all 51 US jurisdictions by the
close of 1996.
LIMITED LIABILITY STRUCTURE IN INDIA

The LLP structure is broadly based on the United Kingdom Limited Liability partnership Act,
2000 and the Singapore LLP Act, 2005. Although this business form carries the designations
partnership and liability, an LLP in the United Kingdom is governed neither by the
partnership Act, 1907, which were already in force at the time of formation of LLPs. In
general, therefore, the law of partnership will not be applicable to LLPs in UK. Nevertheless,
for taxation purpose, an LLP and a partnership is a tax-neutral one. Further a Limited
Liability partnership can be formed by two or more persons with a view to make profits
lawfully; it is not restricted solely to the largely professional partnership such as those of law
and accounting firms. An LLP, the UK, is a body cooperate with the separate legal entity
under the LLP ACT, 2000.3The registration is to be done with the Companies House. There
should be a minimum of two members to form the LLP, and further at least two of the
members should be among the designated members .the designated members are being
responsible carrying out the business and statutory compliances. An LLP can borrow money
and funds in its own name. Foreign nationals can be the partner of Limited Liability
Partnership. The cost for the formation of a LLP in UK is less as being compared to the
company. The liability depends on the amounts of the capital invested towards the LLP.

LLPs were introduced in Singapore in on April 11, 2005. All the LLPs are to be registered
in the registered office of companies of the Singapore. Singapore is a separate legal entity in
the matters of the LLP. There should me minimum of the two members should be amongst

3
LIMITED LIABILITY PARTNERSHIP ACT, 2000 §1(2)

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the designated members and at least two should form a partner. A person himself is not liable
for any of the torts or breach of the contract, solely by reasons of being a partner of the LLP.
Only liability of the other partners is covered by this law; the partnership is not relieved from
the liability for other partnership obligations. The contribution of partners to the LLP is as per
the LLP agreement and the cost of formation of a company. An LLP is wound up voluntarily
or by order of the court. In India, businesses mainly operate as companies, sole
proprietorships and general partnerships. Each of these business structures has its own
advantages and shortcomings and is subject to different regulatory and tax regimes. The
primary intention of LLP is that its external structure should mirror that of the limited
company but in terms of conduct of internal affairs it would be similar to traditional
partnership. The Partnership form of business fails to recognize the difference between
Partnership and Partners. It also restricts the maximum number of partners to ten, in case of
banking business and twenty in case of other business and it imposes unlimited liability on
each partner for acts committed by another and by Partnership as a whole. The Private
Company form of business, by its articles of association, limits the number of its members to
fifty (excluding the past and present employees of the company), restricts the right of its
members to transfer its shares and prohibits an invitation to the public to subscribe to any
shares in or the debentures of the company.

CRITICAL OVERVIEW OF THE LIMITED LIABILITY ACT

The Limited Liability Partnership Act clarifies that an LLP is a body of corporate having a
separate legal existence distinct from its partners. Under this act the partner’s vicarious
liability is limited to the wrongful acts of the partnership and not for liability arising in the
ordinary course of business.4 It has all the incidental characteristics of a body corporate
including that of perpetual succession, ability to sue and to be sued, and a common seal5. Any
such partnership mandatorily needs to be incorporated with the terms “Limited Liability
Partnership” or “LLP” at the end of its name. The LLP act was drafted for the transparency in
the rules and regulations of the LLPs and to prevent the defrauding of creditors and debtors
while also giving the partner the flexibility to conduct internal affairs. In a sense the Magna
carta for LLP is an agreement drafted by the partners. To act as a watchdog, however, the
LLP Act provides for a comprehensive investigation mechanism, empowering the registrar to
call for information before incorporation, and empowering the central government to appoint
inspectors to inquire into the affairs of the LLP. Furthermore, disclosure of the financial
statements of the LLP is compulsory and any contravention with the relevant provisions
attracts severe penalty.6

NEED FOR LLPs IN INDIA

5
Limited Liability Partnership Act, 2008 (sec 3&14)
6
LLP Act chap 7

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The two primary reasons for introducing LLP were the Risk Factor and the enhanced global
competitive advantage to the Indian professionals. In the event of business failure, the
liability would be limited to the partner responsible. There would be no recourse to attach the
personal assets of the other members. This lowers
The risk factor associated with unlimited liability in a partnership and introduced the limited
liability concept of company law to make such bodies more adaptive to international
competition. In the years to come, it may be possible that the various useful services will be
provided by a large pool of Indian professionals to the International clientele. But, in an
increasingly litigious environment, it is really very risky to be a member of partnership firm
with unlimited liability. So, a need was felt that there should be a new corporate entity as an
alternative to the traditional partnership with limited liability and flexible business
environment to operate efficiently to give competition to the International market. Many
professionals in India, such as advocates/lawyers, chartered accountants and doctors are
precluded from practicing through companies. The LLP structure would be particularly
advantageous for providing such professional services in the era of satisfying the global
customers with utmost sincerity. Hence it would be a suitable vehicle for partnership among
professionals who are already regulated such as company Secretaries, Chartered Accountants,
Cost Accountants, Lawyers, and Architects, Engineers and Doctors etc., particularly
accountants and auditors who are not legally permitted to operate as company.

LIMITED LIABILITY PARTNERSHIP IN INDIA

The economy of the India is growing and flourishing. The country India is known for its
highly trained professionals and technicians. Western companies and firms are increasingly
outsourcing the Information Technology and legal services in India. Yet, The Government of
India is facing up with the complex problem. The small and medium sized enterprises are
under developed and provide only 10% of the number of available job oriented opportunity in
India.7Against the background of this, the need has increased for the modernization the legal
framework as well as the infrastructure. In particular the introducing of the new form of
hybrid business, based on the Limited Liability Partnership of UK model and its set of
individual LLP regulations, should make it easier for entrepreneurs to start a business. 8 The
delay in the Limited Liability partnership, 2008 seems to have provided opportunities of the
lawmakers to learn from the experiences from the United Kingdom.

