THE EMERGENCE OF LIMITED LIABILITY PARTNERSHIPS

INTRODUCTION
A Limited Liability Partnership(‘LLP’) is a body corporate which has legal personality
separate from its members and it combines features of both companies and partnerships. It is
often viewed as an ‘alternate corporate vehicle’ which seeks to attain principal benefits of both
forms of business organization- partnership and companies.1 The LLP provides flexibility of a
partnership and also limits the owners’ liability with respect to the LLP to their respective stakes
in the LLP itself. Basically, the partners are able to protect themselves from being held liable for
the losses incurred by one of their business partners. The LLP’s began to emerge in the legal
profession after many traditional partnership firms began to falter due to years of poor planning
and business decisions. Since the benefits of similar business organizations have been
incorporated into this new business form, it is necessary to highlight the advantages of the LLP
over such similar business forms. It is as a result of these very advantages that LLPs, as business
vehicles, have been allowed in several jurisdictions and multiple pieces of legislation have been
enacted to regulate them.

The LLP is a relatively recent legal institution. It has been widely received in most of the
states in the United States of America, however even there, it is of relatively recent vintage. The
sudden emergence of new limited liability vehicles suggests a revolution in the law of limited
liability. However, when placed in historical perspective the developments in the field can be
seen as more evolutionary than revolutionary.2 In the sense that limited liability has existed as
long as commerce has existed although it did not have legal recognition per se. People associated
in business activities have always sought to eliminate, minimize and shift their losses and
liabilities. Often those efforts have been reflected in the development of associational
relationships, grounded in contract or law that bear a striking resemblance to modern forms of

1
Amit M. Sachdeva & Sachin Sachdeva, The Indian LLP Law: Some Concerns for Lawyers and Chartered
Accountants, SEBI & Corporate Law, Vol. 92 No. 6, 2009, 1 available at http://ssrn.com/abstract=1423766 (Last
visited on December 22, 2011).
2
Robert W.Hillman, Limited Liability in historical perspective, Washington and Lee Law Review, Vol 54, Issue 2.

Electronic copy available at: http://ssrn.com/abstract=2117240

business associations. A study of medieval laws such as Roman Law, early Islamic laws,
Byzantine law reveals that the concept of limited liability existed even during those times.3

THE GROWTH OF THE CONCEPT OF LIMITED LIABILITY PARTNERSHIPS

Limited liability partnership is a fairly new legal concept, however as mentioned earlier
the development of limited liability vehicles is an ancient activity. A brief discussion of the
diverse periods in the development of law and commerce would be sufficient to prove the point.

CONCEPT OF LIMITED LIABILITY IN ANCIENT TIMES

Right from the time of the Romans the concept of limited liability existed. Certain methods
existed to limit liability in contract. The most important technique developed was the peculium.4
The peculium consisted of assets entrusted to a slave by his master or to a son by his father.5 The
peculium was an excellent limited liability vehicle for conducting business activities, and further
modifications were made to the concept as Roman law developed.

The concept of limited liability existed in early Islamic law as well. A variety of
techniques developed in early Islamic law to limit liability.6 One of the techniques was that of
the “licensed slave”. This concept was very similar to the Roman concept of peculium discussed
above. A business was launched upon a proclamation of the master authorizing a slave to engage
in business The slave was able to engage in a wide variety of commercial activities, including
purchasing and selling goods on cash or credit, employing workers, and incurring debt. Only the
slave was responsible for claims arising from the business. If the slave was unable to satisfy the
claims from his earnings, he could be sold, with the proceeds used to settle claims. Significantly,
the master was not responsible for claims and could even reclaim any identifiable goods that he
had put in the business.7

3
Ibid.
4
David Johnston, Limiting Liability: Roman Law and the Civil Law Tradition, 70 CHI.-KENT L. REv 1515 (1995).
5
A slave or child could not own property themselves. However, where the slave, or son, traded with his peculium, as
commercially minded slaves were encouraged to do by their masters, debts and liabilities incurred m such trading
could only be enforced by third parties against the master or paterfamilias to the extent of the peculium, and not
against all of the latter's property Thus, any Roman seeking to invest in a business would trade through his slave
or son and limit hIs liability by fixing the size of the peculium.
6
S.W Hasanuzzaman, Limited Liability of Shareholders: An Islamic Perspective, 28 ISLAMIC STUD. 353 (1989).
7
Ibid.

