Business Law

Meetanshi Gaba
19060322060
 Situation
Dean is a successful sole practitioner offering business consultancy services to a number of local
companies. His chief competitor is Caroline, who offers similar services. Caroline and Dean decide that
they wish to work together, but are unsure as to which business structure would be most appropriate.
They seek your advice regarding which business structure would be most suitable, bearing in mind:
They wish to avoid significant levels of formality and regulation
· They want to have flexibility in establishing the procedures by which the business is to be run they
want to be able to run their affairs in private
· They want to avoid personal liability for the debts and liabilities of the business
· The process of creating the business should be relatively cheap and quick
· They do not want to invest significant amounts of their own capital in setting up the
· Business and will probably wish to raise capital from outside sources they wish to take on employees.

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 Answer
Dean and Caroline are both engaged in their respective Sole Proprietorships. Since they are competitors in
the same field, coming together will ensure an increased inflow of revenue. Their conditions for a business
structure are:
- Low levels of formality and regulation
· Flexibility in establishing the procedures by which the business is to be run
- Ability to run their affairs in private
· Avoidance of personal liability
· The process should be relatively cheap and quick
· No significant amounts of their own capital
· Raise capital from outside sources

There is no one right form of business, keeping all the conditions in mind. A Limited Liability Partnership
form of business is best suited. The level of regulation and formality in it is, however, higher as it is a body
corporate as per Section 3 of the LLP Act 2008, and needs to be incorporated with formal documents.
This process is unlikely to be cheap and quick.
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Furthermore, LLP cannot raise money from the public. The two ways a Limited Liability Partnership can
raise funds is by

a. A Uniform or Non-Uniform increase in capital by the existing partners.

b. Adding a new partner for fundraising.

The other possible business structure could be a general partnership governed by the Partnership Act,
1932. Section 69 of the Act makes registration of the firm optional, hence reduces the complexity of setting
it up. It would, therefore, be more regulated than a sole proprietorship since it is under an Act but less than a
company.

In a partnership, however, partners have unlimited personal liability. This means that, in the event of the firm
going bankrupt, the private estates of individual partners can be liquified to meet the deficit.
 Limited Liability Partnership is a business

LIMITED structure that allows for the personal liability of

partners to be limited. It has the elements of a

LIABILITY
partnership and a company.

Each LLP Partner is protected from personal

PARTNERSHIP liability, except to the extent of his capital

contribution in the LLP.

Limited Liability Partnership is a business structure that allows for the personal liability of partners to be
limited. It has the elements of a partnership and a company.

Each LLP Partner is protected from personal liability, except to the extent of his capital contribution in the
LLP. He is not liable for unauthorised actions of other partners and is, thus, shielded from joint liability.

An LLP is subject to income tax like other partnership firms and companies.
 Separate Legal Entity
An LLP, due to its compulsory incorporation, has a
separate legal entity. The partners and the LLP are
distinct from each other. CHARACTERISTICS
Minimum Capital OF AN LLP
There is no minimum capital requirement for a LLP. The
Partners decide how much will be contributed by each
partner. This can be helpful in this case, only drawback
is that funds cannot be raise from external sources.
Audit not mandatory
Registration Process The auditing of the books of accounts of a Limited
Liability Partnership firm is not mandatory except in two
Section 3 of the Limited Liability Partnership Act, 2008 cases, if contribution exceeds 25 lakh rupees or if
states that it needs to be a body corporate. The turnover is more than 40 lakh rupees. This adds to low
registration process is the same as that of a company levels of regulation an formality.
and is done by the Registrar of Companies.

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 Under section 3 of the LLP Act, the firm must be a
REGISTRATION body corporate. The registration of the firm is
compulsory. It requires several important

PROCEDURE documents, like residence proof of partners and

more. It takes up several days and costs a
significant amount of money.

Proof of registered office address and digital

signature certificate are required to complete
registration.

Once registered, the operations are relatively

easier.
 Flexibility
An LLP is more flexible in terms of internal organisation
and working as compared to a company. It does,
however, require certain formalities like incorporation
that are not required in a general partnership.
BENEFITS
No Maximum Limit No Minimum Capital
There are no norms for raising of capital as prescribed in
There is no maximum limit for the number of partners, so
the Companies Act 2013, The raising and utilisation of
if in the future, Dean and Caroline choose to expand
funds depends on partners' will.
their business and add more partners, they can easily
do so.

