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Has the Limited Liability Partnership model provided an effective alternative model to Partnership?

ABSTRACT

The authors have attempted to discuss a perpetually existing issue of company law. This title of the research paper encapsulates its essence. The commencement of the Limited Liability Partnership Act in 2008 led to a new phase in the Indian corporate sector. As the Limited Liability Partnership (hereinafter ‘LLP’) model gained popularity, many compared it to the existing partnership mechanism. While there are some similarities in both, several differences on grounds such as risk and complexity have been examined. Apart from an elaborate explanation of the LLP model, the application of the model on various kinds of businesses has been highlighted. The pandemic situation’s effect on partnerships, and how LLPs will fare after these times has also been evaluated. Towards the end, the authors have touched upon the current limitations of the model and the potential it can reach with certain modifications.

Keywords: Limited Liability Partnership, Partnership Act, Company Law

Introduction

There has been a long tradition of collaborating in order to achieve business and other commercial goals. The primary instruments for achieving these objectives have been Partnerships and Companies. These are seen as an improvement over the single commercial company where one individual carries out his own business with his resources, skills, and effort. Because only one single person’s resources are limited to a single business, a larger enterprise, which needs more investment and resources than a single trader, cannot be considered as such in a business enterprise. 

Conventionally in a partnership, there is an inordinate risk involved in the times of claim, when it outdo the total volume of the assets of the partnership. In such a matter the losses have to be covered by partners through liquefying their private holdings as well, accordingly, it can be said that ‘unlimited liability has been the pivotal cause for the partnerships to not have been able to victoriously keep pace with challenges put forth by the international adversaries. On the other hand in a “Limited Liability Partnership”, the partners are allowed to adopt any type of internal organization then prefer with the assurance that their liability is limited to a certain value and it won’t exceed that under any circumstances. A “Limited Liability Partnership” has both a partnership and a company’s advantages. It is somewhere between the partnership and the company. We first have to grasp what a partnership and company or a corporation is to grasp it. Following “The Indian Partnership Act, 1932”, a partnership is a kind of relationship among people who have agreed to share the earnings of an enterprise that operates for all or any of them. A partnership has no legal identity, unlike an incorporated firm. Whereas, a body corporate is a type of business where its members connect and pool their resources collectively to conduct a business, but a fundamental difference between them is a corporation has a separate legal personality that differs from its members in its prudential distinction. It has a perpetual succession that is to say unlike a partnership, where its partners exist or not the partnership continues to exist.

The hybrid corporate vehicle with perpetual succession and a separate legal entity is a Limited Liability Partnership (LLP). It not only provides limited liability benefits but also enables its partners to flexibly organize their internal structures as a general partnership. LLP combines restricted corporate liability features with operational freedom of partnerships.

Origin and Evolution of LLP’s in India

In India, the proposition of Limited Liability Partnership concept surfaced for the first time in Naresh Chandra Committee report on Regulation of Private Companies and Partnership, and Dr. J. J. Irani Committee report on Company Law (2005). “The Limited Liability Partnership Act, 2008”, which was in force from 31 March 2009, was published in the Official Gazette of India on 9 January, 2009. However, the Act has only ratified certain provisions. In the Official Gazette, the Rules of the Act were published on 1 April 2009 and amended in 2017. On 2 April 2009, the first LLP was introduced. The principal argument given by the committee for Limited Liability Partnership in India is the risk associated with other kinds of companies and how it would be advantageous to Indian professionals like attorneys, accountants, physicians, architects, and company secretaries for an expanded global competitive edge.

For a long time, a necessity has been perceived for a business organization that combines the versatility with the increased uncertainty of an organization at a low cost of consistency. The design of a limited liability partnership is an optional corporate vehicle that delivers the advantages of an organization’s restricted duty but, as with a partnership, allows its members to adjust their interior management on the basis of widely accepted consent. This organization would be of great use to small and medium-sized enterprises when everything is said and especially for administrative efforts. Limited Liability Partnerships are often the favourite means for businesses, especially for the benefit of the industry or practices where specialists are involved. A Limited Liability Partnership is analogous in several aspects to a regular partnership, except that individuals are responsible for any liabilities that result from business maintenance. In contrast to the Partnership structure, there are greater official requirements.

It is true to say that the Limited Liability Partnership is more like a limited enterprise. As far as an obligation is concerned, the Limited Liability Partnership is itself subject to requirements, rather than people from the Limited Liability Partnership, to keep working to sustain the company. Therefore, income-driven operating organizations are proposed for Limited Liability Partnerships. Individuals or existing organizations can be personnel from the limited liability partnership, and not fewer than two persons must be in the Limited Liability Partnership. In general, the rights and obligations of all people would be segmented in a “Deed of Partnership”. An “assigned member” is often chosen by the LLP to be responsible for maintaining communications with Companies House, for getting ready records, and for defending the LLP if it is subsequently broken down for unclear reasons. It is a sort of corporate entity that permits a shared responsibility of partners in a partner firm to be confined to individual partners. In the usual affairs of the business, the liability of the partners in the LLP does not constitute the partner’s personal assets. This encourages partners, especially professionals such as Company Secretaries, Chartered Accountants, Cost Accountants, Attorneys, and others. The specialists can also develop multidisciplinary LLPs to fulfil the shifting financial stipulations. The LLP’s compound structure will encourage visionaries, specialised partners, and specialists to operate imaginatively and productively to compete appropriately in the global marketplace.