Electronic copy available at: http://ssrn.com/abstract=2117240

 A second and more important means of achieving limited liability was the qirffd,8 which is
not mentioned in the Qurn or the traditions of the prophet, the qtrffd was created from a profit-
sharing arrangement in which a "man [the merchant] takes money from his colleague [the
investor] in order to work with it without any liability to himself." The investor could not
stipulate that liability would be borne by the merchant. The merchant had complete discretion on
trading policy, but the investor could assert control over broader matters such as the nature of goods that
the merchant could buy and sell and the locations where the agent could travel. Profits were evenly
divided between the merchant and the investor, although the parties could agree on different
proportions that each would share. As so described, the qirffd presents an interesting twist on the
modem limited partnership, in which it is the passive investor rather than the active manager that
enjoys the benefits of limited liability.9

The appearance of the commenda in eleventh century Italy is a milestone in the history of
limited liability. All serious attempts to trace the origins of modern limited liability vehicles trace
the line of development back at least to the commenda.10 The commenda which was largely used
for sea trade had many characteristics of modern limited liability partnerships. One
party(sleeping partner) would provide capital to the other party(managing partner) to finance a
11
commercial venture. The managing partner would assume responsibility for all aspects of
management of the venture, however it was not necessary for him to provide capital. Upon the
completion of the venture the commenda would terminate and the parties would divide profits
according to the predecided agreement.12 One of the aspects of this system was that the passive
partner enjoyed limited liability, it appears that third parties doing business with the managing
partner were generally unaware of the passive partner.13

A marked development in contemporary limited partnership law has been the relaxation
of restrictions on the extent the limited partner can be active in the business and still enjoy the
benefits of limited liability It seems quite the opposite trend prevailed as use of the commenda

8
Walter Ashburner, The Rhodian Sea-Law (1909); Abraham L. Udovitch, At the Origins of the Western
Commenda: Islam, Israel, Byzantium?, 37 SPECTRUM 198, 201-02 (1962).
9
Ibid.
10
Robert S. Lopez & Irving W Raymond, Medieval Trade in the Mediterranian world 174 (1955)
11
The Cambridge Economic history of Europe 53-55 (M. Postan et al. eds., 1963).
12
Typically, three-fourths of the profits went to the passive partner with the traveling partner receiving only one-
fourth.
13
Lopez & Raymond , supra note 10, at 176.

3
grew. Early commenda agreements usually left to the investor the right of deciding the
destination, choice of ship, and other essentials of the commercial venture undertaken by the
traveling party They also insisted on meticulous accounting and often specified that the goods
should go and return m the custody of the traveling party In time, however, greater and greater
latitude was left to the traveling merchant. Evidently, it was impossible for the sedentary investor
to control adequately the management of the venture without hampering the initiative of the
traveling party; nor were all merchants willing to accept limitation from investors.14

For land trade the compagnia was usually used in place of the commenda.15 The main
different between the two modes of trade was that in contrast to the commenda the compagnia
did not limit the liability of the passive partner.16 The option of limited liability was not made
available except for sea trade.

In the later periods we can see further instances of the use of limited liability
partnerships. In 1408, a statute was enacted that allowed the creation of societa in accomandite
in Florence. This was very similar to the modern limited liability concept. The essential
characteristic of the societa in accomandite was that the passive partners were liable only to the
extent of their investments. From this point the development of limited liability partnerships can
be easily traced. The societa en commandite was incorporated in France for the first time at the
time of Louis XIV in 1671 and then the a Code de Commerce of 1806. The societta en
commandite was the model for the Irish Anonymous Partnership Act of the late eighteenth
century and early American limited partnership partnership statutes, the first of which was enacted by
New York in 1822.17

MODERN CONCEPT OF LIMITED LIABILITY PARTNERSHIPS

The concept of LLP arose in the United States in the aftermath of the real estate and
energy price crisis in the 1980s, from there it became popular in the United Kingdom and
consequently in several other countries.