Limited Liability
Liability of partners is limited to the extent of their
contribution to the capital. This is the biggest
advantage as both Dean and Caroline want their liability
to be limited.
No Auditing
Since auditing is not compulsory, there is more flexibility
and ease in carrying on the business. This fits into the
requirements stated by Dean and Caroline.

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While LLP a suitable option for you, there are certain
requirements it does not fulfil.

As stated earlier; in an LLP, funds cannot be raised from WHY AN LLP

the public. The only two ways of raising funds are:
adding a new partner or increasing contributions by
existing partners.
MIGHT NOT
An LLP needs to be incorporated, so the process is not BE SUITED
exactly cheap and quick and there is a certain level of
formality.
TO YOUR
It is more flexible than a company but less than a general
partnership. NEEDS
The business affairs can be largely private, but
incorporation makes certain formalities necessary.
 A General Partnership includes two or more
individuals establishing a business amidst

GENERAL the need for greater capital investment,

shared risk and more expertise.

PARTNERSHIP It is governed by the Indian Partnerships Act

of 1932. There is mutual agency in
partnerships i.e. an individual partner can
act on behalf of the firm, as well as other
partners.

A Partnership Deed is not mandatory, but is

usually recommended to commence a
partnership firm.
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 CHARACTERISTICS
Two or more Persons
As per Rule 10 of the Companies (Miscellaneous) Rules, 2014 , a
partnership cannot have more than 50 members.

Agreement
A partnership comes into an agreement between the partners for a
particular venture, time period or will. It may be written (Partnership
Deed) or oral. The process is cheap and quick with less formalities.

Lawful Business
The business must operate with the primary motive of earning
profits, must conform to the laws and the sections of the
Partnerships Act, 1932.
Profit Sharing
Partners share profits either a discussed ratio or in the ratio of the
capital contributed, All partners need not bear the losses. There
might be a provision in the deed that exempts certain partners from
sharing the losses.

Mutual Agency
A Partner is treated both as an agent and a principal. He represents
the firm and other partners, so he is an agent. He is represented by
other partners, so he is a principal.
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REGISTRATION
As per Section 69 of the Indian Partnerships Act, 1932, the registration of a
Partnership firm is optional and not compulsory.
 Ease of Formation
As per section 69 of the Indian Partnership Act 1932, a
partnership firm need not be registered. It can be formed
easily by an agreement between the partners. The process is
cheap and quick.

Decision Making
BENEFITS Partners oversee different functions, there is a division of
labour on the basis of the expertise of different partners
leaving to better judgement and increased efficiency.

Secrecy
Dean and Caroline want their business affairs to be private.
This is fulfilled since their is no obligation to get the firm
registered and there is more confidentiality as they are not
required to audit/ publish the accounts.
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WHY A GENERAL PARTNERSHIP MIGHT
NOT BE SUITED TO YOUR NEEDS
Both Dean and Caroline want limited personal liability. In the case o f the firm incurring a loss, and the
assets of the business being insufficient to meet the third party debts, the liability of the partners will
be joint and several. This will enforce them to liquidate even their personal assets to cover the debts.

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 CONCLUSION
To summarise, there is no one best option. The partners can choose what
they are willing to compromise on. Since limited liability seems to be an
important requirement, and LLP seems to be a better option, a personal
suggestion would be to go for a limited liability partnership.

The level of formality is certainly more than a general partnership but it is

not excessive and is doable. Auditing is not mandatory so there is added
ease of doing business.

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 REFERENCES
1. The Indian Partnerships Act, 1932, Bare Act

2. The Companies Act, 2013, Bare Act

3. Limited Liability Partnerships Act, 2008, Bare Act

4. NCERT Business Studies Textbook for Class XI, New Delhi, 2006

5. Grewal, T. S. (2018). Accounting for Partnership Firms- Fundamentals.

In Double Entry Book Keeping- Accounting for Partnership Firms

(`2018, Vol. 1, pp. 1.1–1.4). essay, Sultan Chand & Sons Pvt. Ltd.