Limited Liability Partnership: An Emerging Concept In India (A Critical Study)

2018

Chapter Five
Limited Liability Partnership: A Comparative Analysis

5.1. Introduction

The importance of the Partnership Act 1890 in the historical development of partnership
law in the United Kingdom is beyond question. Drafted in 1879 and finally enacted in
1890 after much debate and amendment, this seminal piece of Victorian legislation with
its "rather limpid prose" and the "deceptive simplicity, born of clear and elegant
expression" in which Sir Frederick Pollock clothed its provisions,323 was intended as
partial codification of the considerable number of common law and equitable principles
developed by the law courts. It has served as an example for most
Commonwealth jurisdictions and has strongly influenced the American Uniform
Partnership Act of 1914 (UPA). In fact, in irrespective of the UPA, the Partnership Act
has served as a model for more than 30 other partnership Acts and ordinances with
implementation dates ranging from 1891 to at least 1981.The Indian law of partnership
in India is based on the provisions of the English law of partnership. Until the English
Partnership Act of 1890 was passed, the law of partnership even in England was largely
based on legal decisions and custom. There were very few acts of parliament relating
directly to partnership. The Indian Partnership Act of 1932 (Partnership Act) was the
result of a Report of a Special Committee consisting of Shri Brojender Lal Mitter, Sir
Dinshaw Mulla, Sir AlladiKrishnaswamiIyer and Sir Arthur Eggar.324

Prior to the enactment of the Partnership Act, the law relating to partnership was
contained in Chapter XI (sections 239 to 266) of the Indian Contract Act, 1872

323
J.J. Henning , Partnership Law Review : The Joint Consultation Papers and the Limited Liability Partnership Act
in Brief Historical and Comparative Perspective, Comp. Law.2004, 25(6), 163-170
324
Law Commission of India, 178thReport, 2001, Recommendations for amending various enactments, both Civil &
Criminal.

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(Contract Act). These provisions contained in the Contract Act were not found
adequate. As a result, Chapter XI of the Contract Act was repealed and replaced by the
Partnership Act of 1932.The limited liability partnership (LLP) concept originated in
the US in the early 90s in unincorporated form. It was inspired by litigation
against professional firms that had done work for failed savings and loan associations.
Claims against all partners, including many who had nothing to do with the failed
associations, were a strong incentive for the development of a mechanism to limit the
vicarious liability of partners.325 Following this, it was also adopted in United Kingdom
(2000) and now the Naresh Chandra Committee has proposed the same for India. Thus,
it is important for us to begin our understanding of Limited Liability Partnership, by
knowing some basic concepts.

5.2. Limited Liability Partnerships – A Comparative Analysis with UK and US

Models

The limited liability partnership (LLP) concept originated in the US in the early 90s in
unincorporated form. It was inspired by litigation against professional firms that had
done work for failed savings and loan associations. It is difficult to believe that Limited
Liability Partnership, such a major reformation of partnership law, had its beginnings
not in a legislative advisory committee meeting or in a courtroom as a judge-made
remedy, but instead began in a law firm of 21 employees in Lubbock, Texas.326

During the crisis, the government sued the law and accounting firms327 that represented
the failed banks for malpractice. Claims against all partners, including many who had
nothing to do with the failed associations, were a strong incentive for the development
of a mechanism to limit the vicarious liability of partners.

325
Johan Henning, the Deadlocked Limited Liability Partnership – Arbitration or Winding Up, Comp. Law. 2005,
26(10)
326
Susan Saab Fortney, Seeking Shelter in the Minefield of Unintentended Consequences--TheTraps of Limited
Liability Law Firms,54 WASH. & LEE L. REV. 717, 720-21 (1997)
327
Over one-third of all bank failures at the time occurred in the state of Texas. Hamilton, supranote 8, at 1069.

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In a short period of time, all US jurisdictions adopted legislation sharing t h e
theme that a LLP limits, or eliminates, joint and several
l i a b i l i t y o f partners for some, or all, liabiliti es and obligations of the
partnership. The National Conference of Commissioners on Uniform State Laws
approved the Uniform Limited Liability Partnership Amendments (ULLPA) to the
Revised Uniform Partnership Act (RUPA) in 1996.