As the limited liability partnership, essentially, is a fairly modern notion, a lot of individuals who want to set up a company have no knowledge of how it operates so they attempt instead, establish an enterprise model, without even understanding the risk that they have to face in their firm. During the test between a private limited company and LLP, other entrepreneurs beginning another firm are fascinated. Both components give different almost equivalent properties that are essential to managing an approximated firm a little too enormous but definitely differ from one point of view in the same way. The following are the explanations as to how Limited liability Partnerships might be favoured over a private limited company: The procedure of registration of private limited companies and the procedure of registration in LLP are basically the same as the contrasts in the fuse applications archives and structures.
The means for fuse of a Private Limited Company are:

  1. Acquiring Digital Signature Certificate (DSC) for the proposed Directors,
  2. Acquiring Director Identification Number (DIN) for the proposed Directors,
  3. Getting name endorsement from MCA and
  4. Petitioning for consolidation.

LLP enlistment likewise has a comparative procedure:

  1. Getting Digital Signature Certificate (DSC) for the proposed Partners,
  2. Acquiring Director Identification Number (DIN) / Designated Partner Identification Number (DPIN) for the proposed Partners,
  3. Acquiring name endorsement from MCA and
  4. Petitioning for joining.

Ministry of Corporate Affairs is the controlling authority to which both Limited Liability Partnership and Private Limited Company are enlisted and such enlistment allows them to acquire a certification of Incorporation. The preparation period for the fusion of a private restricted organization and the LLP is almost the same with two substances that fuse normally for around 20 days. When compared to the Government fee for merging of a private limited firm, government costs for the consolidation of an LLP are essentially lower. LLPs are aware of the problems of private companies and so appreciate the reduction of government fees for membership. Furthermore, if contrasted with private limited company enrolment, the number of records to be printed on a non-judicial stamp Paper and Notarized is lower for LLP registration.
Compliance assessments for both private organizations and the LLP are comparable. However, as far as consistency is concerned, the LLP appreciates major points of interest concerning the Ministry of Corporate Affairs. The annual revenue of the LLP is under Rs40 lakh and the capital commitment under Rs25 lakh does not have to be reviewed in A LLP’s records. In any event, an LLP would have to file Form 8 and Form 11. But an annually reviewed monetary announcement should thereafter be recorded with the Ministry of Corporate Affairs by a private organization every year.

Limited liability partnerships benefit more preferably from the advantages of the partnerships. The nature of simple exchange is unfailing in the LLP and its well-known position in the Corporate World puts an LLP in a far better position than a Partnership. Not everyone really should settle for an LLP but the person who is seeking long-distance growth and is bouncing into the corporate world without the high degree of confining it if a company occurs, the person may favour the LLP in thinking about their desires and detractions.


“The Limited Liability Partnership Act, 2008” recognizes the changing demands in the current era. With the accession of the LLPs new firms such as competent associations that are on the brink of their risk presentation will be a supporting alternative. As the Indian Service sector develops, start-up LLPs will contribute to the management business development, and an expanded range of current organizations, both open and also private, will become LLPs in order to address the benefits of the LLP model. The Government of India has promoted transmission of such inadequate business structures in order to confront global rivalry, to promote the fields of business viewers, specialized partners, and specialists.

Application of Limited Liability Partnership in various business models

The association is one of the most recognized forms of commercial enterprise for new organizations. It offers a window in which efforts and funds are synergized without any difficulties in establishing a supportive business. Any India-framed connection advised that the accomplices be boundlessly binding until 2008. This means that if the company fails to repay its debt, its benefits may be used to repay the obligation and to settle the money-associated obligations.

Although this risk is continually inevitable in new firms, the JJ Irani Committee (2005), which proposed the introduction of limited liability partnerships in India, has recognized the need to secure interests and reinforce enterprises. The development of Limited Liability Partnerships (LLPs) should be promoted, given its potential for the growth of the services sector and the need for small companies to be flexible to participate in joint ventures and agreements that enable them to access and combine business synergies, and to confront the increasing worldwide competition enabled by the WTO, etc. In 2008, a “Limited Liability Partnership Act” was approved by the legislative body. It will provide both specialists and non-proficient people the possibility to search for a business as an organization in the hands of an Association company. (CA/CS/CWA/Doctor/Architect/Engineer/Lawyers, and so forth).

The major economic disadvantage in other businesses is that management skills and money are not adequate so that such an organization is not just suited for small businesses, but all sorts of enterprises. It is beneficial for people to combine their resources for their cooperation to achieve economies of scale. Thus risk is generally shared between partners, while the creditors and workers are vulnerable, particularly if the partners lack private assets to pay the company’s debts. Nevertheless, the major goal was to urge for changes in legislation by providing responsibility for the blame or limiting the professional liability of partners.

