As it is typically understood, a Partnership is a form of business where the partners face ‘unlimited liability’. This means that if the firm owes money, say Rs. 1 crore to creditors, but the capital of the firm is only Rs. 50 lakh, the remainder can be recovered from the personal assets (house, cars etc.) of the partner. This is as opposed to a company where the shareholders face only a ‘limited liability’, limited to the extent of their shareholding in the Company. A Limited Liability Partnership (LLP) is an entirely new animal, where people start a firm, but their liability is limited to only their capital contribution to the Partnership, and their personal assets will not be affected.
The Limited Liability Partnership Act (LLP), 2008 was published in the official Gazette of India on January 9, 2009 and came into force from 31 March 2009. The first LLP in India was incorporated in the first week of April 2009.
Logic behind a ‘Limited Liability Partnership’
A Limited Liability Partnership will be of great value to all those who want the flexibility and ease of a Partnership, with the security of a Company. Particularly, in a partnership, a partner is at risk of losing all his assets for no fault of his own. This is not the case in a LLP, where a partner will only lose the capital he contributed to the firm.
Difference between a typical Partnership and an LLP
The fundamental legal difference between the two is that a Limited Liability Partnership has to be incorporated by a written incorporation document, unlike a traditional Partnership which can even be created orally. The other critical difference is that a LLP has an independent existence. A Partner is an LLP is not affected by the wrong or illegal conduct of another partner. Moreover, he is free to deal with the LLP independently, while this is often not the case in a traditional partnership.
In fact, in many ways, an LLP is more similar to a Company. Even the documents of an LLP are registered with the Registrar of Companies, and not with the Registrar of Firms, as is the case with a Partnership firm. The Registrar of Companies is also the central administrative body, and the Ministry of Corporate Affairs regulates the law relating to LLPs. Like a Company, the death or retirement of a partner does not affect it, unlike a traditional partnership, which would dissolve.
A LLP can even have a Company or a body corporate as a Partner. It would create a lot of complexity if all the members of a LLP were Companies. The law therefore states that atleast two Partners in an LLP must be individuals, and they are called ‘Designated Partners’. A company can nominate an individual to be the ‘Designated Partner’, and every such Designated Partner gets a DPIN [Designated Partner Identification Number] from Central Government.
LLPs around the world
LLP as a concept has been have borrowed from the West, and they have been commonly used for atleast a decade in UK, the USA and more recently in Japan. The other major economy, Germany, has a peculiar structure with the suffix ‘GmbH and Co. KG’, which is a partnership with limited liability, and one of its members is a limited liability company (GmbH). Many countries also require one of the partners to be a ‘general partner’, who bears unlimited liability. In fact, this system is a better mix of partnership and company forms, since it ensures that you don’t have the cake and eat it too.