14
Ibid.
15
Only rarely was the commenda used for overland trade. See 3 Cambridge Economic history of Europe, supra note
11, at 49.
16
Ibid.
17
See 1822 N.Y LAWS., 45th Sess., ch. CCXLIV.

4
Emergence of LLP’s in the United States
As mentioned above the concept of limited liability partnership surfaced in 1980 in
response to great the real estate crisis and the consequent impact it had on the banks and other
financial institutions. . The saga of the partners5 who had not been involved in advising the
financial institutions in any capacity or sense but who were proceeded against in respect of their
personal assets also, sympathetically attracted the consideration of the legislature.18

The United States, was the epicenter of that financial crisis spearheaded the process of
legislating the concept of LLPs. Initially there was hesitation both in academic as well as
legislative circles in disturbing the long settled principles of unlimited liability of partners of a
partnership firm on the grounds of its moralistically weak foundations and its discriminatory
nature, however it was soon overcome by the commercial expediency of its legislation. Thus the
first statute came into existence. The first law on LLP was the Texas House Bull 278 which was
passed on 26th August 1991. The other states of the US soon followed.19

The original Texas legislation created what American lawyers have come to refer to as a
“partial shield” LLP.20 The distinctive feature of the partial shield LLP statute is that it does not
protect partners from personal liability for obligations other than malpractice liabilities. Thus ,
partners in a partial shield LLP remain liable for t he firm’sordinary contract debts. As stated
earlier the other US states soon followed Texas and came up with their own LLP statutes. Other
states however, made a notable departure from the original LLP mod making LLP’s much more
like ordinary business corporations. This dep rture was to shield partner s of LLP s from personal
liability for any obligations of the LLP, rather than for malpractice liabilities only.The “full
18
Hamilton, Registered Limited Liability Partnership: Present at the Birth, 66 University of Colorado Law Review
1065-1069.
19
Weidner, Pitfalls in Partnership Law Reform: Some United States Experience, 26 Journal of Corporation Law
1031.
20
(2) A partner in a registered limited liability partnership is not individually liable for debts and obligations of the
partnership arising from errors, omissions, negligence, incompetence, or malfeasance committed in the course of
the partnership business by another partner or a representative of the partnership not working under the
supervision or direction of the first partner at the time the errors, omissions, negligence, incompetence, or
malfeasance occurred, unless the first partner:
(a) was directly involved in the specific activity in which the errors,omissions, negligence, incompetence, or
malfeasance were committed by the other partner or representative; or
(b) had notice or knowledge of the errors, omissions, negligence,
incompetence, or malfeasance by the other partner or representative at the time of occurrence.
(3) Paragraph (2) does not affect the joint and several liability of a partner for debts and obligations of the
partnership arising from any cause other than those specified in Paragraph (2).(4) Paragraph (2) does not affect the
liability of partnership assets forpartnership debts and obligations.

5
shield” approach is rapidly overtook the partial shield approach in U.S.By late 1997 the full
shield approach had been adopted in approximately twenty states, most of which had originally
followed the partial shield approach.21

LLP structure in the UK

Following the introduction of the concept of LLPs in Texas, major accounting firms in
the UK raised a campaign for the creation of LLPs in order to limit the liability of an individual
partner to acts specifically involving that particular partner. Accordingly, the UK Companies
Act, 1989 was amended to allow accounting firms to work as limited liability companies.
General partners in charge of the ordinary day-to-day activities of the firm were, however, still
held jointly and severally responsible. This was achieved by a campaign in the 1990s calling for
proportional liability in partnership firms.22 Owing to the rising demand, the Limited Liability
Partnership Act was passed in the UK in the year 2000.

