In the contemporary and complicated world, nobody desires to have liabilities hovering over their head, but everybody prefers ease and flexibility in carrying out business with simultaneous profitability. Evolving from time to time, the concept of Limited Liability Partnerships (LLPs) is based on the same lines. With a quite intriguing history, LLPs find their origin in the United States.

The US financial crises of the late 20th century during the 1980s and 1990s declared hundreds of saving and loan firms as insolvent, resulting in the collapse of accounting and legal firms.[1] This was further followed by these firms facing the huge US government instigated legal claims which burdened even the unaccountable partners with heavy liability to repay millions of dollars as compensation.

This incident led to the onset of the concept of limited liability partnerships in Texas in 1991 which after gaining popularity in the majority of the US was eventually passed as legislation. India incorporated this concept through the Limited Liability Act of 2008. LLP is basically a form of partnership in which an individual partner is protected against personal liability for certain partnership obligations.[2] It is different from a general partnership in which individual partners are held liable for the debts and obligations of the partnership.

As described by the Ministry of Corporate Affairs, LLP was brought in for providing impetus to the economic growth of India through the combination, operation, and organization of growing expert knowledge and entrepreneurship inefficacious, flexible and innovative manner.[3]

It has been overwhelmingly welcomed by people from different areas who had been aspiring to tie- up for commercial reasons and the flexibility of a partnership and of organizing internal management based on mutual agreement in addition to other merits of limited liability partnership in contrast to the partnerships under the Partnerships Act attracted those people. This article mainly discusses the difference between LLP and other entities i.e. company and partnership. Further, it puts light on the extent of liability of the partners of an LLP.

How Is An LLP Different From Other Entities

As described under section 3 of the LLP Act 2008, LLP is a body corporate having a legal entity separate from its partners and has a perpetual succession. Any variation in the partners of LLP shan’t affect the rights, obligations, and existence of the LLP. It is a hybrid form of entity that was introduced in order to tackle the shortcomings of partnership and company as forms of businesses and combines the advantages of both the formats at low compliance cost.

The Company as a business is considered the most popular one and as per the Companies Act 2013, it is a registered association which is an artificial legal person, having an independent legal, entity with a perpetual succession, a common seal for its signatures, a common capital comprised of transferable shares and carrying limited liability.[4]

However, when it comes to the professions like accountants, doctors, lawyers, etc. which have to be in compliance with the legal entity structure as well as the respective regulatory statutes they are a part of, operating as a company is not possible as they aren’t permitted to operate as a corporate body at the first place. An LLP has fewer compliance requirements than a company and is regulated by an agreement between the parties in contrast to a company that is regulated by the Companies Act 2013.

With regards to similarity, aside from some statutory exceptions to the principle, a company being a separate entity have the privilege of limited liability for business debts and it is quite advantageous for the liability of a member as a shareholder extends to their asset contribution in the company. In the case of Buckley J. in Re. London and Global Finance Corporation 1903[5], it was observed that the statutes relating to limited liability contribute to the commercial prosperity of the country as they were found to have allowed and promoted conversion of small sums into large capitals employed in the undertakings of immense public utility greatly increasing the country’s wealth.

Secondly, a partnership, as per section 4 of the Partnerships Act of 1932, is the relationship between the partners who have decided and agreed to share the profits earned out of the business being carried on by all or any of them acting on behalf of all.[6] The partnership concept doesn’t give limited liability, instead, it always puts the personal property of all the partners at risk and thus is not preferred as a form of business by many. Unlike LLP, a partnership doesn’t observe perpetual succession meaning that its partners are referred to as the fir and it isn’t independent of its partners. On the other hand, LLP can continue irrespective of the partner changes or they can have a property in their own name for they are independent entities separate from their individual partners.[7]

Liability Of Partners In LLP

The extent of liability in LLP is limited and no partner is liable for the independent and unauthorized act of another partner. As per section 26 of the Act, every partner is the agent of the LLP firm but not of any other partner like in the business format of partnership.[8] A partner is not directly or indirectly liable for the obligation of the LLP and the release of its liabilities through its property, to the full extent of its assets. The partner is liable to the extent of the agreed contribution of their assets. The other way round, LLP doesn’t have the responsibility for the wrongful acts or omissions by the partner. According to section 27(1), LLP isn’t liable for anything done by the partner if the latter doesn’t have any authority to act for LLP in doing a specific act and the third party knows that the partner has no authority or doesn’t know or believe them to be a partner of the LLP.[9]

As regards the relationship with the partners, the mutual rights and duties of the partners of LLP and those of the LLP and the partners are the LLP agreement between the partners or between the LLP and the partners.[10] If there is no such agreement, the mutual rights and duties are determined by the provisions relating to that matter as are set out in the First Schedule.[11]

The First Schedule is significant for it ensures an amiable and fiduciary relationship and dependable environment amongst the partners inter-se and between LLP and partners.[12] It is noteworthy that the mutual rights and duties mentioned in the First Schedule are similar to the ones covered under the Indian Partnerships ct 1932. For instance, a provision of the schedule is that all partners are entitled to share equally in the profits, losses, and capital of LLP is also there for partnerships as stated in section 13(b) of the Act.

