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Total Number of Subscribers: 428 |
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Date: 31 May 2008 |
Compiled by Mr. M. Sathya Kumar |
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The Concept of Limited Liability Partnership
"Application of the LLP Regime in India & Its Feasibility" Limited Partnership - This is term that
is heard once in a way in this country as a concept that is worthy of
consideration for introduction. This is unfortunate because it is one reform
that, if introduced in a proper form, would help small businesses, including
small-scale industries (SSIs) and small service enterprises. It is known that
more than 90 per cent of SSIs are proprietorships and partnerships. Thus the
vast majority of small entrepreneurs are exposed to unlimited liability for
debts of their businesses, which operate in a highly competitive environment. This is in stark contrast to the perennial talk about reform and
liberalization of law governing companies. Numerous committee reports and
many draft laws and amendments have been seen and some changes actually
introduced in the company law over the 14 years since the beginning of
economic reform. Though simplification of the company law and dispensing with
outdated controls and procedures have not kept pace with much proclaimed
intentions of policy-makers, this is still a much better picture compared to
the nil progress on one simple reform – introduction
of a law on limited partnership -- that would have made a substantial difference to
small entrepreneurs. The concept of limited partnership prevails in many countries,
especially developed countries. Under this provision, "general
partners", including those in actual control of operations of a
partnership business, alone would be exposed to unlimited liability to
debtors of the business, while the enterprise would be able access capital
from other partners whose liability would be limited to their contribution of
capital. (Their share of profits would be in proportion to their share in the
capital). Thus, limited partnership would help SSIs and other small
businesses overcome one of their major constraints – inadequate access to finance, and provide them with a partial
"level playing field" vis-à-vis bigger corporates. Introduction of
a separate piece of legislation for small private companies or a separate
chapter for them in the Companies Act to govern small private companies
should be helpful to Small Scale Industries. Under the LLP, all members of
the professional outfit would not be liable for claims arising from alleged
wrongs of individual members, who alone would be liable. Professionals are
also demanding legal amendments to enable professionals from different
disciplines (like law, accountancy or engineering) to form a single outfit to
render services under a "single window". The need for Limited Liability Partnerships In India, the businesses operate mainly as companies, sole
partnerships and partnerships. Different laws of the country govern these.
However, there is a gap in the business structure, which needs to be filled
so as to enable high growth in the service sector especially that related to
the professionals. This gap is sought to be bridged by introducing a Limited
Liability Partnership Law. This subject has been dealt in the Naresh Chandra
Committee on Regulation of Private Companies and Partnership Concerns and the
Expert Committee on Company Law[4]. In foreign countries, LLPs have been
important vehicles that have catered to the needs of small-scale sector and
venture capital funds. Even though the concept of limiting the financial
liability of non-active partners to the capital investor has been debated in
various forums of the Government for more than a decade, the case for having
LLPs has been strengthened by the new business environment and initiatives of
the Department of Small-Scale Industries. The primary confusion with regards to the concept of LLP is the
distinction between partnership (in the general sense) and a LLP. Precisely,
the broad distinction between a General Partnership and an LLP can be
outlined as under: (a) General Partnership – The
partnership simpliciter constituted under the Indian Partnership Act, 1932. Each
of the partners is jointly and severally liable for any liability arising out
of or in respect of the partnership. (b) Limited Liability Partnership – The
LLP is a separate legal entity with unlimited capacity where no member or
partner is liable on account of the independent or unauthorized actions of
one’s partner, and whose liability is limited to the
respective stake of each in the LLP. The members of an LLP would have the
option to have a general partner or more with unlimited liability, but it
would not shield the partners from legal liability arising out of their own
personal acts which are not done for and on behalf of the LLP, that is, any act
done beyond the acts and powers of the partners as laid down in the
incorporation document. Further, a partner’s liability is not
limited when the misconduct is attributable to him or to an employee under
the supervision or control of that partner. An LLP only protects a partner,
other than a general partner from the liability arising from the misconduct
or personal acts of other partners. United Kingdom Limited Liability
Partnership Act 2000- Forerunner of LLP concept in India. This is a relatively new creature to English law, and was
introduced in 2001 by the Limited Liability Partnership Act 2000. The LLP is
a halfway house of sorts between a partnership and a limited company, having
some of the characteristics of each. The UK Limited Liability Partnership Act
2000 came into effect in April 2001 and introduced an exciting new vehicle
for international business. The essential features of the UK LLP include:• An LLP is a body corporate and has a separate legal personality. • An LLP can own any property and
undertake any contract; Report Of The Committee On Regulation Of
Private Companies And Partnership (Naresh Chandra Committee-II) It is of high significance that the LLP concept was introduced
in India through the Naresh Chandra Committee Report. Therefore, it is
important to understand the various aspects dealt by the Committee with
respect to this concept. The broad areas of analysis with respect to LLPs as
provided under the Committee Report are: Application of the LLP regime In the Committee’s view, the scope of LLP
should, in the first instance be made available to firms providing professional
services, as opposed to trading firms and or manufacturing firms, for several
reasons. Firstly, because Indian professional firms are precluded from
practicing under any other legal form in view of the restrictions imposed by
their respective regulatory laws; trading firms or manufacturing firms,