5.2.1. LLPs/LLCs in US

LLPs originated in the United States in the 1990’s as a number of business scandals
prompted lawyers to worry about personal liability and lobby for more protection than
under general partnership law. American LLPs would differ markedly from the
proposed Indian LLPs under the LLP Act. The LLP Act would apply uniformly
throughout the country, whereas US LLP policy differs from state to state. Some states,
like New York, limit LLP status to professionals requiring licenses whereas the LLP
Act proposes no such limitation. Moreover, LLPs in states like Texas limit the liability
to the partnership’s non-malpractice contractual and tort liabilities. Other states, like
Delaware, mirror the LLP Act by extending liability to all obligations of the
partnership. The LLP Act may best resemble American Limited Liability Companies
(“LLCs”) statutes because United States LLCs and Indian LLPs generally protect
owners from personal liability for business debts and claims. However, LLCs in the
United States can be distinguished from Indian LLPs. Unlike Indian LLPs, LLCs are
not technically a ‘body corporate’ and can be formed for non-profit purposes.

5.2.2. LLPs in UK:

With the introduction of Limited Liability Partnerships Act 2000 in April, 2001, the
LLP concept remains somewhat of a novelty among UK laws. Still, the Indian
Parliament seems to have used the UK Act as a model for the LLP Act. LLPs under the
UK Act and the LLP Act shield partners from personal liability for each other’s actions
and (save for situations of fraud or wrongful trading) limit losses to the partner’s
contribution. However, the LLP Act differs from the UK LLP Act in a few important

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ways. First, the UK Act has no “resident” requirement, whereas the LLP Act requires at
least one designated partner to be “resident” of India. Second, the Act requires two
designated partners for incorporation whereas the UK LLP Act requires only one. Third,
unlike the UK LLP Act, the LLP Act specifies a time limit for which an LLP can
operate with one partner. Fourth, the UK Act requires LLPs to buy an insurance policy
for satisfaction of liabilities pursuant to contrary judgments (if any), which concept has
not been inculcated in the LLP Act.328

5.2.3. Comparison of key provisions with LLP Acts in the US & UK

Following are some Comparison between LLP Acts in the US & UK329
Table:-1 A Comparative Analysis with US and UK.

United State United Kingdom

Basic

History Introduced in 1991 in Texas. Formed under the Limited

Incorporated into commercial law Liability Partnerships Act
in most states by Uniform 2000.
Partnership Act, 1996.

Membership Any two or more people can form Any two or more people can
an LLP. Some states restrict form an LLP for the conduct of
membership to specific any form of business.
professions only.

Liability of Liability limited to investment in Liability limited to investment

Partners LLP, except in the case of in LLP, except in the case of

328
Limited Liability Partnership, A.R.A. LAW - Advocates & Solicitors, VOL. XV- February 2009 ISSUE 1.
329
US Uniform Partnership Act (1997), UK Limited Liability Partnerships Act 2000, LLP Bill, PRS

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deliberate fraud. deliberate fraud.

Taxation Profits distributed among Profits distributed among

members, and taxed as individual members, and taxed as
income. The LLP does not pay individual income. The LLP
taxes. does not pay taxes.

5.3. Limited Liability Partnerships – A Comparative Analysis with UK and India.

In an increasingly litigious market environment, the prospect of being a member of a

partnership firm with unlimited personal liability is, to say the least, risky and
unattractive. In India, some bodies of professionals have been prohibited from
practicing under an incorporated form. E.g. Development of legal profession in India
has been restricted in India on account of the number of impediments in the current
regulatory system which hinders Indian law firms from competing effectively against
foreign firms.
This would hamper the growth of Indian Law Firms in comparison to the Foreign Law
Firms 330
once the Legal Sector is opened. The ‘general partnership’ or partnership
simplicities has traditionally been the entity of choice to provide services by
professionals such as lawyers, accountants, doctors, architects, and company
331
secretaries. The unlimited liability of general partnerships under the Indian
Partnership Act 1932 has become a cause for concern in the light of increase in the
incidence of litigation for professional negligence, the size of the claims and the risk to
a partner's personal assets when a claim exceeds the sum of the assets of the partnership.
The idea that LLPs should be introduced in India was mooted in the Report of