The UK LLP Act is based on three broad principles- limited liability, corporate
personality and partnership flexibility. The existence of an LLP in the UK as a separate legal
entity means that it has its own rights and liabilities, distinct from those of its members.23 In the
UK, an LLP differs from a company to the extent that the former has greater organizational
flexibility and is taxed as a partnership. In the UK, LLPs are accorded ‘entity’ treatment whilst
partnerships governed by the provisions of the UK Partnership Act are generally treated as
aggregates of individuals.24 It must be mentioned at this point that The Indian LLP Act, 2008
which will be discussed in the later chapters finds its basis in the UK LLP Act.

21
Carter G. Bishop, The Limited Liability Partnership Amendments to the Uniform Partnership Act (1994),
(1997)53 Bus. Law. 101, p.365
22
Ashish Ahuja, Limited Liability Partnership Act, 2008- Some Issues, available at
http://www.bcasonline.org/webadmin/res_material/resfiles/LM%20Ashish%20Ahuja%204Feb09.pdf (Last visited
on March 26, 2012).
23
Yeo Hwee Ying, Liability of Partners in a Limited Liability Partnership Regime, (2003) 15 SAcLJ 392; See Re,
Rogers, [2006] EWHC 753 (Ch) (in this case it was determined that if a will appointed partners in a firm as
executors, this would include the profit-sharing members of the LLP as well).
24
Id.

6
THE OBJECTIVES OF LIMITED LIABILITY PARTNERSHIPS
In an increasingly litigious environment, the prospect of being a member of a partnership
firm with unlimited personal liability is a very risky affair and hence unattractive. Indeed, this is
the prime reason why partnership firms of professionals, such as accountants, lawyers etc. have
not grown in size to successfully meet the challenges posed today by international competition.
The objective of the LLP law is quite clear. It seeks to achieve the principal benefits of both
partnership and company as forms of business organization. Primarily, it aims at freeing the
mind of a professional from the fear that his personal assets may be attached for the negligent
and other wrongful acts of his copartners, over whom he has no control.25 This, the law does, by
providing the shield of limited liability26 by way of a separate legal personality. In other words,
it enables professional expertise and initiative to combine with financial risk taking capacity in
an innovative and efficient manner. 27 The other objective is to allow to the LLP the same
organization freedom from compliances as are available to a general partnership, thus calling for
a new form of corporate governance.28 Additionally, an LLP is also conferred the same status as
a general partnership for tax purposes, by following the flow-through system, so that the tax
incidence does not act as a disincentive against this form of organization.

In a nutshell, the Limited Liability Partnership has the following advantages29:

• It provides limited liability to its partners. Though personal Liability arises in case of
wrongful acts or omissions, a partner is not personally liable for such acts or omissions of
other partner.
• LLP Business Structure also has the advantage of Internal Flexibility. As in traditional
partnership, the internal structure of LLP can be organized as per mutual agreement.

25
Hamilton, Registered Limited Liability Partnership: Present at the Birth, 66 University of Colorado Law Review
1065, 1066.
26
Jhaveri and Sithapathy, Limited Liability Partnership: An Insight available at icai.org/resource_file/9996417-
421.pdf, [last visited on 25 March 2012].
27
Malik, The Latest Hybrid in India: Limited Liability Partnership SOAS Centre for International Studies and
Diplomacy Conference on 20-21 July 2007, available at
http://www.cisd.soas.ac.uk/Editor/assets/vikramadityasinghmalik.pdf, [last visited on 25 March 2012].
28
Supra N.20
29
Kartik Dawar, Limited Liability Partnership : An Emerging concept in India,( April. 2, 2012),
http://www.legallyindia.com/1477-limited-liability-partnership-an-emerging-concept-in-india.

7
• The requirements as to Board Meetings, Resolutions, Annual meetings, etc. are not there in
case of LLP.
• There is less paperwork in case of LLPs, even the formation of a partnership agreement is not
mandatory.
• Since LLP is a separate legal entity, its existence is not offered by the entry or exit of partners.

