‘General partnership that advances protection to an individual against personal liability for certain partnership obligations’
Introduction
A business partnership is a business established for the purpose of gaining profit and is run by two or more people. There can be any number of partners associated with the business as long as the minimum number remains two. A business partner becomes a co-owner of the business.
Most business partnerships are usually general partnerships denoting that all partners have the responsibility for the business and limitless obligations for the financial obligations of the business. This implies that general partners share both the benefits as well as the damages caused due to the business. However, a limited liability partnership is considered to be a newer type of business partnership where all of the owners have personal liability (which is essentially limited) for the financial obligations concerned with the business. There are no general partners in an LLP. But an LLP is kind of similar to a general partnership. Every limited liability partner contributes to the everyday business operations, although each partner possesses limited personal liability for the acts of other partners. Each person’s personal liability for another partner’s acts is limited only to the partnership’s assets i.e. a partner cannot lose more than his investment for something that is done by the other partner.
It delivers the benefits of limited liability of a company, but at the same time allows its members the leisure of organising their internal management that is based on a mutually consented agreement that is similar to that in a partnership firm.
Owing to flexibility in its structure and functioning, LLP is considered to be very useful for small and medium enterprises and particularly for the enterprises in the services sector.
Two or more individuals, concerned with carrying on a lawful business with the intention of profit, may form an LLP by means of subscribing their names to an incorporation document and filing it with the Registrar.
The LLP will be considered as a separate legal body (responsible to the full extent of its assets) with the accountability of the partners being limited only to their consented contribution in the LLP which may be of either tangible or intangible nature or both tangible and intangible in nature.
Characteristics of LLP (according to limited liability partnership act, 2008)
- The LLP will be a corporate entity and have a distinct legal body. It implies that limited liability partnership and the partners are separate from each other.
- The mutual rights and responsibilities of partners of a LLP will be regulated by an agreement between partners or between the LLP and the partners based on the provisions of the LLP Act of 2008. The act gives flexibility to design the agreement as they please.
- Every LLP will have compulsorily minimum of two partners but the maximum number of partners is not limited
- The LLP will have a responsibility to maintain annual accounts that is supposed to reflect the true and fair view of its functioning.
- A firm or a private company or an unregistered public company can get converted to a LLP according to the provisions of the Act.
- The end to the LLP may be achieved either voluntary or by the committee to be created according to the Companies Act, 1956. Until the committee is formed, the power lies with the High Court in this regard.
- The Indian Partnership Act, 1932 will not be of relevance to Limited Liability Partnerships
Advantages of forming an LLP
- The liability of each partner is only up to the extent of his share as formulated in the agreement at the time of creating a LLP
- It has a low cost of establishment and is easy to manage
- The partners are not responsible for the acts of each other and can only be held responsible for their own acts
- Lesser restrictions are enforced on LLP by the government however the restrictions enforced on a company are much greater.
- A LLP can sue in its name and can be sued by others, the partners are not at all liable to be sued for the dues as against the LLP
Disadvantages of forming a LLP
- It cannot come out of its IPO (initial public offering) and acquire money from the public, which a company form of an organization can easily do.