LLP in the post COVID-19 era

COVID-19 has taken over our lives for the past 1.5 years, and experts anticipate that the pandemic will permanently influence our lifestyle, and it will determine what we call a “new normal”. The so-called “new normal” is expected to also influence the manner in which companies are operated. For example, people may eliminate travel and favour screen meetings. However, as established before Covid-19, the commercial world will continue to function. In keeping with changes, companies may now desire a more flexible, regulatory, and cost-effective structure. 

That stated, the benefits of a limited liability partnership (“LLP”) have to be reviewed and how LLPs might assist achieve these goals during the new baseline. LLP is a partnership organization that has some integrated aspects of a limited liability corporation to update its structure. Overall there are three qualities, namely a restricted liability, a separate legal entity, and permanent estate, which distinguish an LLP over a conventional partnership business.

LLP provides a number of flexibilities in the administrative, conformity, infusion, and withdrawal of capital, dissolution, and easy exit sectors in comparison with a limited liability company, and others.  

• Pliability in administration and expenses:

Members of an LLP are not required by law to attend quarterly or annual general meetings of the board. In addition, the designation of “Key Managerial Personnel” in an LLP is not necessary. In some situations, no necessity is required, in comparison to “The Companies Act, 2013”, to get the previous permission of owners through ordinary or extraordinary resolutions. The management and decision-making of an LLP are, therefore, quicker and more practical.

Let us imagine, for example, a choice to sell a significant share of a manufacturing company. It takes around one month for a limited corporation to receive different statutory permissions to fulfil the documentation needs.

However, in the case of an LLP, it takes only a few days to determine while the statutory documentation requires much less.

Framework:

The annual return and an annual account statement are usually needed exclusively by an LLP. Although the Parties may select their salaries freely, claims for LLP payment for a tax deduction are subject to taxation restrictions. In the case of firms, the remuneration for directors and family payments need permissions and documents. And expansions, including corporate social responsibility (CSR) compliance for firms, are being informed at this time.

• Forming and dissolution of LLP:

The creation of an LLP in comparison with a business is a simpler and faster procedure. For example, if two parties urgently submit an offer together, an LLP may float and make the necessary arrangements. In this scenario, compare business incorporation that will involve a lot more documents and time. This enables LLPs to facilitate fast collaboration or joint venture establishment (‘JV’). It’s also easier to leave from an LLP. All it takes for the partner to leave the LLP is a change to the LLP agreement. Without any permission or tax consequences, the outstanding capital balance may be paid to this partner.

• Advantages In Taxation:

For enterprises with the choice to pay tax, the effective marginal tax rate of 22 % is 57.15% under the new tax structure. For an LLP, the effective rate of taxation is 34.94%. The LLP structure allows promoters to gain more.

In the present-day new normal, when management is aiming for achieving twin objectives of cost as well as operational efficiency, the aforementioned benefits and operational facility for an LLP structure need to be considered. The LLP framework helps to reduce expenses automatically due to reductions in compliance, paperwork, decision-making, and taxation expenses. As a result, existing companies can assess migration from their corporate structure to an LLP structure. Besides tax obligations, several other aspects must also be taken into consideration, such as the number of shareholders, investors, and loan preferences.

In conclusion, Covid-19 has made us took a break to examine whether LLPs should be taken into account for their easy operations and their easier compliance and JV.

Conclusion

The merits of business configuration in an LLP model include inexpensive formation costs, infinite capacity independent legal entities, and restricted partnership liabilities to their agreed participation. It has a constant sequence that has nothing to do with the exit or arrival of partners. The management is also flexible, such that it can simply be regulated by a partnership agreement. This kind of business is fusion which combines a company’s specific characteristics with that of a typical partnership. Even the company law authorities, who must administer these LLPs, are obliged to manage LLPs for better implementation and success, but a smaller set of compliance and reporting vis-à-vis firms. The LLP model has the capacity, in a nutshell, to operate effectively as the engine of growth for the country’s economic growth and will likely promote the expansion of its professional services. LLP would promote joint ventures as an alternative business model, making Indian services competitive worldwide.

The 2008 LLP Act is silent with respect to the income taxes of LLP. However, LLPs will be viewed internationally as a pass-through, and income taxes on partners and not LLP would be imposed appropriately. It’s important to note that LLPs were also proposed in the Concept paper on LLPs by the Ministry of Corporate Affairs for the Status of LLPs. Although the LLP is a separate entity and has many similarities and benefits from a body, one of the deficiencies of the Act is still that its IPO can’t be drawn up and the public money can be raised by the business only.

There are many benefits in LLP, such as infinite capacity separated legal entity, extremely cheap costs of incorporation, highly distinct from their partners, and responsibility is confined to a specified limit provided to them. The government is also adaptable that just an assertion amongst accomplices tends to symbolize the administration. It essentially coincides with the characteristics of a corporation.

Essentially, the LLP user interface may be a feasible motor of expansion for economic advancement and will likely foster the growth of the nation’s expert authorities. LLP would promote cooperative efforts and establish Indian administrations as a next action plan.

AUTHORS:

HARSH RAI (Hidayatullah National Law University, Raipur)
SAMRIDHI SETH (Army Institute of Law, Mohali)