DISTINGUISHING LLP’S FROM SIMILAR OTHER BUSINESS FORMS

In order to understand the concept of LLP’s it is important to understand the difference
between LLP’s and other similar forms of business organization. Once a comparison is drawn it
becomes evident that LLP’s have certain advantages compared to other similar forms.

LIMITED LIABILITY PARTNERSHIPS AND GENERAL PARTNERSHIPS

First and foremost a comparison must be drawn between an LLP and a general
partnership. The foundational distinction between the two forms of business organizations is that
a general partnership enjoys no legal status or existence separate from the partners who
constitute it, on the other hand an LLP, on the other hand, is a legal entity, separate from its
partners. In terms precisely of the extent of liability, an LLP is different from a general
partnership in the following sense: in a general partnership, all partners are personally liable
for all business debts to the extent they exceed the assets of the partnership. Vis-à-vis a third
party, the liability is joint and several, i.e. each partner may be sued for the full amount of any
claim. The basis for this sort of liability is perhaps the entitlement of each partner to represent as
an agent, supervise as a principal,30 and take decisions for the partnership business as well as
other partners. In an LLP, on the other hand, no partner is liable for the actions of any other
partner beyond the extent of his share in the LLP.

LIMITED LIABILITY PARTNERSHIPS AND LIMITED PARTNERSHIPS

An LLP is different also from a Limited Partnership in that unlike the former, at least one
of the partners of the latter is a general partner31 who is in the ordinary control of day to day
business of the firm and has unlimited personal liability. Besides the general partner, there is also

30
Andrew Richmond, Law Firm Partners as Their Brothers Keepers,96 Kentucky Law Journal 231, 263-273
31
Ibid.

8
at least one partner who has limited liability for debts and claims arising out of business
decisions and activities. An LLP has no general partner.32

LIMITED LIABILITY PARTNERSHIPS AND LIMITED LIABILITY COMPANY

It may, at this point, also be appropriate to distinguish an LLP from a ―Limited Liability
Company. The precise distinction between the two concepts is not very well defined. The reason,
perhaps, is that since ―LLC is a peculiarly US concept, where the legislative competence, in this
regard, is vested in the provincial states and due to the differences in the needs of different states,
the regime providing for the formation of LLCs is different from state to state. However, some
broad generalizations may be made. There can be a single member LLC, however in case of
LLP’s there has to be atleast two persons in the organisation. An LLC may carry on any sort of
trade or business whereas the scope of LLP is generall much restricted. For instance, in
California, an LLP may be engaged only in the practice of public accountancy, the practice of
law or the practice of architecture.33 An LLC is afforded a corporate-like regulatory regime for
most purposes including the protection against personal liability. It is, however, usually treated
as a non-corporate business organization for tax purposes. In short, it is a company for most
purposes other than tax, for which purposes it is treated as a partnership. 34Though treated as
corporate entity, an LLP is afforded a partnership-type regulatory regime for most purposes
including tax. For limited purposes, it is treated as a company. This is particularly so in case of
the extent of the liability of the persons constituting an LLP.35

LLP’s are seen as the preferred form of business organization because of the peculiar
nature of certain professions. An LLP enables a partner to escape from personal liability for other
partners activities including acts of professional misconduct and negligence. Because of these
features LLP as a model of business organization has become popular in a very short span of
time. LLP’s are in use not only in the United States but also in countries like United Kingdom,
Singapore, Hong Kong. LLP’s are gaining popularity in India as well.

32
Peri Pakroo, ―Limited Partnerships and Limited Liability Partnerships,
http://www.nolo.com/article.cfm/, last visited on 24 September 2008.[last visited 5 April 2012]
33
California Business Portal, maintained under the name of the Secretary of State for California, ―Limited Liability
Companies FAQs,http://www.sos.ca.gov/business/llc/llc_faq.htm#question2,[ last visited on 5 April 2012]
34
Ibid.
35
Ibid.