however, have the option to carry on business as a private limited or public
company under the Companies Act, 1956. Secondly, as the professionals are
also governed and regulated by their respective professional, regulatory
bodies, which also control and monitor professional conduct, extending the
LLP structure only to professionals minimizes the risk inherent in testing
new waters. Thirdly, there is no special advantage that small private
companies or SSI units would derive from being an LLP, especially in light of
the fact that this Committee itself is simultaneously recommending a
considerable easing of regulations on private companies, especially small
private companies. It was felt that extending the LLP structure to
professionals, in the first instance, would help evaluate its advantages and
risks; and based on such evaluation and experience, the LLP form can be
considered for extension to small-scale manufacturing and/or trading firms as
well in the future. As incorporated under Proposed Concept
Paper of Limited Liability Partnerships: An LLP is a body corporate having perpetual succession and a
legal personality of its own. It shall have at least two partners but there
is no limit on the maximum number of partners that it can have. If at any
time the number of partners of an LLP falls below two and the business is
carried on for more than six months, a person who is a partner of the LLP
during the time that it so carries on business after those six months and is
cognizant of this fact shall be liable jointly and severally with the LLP for
the obligations of the LLP incurred during that period Any individual or body corporate may be a partner in an LLP. An
LLP being a body corporate, the law relating to partnerships is generally not
applicable to a limited liability partnership. Similarly, any change in the
partners does not affect the existence, rights and liabilities of the LLP. Every LLP shall ensure that it has a manager who is an
individual and is resident in India. The role of a manager is to perform the
administrative and filing duties of the LLP and will be held personally
liable for all penalties imposed on the LLP unless he satisfies the Tribunal
that he should not be held liable. Further, in all cases where the manager is
liable the LLP shall also be liable to the same extent for such defaults. A
manager need not be a partner of the LLP. However, if no manager is
appointed, each partner who is resident in India shall be treated as a
manager. The LLP shall appoint another person as the manager within sixty
days from the date on which a person ceases to be a manager. Incorporation, registration and partners An LLP must be incorporated by using a formal mechanism of
filing the incorporation document with the Registrar. Further, there should
be no restrictions on the number of partners in an LLP. As incorporated under Proposed Concept
Paper of Limited Liability Partnerships: To form an LLP, there must at the outset be at least two persons
who are associated for carrying on a lawful business with a view to profit
and who subscribe their names to a document called an "incorporation
document". The incorporation document must be delivered to the Registrar in
the prescribed form and manner. A statement must also be delivered to the
Registrar that there has been compliance with all the requirements of this
Act and Regulations with respect to incorporation and matters precedent and
incidental thereto. The statement must be made by a subscriber to the
incorporation document and by either an advocate, or a Company Secretary, or
a Chartered Accountant in whole time practice in India, who is engaged in the
formation of the LLP. If a person makes a statement under Section 8 (1) (c)
that he knows to be false or does not believe to be true he shall be
punishable under the Act. When the registrar receives the incorporation
document, he will retain and register it. Once the documents have been
registered, the registrar will issue a certificate that the LLP is
incorporated by the name specified in the incorporation document. A statement
that is delivered under Section 8(1) (c) may be accepted by the registrar as
sufficient evidence that the requirement in section 8(1) (a) has been
complied with. The certificate issued by the registrar is an evidence that
all the requirements have been complied with. An LLP, shall by its name has the power to sue and being sued, hold
and dispose property, have a common seal and to do and suffer such other acts
as bodies corporate may lawfully do and suffer. Every LLP is required to have
either the words “limited liability partnership” or
the acronym “LLP” as the last words of its name. An LLP shall not be allowed to
register with a name, which is undesirable or identical to a name of any
other LLP or body corporate or to a registered trade mark, or a trade mark
which is subject of an application for registration, of any other person
under the Trade Marks Act, 1999. The name shall be printed on all its
invoices and official correspondence along with a statement that it is
registered with limited liability. Limited liability As opposed to the concept of joint and several liability, applicable
in general partnerships, the liability for partners in a LLP should be
limited. In other words, the LLP would assume liability in the event that a
partner of the LLP commits an act of commission or omission for and on behalf
of the LLP, that results in such liability. The partners would be liable only
to the extent of their respective agreed contribution to the LLP without any
recourse to the personal assets of a partner. Provisions dealing with
insolvency, winding up and dissolution of an LLP should be similar to those
provided for private companies in the Companies Act, 1956. There should also
be provisions detailing the liability of partners to contribute to the assets
of the LLP in the event of its being wound up. As incorporated under Proposed Concept
Paper of Limited Liability Partnerships: Each partner of the LLP is an agent of the LLP but not of other
partners. Therefore, a partner shall be held personally liable for his own
wrongful act or omission, but will not be liable for the wrongful act or
omission of any other partner of the LLP. An LLP is however, not bound by the
actions of a partner where that partner has no authority to act for the LLP,
and the person dealing with the partner is aware of this or does not know or
believe that the partner was in fact a partner of the LLP. Further, where a partner of an LLP is liable to a person for a
wrongful act or omission in the course of business of the LLP or with its
authority, the LLP will be liable to the same extent as the partner. An LLP being
a separate legal entity is liable for an obligation arising in contract or
otherwise and the liabilities of the LLP shall be met out of its property.