The Indian Supreme Court, in the case of M. Govinda & Co. v. Commissioner of I.T., Andhra Pradesh[13], held that wherein it is agreed that all the partners will equally share the profits, the fair presumption and inference is that the losses will also be shared in the same fashion; except when in the presence of contract to the contrary they prove that they don’t have the loss’s liability being asserted against them as laid down in the case of K. Pitchaiah Chettiar v. G. Subramaniam Chettiar[14].

Every partner shall be indemnified by the LLP if during the ordinary and proper conduct of the LLP’s business or for the preservation of its business or property, the partner incurs any payment and personal liability. In the same way, the LLP shall be indemnified by every partner for any loss they have caused due to any fraudulent act in the conduct of the business of LLP. Also, every partner is supposed to account for the LLP for any benefits or profits they derive from any transaction relating to the LLP or use of property, business connection or name of LLP, without the consent of LLP.

There are many other provisions mentioned under the First Schedule that check on the unethical activities of the partners. According to section 30 of the act, the LLP and the fraudulent partner are unlimitedly liable for all the debts and liabilities owing to defrauding the LLP’s creditors or anybody else.[15] Every person who was knowingly a party to the fraud shall be punished with maximum of two years of imprisonment and with a fine of the amount of 50, 000 Rupees-5, 00, 000 Rupees.[16] So, every partner is responsible for their own acts of negligence, malpractice, or misconduct.

Conclusion
The introduction of the specially- planned act is a brilliant step in the Indian commercial sector for saves the uninvolved partners from the malpractices of other liable partners. This alternate business format is the perfect crossbreed of a corporate firm that provides protection from unlimited liability and a traditional partnership that gives its partners the flexibility to organize their internal structure. LLPs majorly contribute to the growth of the service sector that accounts for almost half of the Indian GDP and the professionals, entrepreneurs, and enterprises can design their own commercially efficient vehicle of LLP as it suits them and their resources.

End-Notes:

1. Limited Liability Partnership -The Hybrid Structure - Corporate/Commercial Law - India, https://www.mondaq.com/india/corporate-and-company-law/637738/limited-liability-partnership-the-hybrid-structure (last visited May 2, 2021
2. limited liability partnership, TheFreeDictionary.com, https://legal-dictionary.thefreedictionary.com/limited+liability+partnership (last visited May 2, 2021).
3. LLPs In India - All You Want To Know - Corporate/Commercial Law - India, https://www.mondaq.com/india/corporate-and-company-law/552322/llps-in-india--all-you-want-to-know (last visited May 2, 2021).
4. What Is A Company? Meaning, Features, & Types Of Companies | Feedough, https://www.feedough.com/what-is-a-company-meaning-types-features-of-a-company/ (last visited May 2, 2021).
5. Buckley J. in Re. London and Global Finance Corporation, (1903) 1 Ch.D. 728 at 731
6. The Partnership Act, 1932, 28
7. Limited Liability Partnership In India, Legal Articles in India, http://www.legalservicesindia.com/law/article/963/3/Limited-Liability-Partnership-In-India (last visited May 3, 2021).
8. The Limited Liability Partnership Act, 2008.pdf, https://legislative.gov.in/sites/default/files/The%20Limited%20Liability%20Partnership%20Act,%202008.pdf (last visited May 3, 2021).
9. Id., Sec. 27, Cl. 1
10. Supra Note 8, Sec. 23, Cl. 1
11. Id., Cl. 4
12. Santosh Kumar, The Extent of Liability of Partners and Limited Liability Partnership in a Limited Liability Partnership in India, Academike (2015), https://www.lawctopus.com/academike/the-extent-of-liability-of-partners-and-limited-liability-partnership-in-a-limited-liability-partnership-in-india/ (last visited May 3, 2021).
13. M. Govinda & Co. v. Commissioner of I.T., Andhra Pradesh AIR 1975 SC 2284
14. K. Pitchaiah Chettiar v. G. Subramaniam Chettiar, AIR 1934 Mad 494
15. Supra Note 8, Sec. 30, Cl. 1
16. Id., Cl. 2
17. https://www.linkedin.com/pulse/emergence-limited-liability-partnerships-facets-navin-kumar-jaggi/

Written By:

1. Navin Kumar Jaggi
2. Vanshika Mehra