Limited Liability Partnerships

General partnerships have been the one of the most common forms of business enterprise, as they allow their members (partners) to combine their resources, while minimising the cumbersome regulatory and compliance burden that applies to corporates. However, the associated unlimited liability is a clear disincentive for entrepreneurs. Limited Liability Partnerships (LLPs) provide a further benefit, by limiting a partner’s liability while continuing to provide the structural framework of the partnership. Since the early 1990s, LLPs have consistently grown to a position of strength as a preferred form of business organisation. Most professional service firms as well as a substantially large number of other businesses and service organisations have now been structured as LLPs. This form of business organisation is now expected to gain momentum in India as well, as they have the potential to be a very important vehicle for growth in trade, commerce and services. In this regard, LLPs provide the opportunity to smaller businesses to participate in national and international commerce far more than previously.

A Concept Paper on LLP Law was introduced by the Department of Company Affairs in 2005 in view of its inherent advantages and growth prospects for Indian businesses, which was later followed by the LLP Bill 2006. The recently introduced LLP Bill 2008 is a "new and improved" version of the 2006 Bill. However, the underlying concept is the same, combining the limited liability features of a company without relatively greater compliance requirements.

LLPs provide the key feature of limited liability, which reduces the risk of a partner's personal wealth being exposed to claims. This means that the partner can decide the amount of their investment, and risk of losses is restricted to their investment in the LLP, much like investment in shares of a company. However, at the same time, the partner continues to be part of management of the business. This facilitates easier access to financial resources, for the LLP.

LLPs also promote internal flexibility, allowing participation in management while maintaining the ethos of partnership. This, coupled with reduced compliance requirements, will encourage and promote new business ventures and aid commerce. Companies today have a variety of compliance requirements, including filing of forms, periodic statements and returns, holding meetings, approvals to be obtained from shareholders and/or the government in many cases, etc. In contrast, an LLP has no such compliance burdens, which means there is more time to focus on the business and operations.

LLP also has several other benefits like being recognised as a separate and independent legal entity. Technically, there is no cap on the number of partners in an LLP and therefore, it has access to virtually unlimited capital for its business operations. It is also easier for individuals to invest in an LLP because their financial risk is limited and known. A partner in an LLP, is an agent of the firm but not of the other partners, therefore, he is not exposed to the negligent or fraudulent acts of other partners. In all these respects, an LLP scores over a general partnership.

The significant advantages of the LLP form of business is that it provides greater opportunities for general partnerships and unlisted / private companies to convert themselves into and operate as LLPs, as a result, enabling new converged entities to avail benefits of the ‘LLP type of organisation’. It will also result in lower administration needs and costs for the government in regulating corporate entities.

The LLP Bill 2008 parallelly proposes a few stringent requirements in order to ensure adequate compliance, governance and transparency, including unlimited liability in certain cases (such as fraudulent acts) and the need to maintain records and make filings /disclosures on an ongoing basis. Also, the accounts of an LLP need to be audited and an annual return is required to be filed with the Registrar.

Having said that, there are still some areas that need to be addressed by the LLP Bill 2008. These include requirements for LLPs to be adequately insured in order to protect themselves from claims, and greater inclusiveness of third parties who deal with such general partnerships that convert into LLPs, as the limited liability status of the new LLP would affect them directly. Also, more clarity is required as regards taxability of the LLP and also the applicability of duties, etc on conversion of entities into LLPs and the consequent transfer of assets.

All credit to the MCA for progressive steps taken towards LLPs. While there may not be many takers for this form of business initially, the benefits of an LLP significantly outweigh the disadvantages and will eventually find ground in India. Ultimately, the success of this legislation will indirectly contribute to the success and economic progress of a nation that has already demonstrated a lot of promise globally.