In India, Companies are required to be governed by various corporate laws and incorporated in accordance with the Companies Act, 2013 and the Rules laid down for the same. Similarly, a Limited Liability Partnership is to be formed in accordance with the Limited Liability Partnership Act, 2008 (hereinafter referred to as “LLP Act”). The LLP Act was passed in the Upper House and Lower House of the Parliament on 24th October, 2008 and 12th December, 2008. The aforesaid Act received the assent of the President on 7th January, 2009 and was brought into force from 31st March, 2009.
The concept of Designated Partner (hereinafter referred to as “DP”) is a fairly new concept and did not exist until the enactment of the LLP Act. Every partner is not a DP. While a Company can be a partner in a Limited Liability Partnership, only an individual can be a DP. It is necessary for a Limited Liability Partnership to have at least two DPs, one of them being an Indian Resident. Just the way a Director in a Company is supposed to obtain a Director Identification Number, a DP shall also obtain a DPIN i.e., Designated Partner Identification Number from the Central Government.
Eligibility and Relation of Partners
Any person cannot be a Partner in a Limited Liability Partnership. The individuals who have subscribed to the incorporation document may be regarded as the partners of that particular Limited Liability Partnership. The mutual rights of the partners amongst themselves and that with the Limited Liability Partnership are set forth in their Limited Liability Partnership Agreement. Where there exists no agreement, the provisions of the LLP Act will be applicable and the rights and duties of the Partners and the Partners and the Limited Liability Partnership will be set forth in the Act. An interesting provision has been incorporated in the LLP Act. Section 23 (3) of the Act states that where there exists an Agreement prior to the incorporation of the Limited Liability Partnership and the same has been ratified post incorporation by all the Partners who have subscribed their name to the incorporation document, any obligations imposed under such Agreement would be binding.
Essential Clauses of a Limited Liability Partnership Agreement
Just the way a Partnership can be solidified by signing a Partnership Agreement or Deed, a Limited Liability Partnership shall execute an agreement after incorporation. Such an agreement shall define the mutual rights and obligations or duties of the partners in relation to the limited liability partnership. The Agreement can prove to be highly beneficial as it helps defines the nature of responsibilities, procedures to perform various tasks, defines powers of the Partners, etc. It is essential to include the following clauses in the Agreement:
- The business of the Limited Liability Partnership must be clearly defined in the Agreement as it forms the crux of the Agreement. It must be carefully worded and there shall be no scope for any sort of misinterpretation pertaining to this clause.
- The second most important clause would be the Capital Clause. This is because the aforesaid clause would set forth the proportion of contribution of each partner. Where the Partner wishes to contribute in non-monetary form, the same shall be stated explicitly in the Agreement. Any other details necessary to be put into words must be enumerated in this clause.
- Following the Capital Clause is the Clause demarcating the share of profits i.e., the Profit sharing Ratio. The Agreement shall clearly set out the profit sharing ratio.
- It is of utmost importance to lay down the rights and duties of the partners. The rights and duties can be explicitly stated in the Agreement or in the absence of an Agreement, the First Schedule to the LLP Act could be adopted instead.
- The Agreement shall lay down the terms related to admission, retirement or expulsion of the Partnership as these things cannot be ignored.
- These days every Agreement consists of a ‘Dispute Resolution’ clause, an Agreement concerning a LLP is no different. It is crucial to make a provision for Dispute Resolution and in order to avoid litigation, the aforesaid clause shall make provision for resorting to Arbitration in case of any dispute.
- If the term of the Agreement is restricted, it shall be clearly specified. The terms and conditions of winding up shall also be specified in one of the clauses.
- A clause related to the maintenance of the books of accounts must also be included in the Agreement.
Extent of liability of the Limited Liability Partnership & Partners
Section 27 and 28 of the LLP Act enumerate the liability of the Limited Liability Partnership and the Partners. The Limited Liability Partnership will not be responsible for the actions of the Partners in the following cases:
- When the partner was devoid of the authority for commission of a particular act
- When the person knows that he has no authority or does not know or believe him to be a partner of the limited liability partnership.
The Limited liability Partnership will be liable for all the acts arising out of the Contract that the said Partnership is a Party to and has obligations under. Nonetheless, a partner cannot be held personally liable for the same and can only be held liable on account of doing a wrongful commission or ommission. Notwithstanding that, a partner shall not be held accountable for the wrongful omission and commission of his partner/s. Further, the Limited Liability Partnership will be responsible for the omission or commission of a wrongful act of its partner done during the course of its business.
Section 30 of the LLP Act enumerates the liability in case of fraud. Where the intention of the Limited Liability Partnership or the partners is to defraud the creditors or other person or for a fraudulent purpose, such partners’ or the limited liability partnership’s liability shall deem to be unlimited. This may also be punishable under the Act with imprisonment and fine.
Transferability of Rights
A distinguishing feature of a Limited Liability Partnership is the fact that a Partner can transfer its interests. This means that the partner can transfer their share in the profits and losses of the limited liability partnership and their right to receive distributions as in the share of profits and losses can be transferred. This shall not directly result in the dissolution or winding of the limited liability partnership. This provision does not entitle any such transferee or assignee to partake in the management or activities of the limited liability partnership or access any crucial details concerning pivotal transactions.
Section 55 to Section 57 mentions that a firm, a private company or an unlisted public company can be converted into a limited liability partnership as per the Second Schedule, Third Schedule and Fourth Schedule of the LLP Act respectively. Further, Chapter Ten (X) lays down the effect of conversion as well. As per Section 58, upon conversion, the Registrar may only issue a certificate of conversion when the said Registrar is convinced that the firm, private company or an unlisted public company has complied with the provisions of the Second Schedule, the Third Schedule or the Fourth Schedule, as the case may be. The Registrar will also register the documents submitted. While doing the aforesaid procedure, the Registrar shall do it in accordance with the applicable Rules and the LLP Act. The Registrar of Firms or the Registrar of Companies, as the case may be, shall also be informed about such conversion within fifteen days of such conversion.
The effects of conversion are as follows:
1) Post conversion, the Second Schedule, the Third Schedule or the Fourth Schedule will be applicable to the partners of the firm, the shareholders of private company or unlisted public company, the limited liability partnership to which such firm or such company has converted, and the partners of the limited liability partnership as the case may be.
2) The Assets, liabilities, rights, obligations, etc of the firm or company will be transferred to and vest in the limited liability partnership.
3) The Firm or Company’s former existence will be dissolved on paper as well i.e., it shall be removed from the records of the Registrar of Firms or Registrar of Companies.
A limited liability partnership is a corporate body with the perks of a partnership and a company. It has perpetual succession and is a separate legal entity. The liability of the partners is limited to the extent of their contribution in the limited liability partnership and the limited liability partnership shall be liable to the full capacity of the assets owned by it. The concept of joint liability is also done away with. Therefore, where an entrepreneur wants the proposed business entity to enjoy the perks and flexibilities that come with a partnership and a company, they shall register the business as a limited liability partnership.
- The Limited Liability Partnership Act, 2008 (Act 6 of 2009).
- FAQs On Nature Of Limited Liability Parterneship (LLP) available at: https://www.mca.gov.in/MinistryV2/natureoflimitedliabilityparterneshipllp.html (last visited: 7th August, 2022)
- Designated Partner in LLP available at: https://www.indiafilings.com/learn/designated-partner-llp/ (Last Visited: 3rd August, 2022)
- Setting Up of Business Entities and Closure by The Institute of Company Secretaries of India
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