330
A Consultation Paper on Legal Services under GATS (Prepared by Trade and Policy Division, Department of
Commerce, Government of India)
331
Naresh Chandra Committee Report

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the Naresh Chandra Committee on Regulation of Private Companies and Partnership
and the May 2005 Report of the Expert Committee on Company Law ( J. J. Irani
Committee). In response, on November 2, 2005, the Ministry of Company Affairs in the
Government of India circulated a concept paper on LLP’s with a view to stimulating
public debate over ideas which will be incorporated in the proposed Limited Liability
Partnership Bill (the "Bill"). The proposed Bill is drafted on the lines of the United
Kingdom's Limited Liability Partnerships Act 2000.332

Table:-2 Comparison between LLP in UK and LLP in India

LLP In United Kingdom LLP In India

1.
The Law introduced in the year The Law introduced in the year 2008 with
2000 with the nomenclature the nomenclature Limited Liability
Limited Partnership Act, 2000. Partnership Act, 2008.

2.
Registration of LLP is with Registration of LLP is with Registrar of
Companies House. companies.

3 LLP Agreement is the LLP Agreement is the document which

document which needs to be needs to be registered.
registered.

4.
It is a separate legal entity under It is a separate legal entity under Limited
the Limited Liability Liability Partnership Act, 2008.
Partnership Act, 2000. It is
operating under a combination
of partnership and Company
Law.

332
AparnaViswanathan, India considers introduction of Limited Liability Partnerships, I.C.C.L.R. 2006, 17(5), 141

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5.
Contribution is a matter of The contribution of partners is as per LLP
commercial/economic activity. Agreement.

6.
The cost of formation of LLP is The cost of formation of LLP is
comparatively lesser than the comparatively lesser than the cost of
cost of formation of the formation of the Company.
Company.

7. The liability of partners is The liability of partners is limited to the

limited to the extent of their extent of their contribution towards LLP,
contribution towards LLP. except in case if intentional fraud or
wrongful act of omission by the partners.

8.
Members will be liable to pay No such liability prevails.
Class 2 and Class 4 National
Insurance contributions.

9.
Annual Return is to be filed Annual Financial Statement and Statement
with the Registrar of Companies of Solvency is required to be filed with the
every year. Registrar of Companies every year.

10.
Tax liability is not subject to Status of LLP has not made clear under
any Corporate income tax but the taxation laws.
the profits are distributed to the
members who pay personal
income tax on their income
from the partnership. Subject to
Capital Gain Tax, the Limited
Liability Partnership must file

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an annual informational tax
return.

11.
The Secretary of State has
statutory powers to direct a
limited liability partnership to
change its name in certain
circumstances.
The Central Government has statutory
powers to direct a limited liability
partnership to change its name in certain
circumstances.

12.
LLPs that do not carry on Taxation provisions have not yet been
business as a trade or profession defined.
such as an investment company
will be subject to corporation
tax.

5.4. Limited Liability Partnerships – A Comparative Analysis with US and India.

Table:-3 Comparison between LLP in US and LLP in India

LLP In United States LLP In India

1
Registration of LLP is with Registration of LLP is with Registrar
California Secretary of States. of Companies.

2 Here, no such combination exists.

Some US States have combined LP
and LLP to form Limited Liability
Limited Partnership (LLLP).

3
Form LLP- 1 is the document which LLP Agreement is the document

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needs to be registered. which needs to be registered.

4
It is a separate legal entity under the It is a separate legal entity under
Uniform Partnership Act, 1996. Each Limited Liability Partnership Act, 2008.
individual States have passed
Revised Uniform Partnership Act,
1997 to implement LLP in their own
States. It means LLP in one specific
states is entirely different from other.

5
Name to contain “Limited Liability Name to contain “Limited Liability
Partnership” or “LLP/LLLP” as Partnership” or “LLP” as suffix.
suffix.