However, this liability shield will be withdrawn in case of an act carried
out by a LLP with the intent to defraud creditors or for any other fraudulent
purposes. Financial safeguards The Committee Report mentions that the standards of financial
disclosure as applicable to private companies should also be made applicable
to an LLP. The advantages gained from having the privilege of limited
liability should be coupled with the responsibility of making adequate
financial disclosures so as to minimise the chances of fraud and
mismanagement. This should be subject to such privilege as may be available
to a professional in his relationship with his or her client in maintaining
confidentiality, and it may be different for different professions. As incorporated under Proposed Concept
Paper of Limited Liability Partnerships: A limited liability partnership is required to maintain proper
books of accounts at its registered office relating to its affairs for each
year of its existence on accrual basis and according to the double entry
system of accounting. An LLP shall take reasonable precautions to maintain
the records to prevent loss or destruction, falsification of entries and
facilitate detection and correction of inaccuracies. If default is made in
complying with these provisions, the manager shall be punishable under the
Act. The manager of an LLP shall lodge with the Registrar a
declaration as to whether in his opinion the LLP appears to be able to pay
its debts in the normal course of business or not. The declaration is to be
lodged within 15 months of registration and subsequently every financial year
at intervals of not more that 15 months. If the manager fails to lodge the
declaration or makes a declaration without having reasonable grounds for his
opinion, he shall be punishable under the Act. Further, if any person makes a
statement or furnishes information to a manager that is false or misleading
in a material particular, then that person shall also be punishable under the
Act. Further, the Registrar may destroy any document lodged, filed or
registered with it, if it is no longer necessary or desirable to retain the
same. Regulations to the Act shall prescribe the offences, which may be
compounded by the Central Government under this Act. A limited liability
partnership shall take all reasonable precautions to maintain the records it
is required to maintain under sub-section (1) of section 27 in a manner so as
to prevent loss or destruction thereof prevent falsification of entries and
facilitate detection and correction of inaccuracies. Tax treatment of an LLP Section 10 of the UK LLP Act lays down that a trade, profession
or business carried on by an LLP, with the view to profit, shall be treated
as carried on in partnership by its members and not by the LLP itself. Thus,
any asset held by an LLP, or any tax chargeable on gains made shall be
treated as held by the partners, or gains made by the partners, and not by
the LLP itself. In other words, an LLP enjoys a pass-through status and is
not taxable as such; the taxation liability falls on the partners in their
individual capacity. In the USA, too, LLPs enjoy a pass through status for
the purposes of taxation. The profits or losses of the LLP pass through the
business and are reported on each partner’s personal returns. As incorporated under Proposed Concept Paper
of Limited Liability Partnerships: The partners of an LLP which is carrying on a business with a
view to profit are treated for the purposes of income tax and capital gains
tax as if they were partners carrying on a business in partnership, despite
the fact that an LLP is a body corporate. It also provides that the property
of the LLP shall be treated for those purposes as property of its partners.
This ensures that partners will be individually liable to tax on their share
of the profits of the trade, profession or business carried on by the LLP.
Further, the assets of the LLP shall be treated as assets held by the
partners for the purpose of taxing capital gains. This ensures that the
partners of the LLP, rather than the LLP itself, will be liable to tax for
capital gains on the disposal of LLP assets. The chapter brings LLPs in line
with the approach adopted for partnerships, which similarly treats assets as
held by the partners rather than by the partnership. Conclusion While there could be no objection to any such reform being
undertaken after due deliberation, neglected themes like limited partnership
and small private companies should be given priority attention in the
interest of small entrepreneurs in all sectors. This is likely to happen only
if the SSI community takes up and studies the issues in depth and presents a
united stand before policy-makers. The Naresh Chandra committee, which examined the scope for
liberalising the company law in the case of private limited companies (viz,
companies that are closely held and have not accessed resources from the
public in the primary capital market) has proposed that a separate category
of "small private companies" (SPCs) be created with a still more
liberal legal framework than for private companies in general. This, the
committee rightly felt, would enable small businesses operating under the
purview of one of the world's most voluminous and tortuous company
legislations, to enjoy freedom from rigorous procedures irrelevant to them.
However, the committee has not gone into specifics of ways in which SPCs
could be given freedom from unnecessary regulation, while it has come out
with more elaborate and specific proposals for easing regulations that could
be applied to all private limited companies. This Concept is of high significance in lieu of the fact that in
the background of the global economic trends which enable investment and
services to flow across borders, the growing role of service & knowledge
based enterprises and emerging international competition, it is highly
necessary to enable Indian entities also to have the requisite choice in
corporate organizations to compete internationally on level playing field. Courtesy
: Garima Tiwari and T.Priyadarshini, National Law Institute University, Bhopal |
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