9
LIMITED LIABILITY PARTNERSHIP LAW IN INDIA
Keeping in view the international business trends where a range of services is being
offered by professionals and businesses in the form of Limited Liability Partnerships, the Indian
legislature enacted the ‘Limited Liability Partnership Act’ in the year 2008. The LLP Act is
broadly based on the UK LLP Act, 2000 and the Singapore LLP Act, 2005. In India 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 professionals. The purpose of the Act is to bridge this gap.

There are two basic models of LLPs witnessed around the globe. The first is the Texas
LLP model. Under this model, the partners’ vicarious liability is limited to the wrongful acts of
the partnership and not for liability arising in the ordinary course of business. 36 The second
model, known as the Delaware model, is one where all obligations of the LLP are solely the
liability of the LLP and the partners are not personally liable for any action arising in tort,
contract, etc.37 The LLP Act draws greater inspiration from the Delaware model than the Texas
model.

The Indian LLP, a creation of the LLP Act, has successfully attained a middle path
between a partnership and a company. The LLP Act has provisions starting from the
incorporation of, or conversion to, an LLP, up to the winding up of the LLP. Detailed emphasis
has been given to the role of partners. Their rights and liabilities have been elucidated. It is
widely believed that while some more fine-tuning of the LLP Act is required, the LLP Act along
with all the related recent legislative enactments, has genuinely been a boon to Indian business
interests.

36
Amit M. Sachdeva & Sachin Sachdeva, The India LLP Law: Some Concerns for Lawyers and Chartered
Accountants, February 4, 2009 available at http://www.vaishlaw.com/article/LLP%20Law%20-%20Taxmann-
Amit%20Sachdeva.pdf (Last visited on December 26, 2011).
37
Id.

10
CONCLUSION

This paper has endeavoured to provide a thorough analysis of the concept called the
Limited Liability Partnership. First and foremost, it has traced the evolutionary history of the
LLP, the attempt of the author been to argue that the concept of limited liability existed right
from the time of the Romans and the concept is more evolutionary than revolutionary. In the next
part the growth of the modern concept of LLP’s has been discussed right from its creation in
Texas and its spread to other jurisdictions. In the course of this project the author has also
attempted to highlight the main objectives of LLP’s and the reasons for which LLP’s are more
favourable than other forms of business organizations. A brief analysis of the LLP law in India
has also been provided.

If one gives a thorough look at the concept of LLP’s it becomes evident that it is certainly
very profitable for business purposes. It eliminates risks and encourages people to enter into
partnerships and take part in new business ventures, hence it is no surprise that the concept has
rapidly become popular in most parts of the world. As mentioned earlier the concept of limited
liability has always existed in trade and commerce, an LLP is nothing but the evolved form of
the concept of limited liability laws that existed during the times of the Romans or the French or
Italian medieval laws.

11
 BIBLIOGRAPHY

ARTICLES REFERRED
• Amit M. Sachdeva & Sachin Sachdeva, The Indian LLP Law: Some Concerns for
Lawyers and Chartered Accountants, SEBI & Corporate Law (2009).
• Robert W.Hillman, Limited Liability in historical perspective, Washington and Lee Law
Review (2001).
• David Johnston, Limiting Liability: Roman Law and the Civil Law Tradition, Chicago
Law Review (1995).
• Hamilton, Registered Limited Liability Partnership: Present at the Birth, University of
Colorado Law Review (1999)

• Ashish Ahuja, Limited Liability Partnership Act, 2008- Some Issues

http://www.bcasonline.org/webadmin/res_material/resfiles/LM%20Ashish%20Ahuja%20
4Feb09.pdf
• Jhaveri and Sithapathy, Limited Liability Partnership: An Insight. available at
icai.org/resource_file/9996417- 421.pdf.

• Andrew Richmond, Law Firm Partners as Their Brothers Keepers, Kentucky Law Journal
(2002).
• Peri Pakroo, Limited Partnerships and Limited Liability Partnerships,
http://www.nolo.com/article.cfm/, last visited on 24 September 2008.

WEB SOURCES
1. <www.jstor.org>.

2. <www.heinonline.com>.