6
The cost of formation of LLP is The cost of formation of LLP is
approximately US$70. comparatively lesser than the cost of
formation of the Company.

7
The liability of partners is limited to The liability of partners is limited to
the extent of their contribution the extent of their contribution
towards LLP. In case of fraud, or towards LLP, except in case if
omission LLP is liableforpartners intentional fraud or wrongful act of
wrongful act. omission by the partners.

8
Annual Return must be filed with the Annual Financial Statement and
Secretary of States. Statement of Solvency is required to
be filed with the Registrar of
Companies every year.

9
Regulations relating to transfer Regulations relating to transfer are

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aregoverned by the Written governed by the LLP Agreement.
Partnership Agreement.

10
Profits are distributed among the Taxation scheme for LLP prescribed
Partners for tax purpose and no on the same lines as currently
double taxation exists like in applicable for Partnership Firms, i.e.
corporations. tax will be levied on LLP and Partners
will be exempt from tax.

11
The borrowings of partners are The borrowings of partners are
decided by Borrowing Resolution. decided by LLP Agreement.

12
LLP is under obligation to pay LLP is under obligation to pay
Annual Minimum tax of US$800 to Corporate Tax at 30% flat tax rate
the Franchise Tax Board. Such tax is plus 3% education cess. No Minimum
not applicable if no business is Alternate Tax and Dividend
carried out by LLP in California Distribution Tax is levied.
during the year.

13
By Filing Form LLP-4 with the LLP gets wound up voluntarily or by
Secretary of States the LLP gets order of the National Company Law
wound up. Tribunal.

14 Whistle Blowing policy exists.

Provisions have been made to provide
protection to the employees &
partners, providing useful information
during an investigation or convicting
any partner or firm

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5.5. Limited Liability Partnerships – A Comparative Analysis with Singapore and
India.

In case of Singapore, the LLP is governed under the Limited Liability Partnerships Act,
2005. The Limited Liability Partnerships Act 2005 draws on both the US and UK
models of the LLP, and like the latter establishes the LLP as a body corporate.
However, for tax purposes it is treated like a general partnership, so that the partners
rather than the partnership are subject to tax (tax transparency).333

Table:-4 Comparison between LLP in Singapore and LLP in India

LLP In Singapore LLP In India

1
The Law introduced in the year 2005 The Law introduced in the year
with the nomenclature Limited 2008 with the nomenclature
Partnership Act, 2005. Limited Liability Partnership Act,
2008.

2
It is a separate legal entity under the It is a separate legal entity under
Limited Liability Partnership Act, Limited Liability Partnership Act,
2005. 2008.

3
The Registrar has the statutory The Central Government has the
powers to direct a limited liability statutory powers to direct a
partnership to change its name in limited liability partnership to
certain circumstances. change its name in certain
circumstances.

4 Foreign Nationals can be a partner

Foreign Nationals can be a partner of

333
http://www.brecorder.com/top-stories/0/1218508/?tmpl=component&print=1&layout=... 8/29/2014

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LLP provided foreigners must appoint of LLP.
a professional service bureau to carry
out the registration in their behalf.

5
The minimum capital contribution The minimum capital contribution
should be £ 2. should be Rs. 1,00,000/-

6
The liability of partners is limited to The liability of partners is limited
the extent of their contribution to the extent of their contribution
towards LLP. In case of fraud, or towards LLP, except in case if
omission LLP is liable for partner’s intentional fraud or wrongful act
wrongful act. of omission by the partners.

7
Minimum one partner must be Designated Partners are
ordinarily resident in Singapore and responsible for managing the day
responsible for managing the day to to day business and other
day business and other statutory statutory compliances.
compliances.

8
No partner shall be entitled to Unless otherwise agreed in LLP
remuneration for acting in the agreement, no partner shall be
business or management of the entitled to remuneration for acting
limited liability partnership. in business or management.

9
LLP can enter into any contracts. Partners are free to enter into any
contracts.

10
Whistle Blowing policy exists. Provisions have been made to
provide protection to the
employees & partners, providing

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useful information during an
investigation or convicting any
partner or firm.

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