BALANCE BETWEEN PARTNER AND COMPANY

The registration process of the Limited Liability Partnership there is a compulsory

registration process is required with the ROC whereas in that of company compulsory
registration is required with the ROC. Certificate of the incorporation is a conclusive
evidence. The naming of a public company to end with the word “limited” and a private

7
See Financial Statement, 6th Sep 2010.
8
Interestingly, The LLP in the country India has introduced before discussions on a more general company law
review were started. It is only to be expected that the new private company law will be more flexible and
contractual in nature.

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company with the words “private limited” where according to the LLP Act name to be end
with “LLP” Limited Liability Partnership. The capital contribution in a private company
should have a minimum paid up a capital of ₹ 1Lakh and ₹ 5Lakh for a public company but
in the LLP act it is not specified. The legal status entity of both the acts is not specified. The
liability is to the extent of unpaid capital in the company and in LLP liability is limited to the
extent of the agreed contribution. The no. Of share holders and partners in company is
minimum of 2 and 7 in case of private and public company respectively. In a business,
private company, maximum of 50 shareholders but in the LLP minimum of 2, No maximum.
In a company foreign nationals can be shareholders but in LLP foreign nationals can only be
partners. In company there is quarterly board of Director’s meeting and annual general
meeting of share holder is mandatory but in the LLP it is not required. The annual return and
annual account is to be filed with ROC, in LLP annual statements of accounts and solvency
& annual return has to be filed with ROC. The audit is compulsory, irrespective of share
capital and turnover in subject of company but in LLP audit is required, if the contribution is
above ₹ 25lakh or if the annual turnover is above ₹40lakh. The dissolution of the company is
very procedural voluntary or by the orders of the court as in the case of LLP. A firm may be
converted into an LLP in accordance with the provisions of Chapter 10 and the second
schedule [§55] whereas a private company may convert into an LLP in accordance with the
provisions of Chapter 10 and the Third Schedule.[§56] but in an unlisted public company
may convert into an LLP in accordance with the provisions of Chapter 10 and the fourth
Schedule.[§57]

The Registrar, on being satisfied that a firm, private company or unlisted public company
has compiled with the provisions of the first, second or Third schedule has to register the
document submitted under the applicable schedule. The Registrar then has to issue a
certificate of registration in such form as the Registrar may determine stating that the LLP is
registered under the Act on and from the date specified in the certificate. Within 15 days the
LLP has to inform the Registrar of Companies or Registrar of partnership with whom the
company or the firm was registered about the conversion and of the particulars of the LLP.
This has to be done in the prescribed form and manner [Sub-s (1)]

Upon such conversions, the partners of the firm, shareholders of the private company or
public unlisted company would become an LLP. The partners of the LLP are to be bound by
the provisions of the applicable schedule the effect of conversion, as from the date of the
certificate of registration, would be as specified in the second schedule, Third schedule and
fourth schedule as may be applicable.

Sub-section (4) indicates some further effects of conversion. It says, that there emerges a
Limited Liability partnership by the name specified in the certificate of registration; all the
tangible (movable or immovable) and intangible property vested in the form of company, all
assets, interest, rights, privileges, liabilities, obligations relating to the firm or the company
and the whole of ties, obligations relating to the firm or the company and the whole of its
undertaking is to be transferred to and vested in the LLP without any further assurance, act or
deed; the firm or the company is deemed to be dissolved and removed from the records of the
registrar of firm or companies.

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After globalization, Indian professionals are able to serve worldwide. They cannot serve in
form of company because of professional restrictions and moreover they hesitate to form
Partnerships due to number of reasons. In the wake of same, LLP would be a suitable vehicle
for partnership among professionals who are already regulated such as company secretaries,
chartered accountants, cost accountants, lawyers, architects, engineers, doctors. So, we can
say that LLP is a format that attempts to fill up the vacuum that existed between partnership
law and company law. It is a marriage of principles of company law and partnership law in
order to address the deficiencies in both the areas for small scale business and professional
firms. LLP promises a rosy future in the future for the small scale industries and the
professionals alike. Moreover, the possible Business Structures can convert into reality if the
concerns that matters relating to the same are contained. LLPs can be seen as a corporate
business vehicle that enables professional expertise and entrepreneurial initiative to combine
and operate in flexible, innovative and efficient manner, providing benefits of limited liability
while allowing its members the flexibility for organizing their internal structure as a
partnership. This set up is useful for small and medium enterprises in general and for the
enterprises in service sector. Hence, there is a large scope of LLPs in future given that the
issues relating to them are timely and properly addressed to ensure their working the best
possible and efficient manner. With its inherent flexible structure, it remains a viable form of
business in the long run. The Indian LLP has attained a successfully middle path between the
company and the partnership. The Limited Liability Partnership has the provisions of the
incorporations of, or conversion to, an LLP, up to the winding up of the LLP. Details
emphasis has been given elucidated. Subsequent to the Finance Act, 2010, the taxation of an
LLP has been clarified to similar to the taxation of partnership. Moreover the securities and
exchange Board of India through its circular dated July 11, 2011 has stated that LLPs are
similar to the Limited Liability Companies and partnership firms, and are thus eligible to be
admitted as members of stock exchanges. Thus is the subject to LLP compliance with the
conditions laid down in the Rule 8(4a) of the Securities Contract Regulations Rules, 1957 as
far as it may apply to LLPs.

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