From Partnerships to Limited Liability Partnerships

Introduction

Traditionally, the law firms in India had been partnerships. Thus, as the firm grew, the ability to add members to the senior positions was seriously circumscribed with the maximum cap on partnership being 20. Likewise, there was a movement elsewhere round the globe, but for different reasons. In countries like US & UK, where in the accounting industry strong lobby and an even stronger demand for forming an entity that drew the features of a company, while simultaneously not being subject to public scrutiny like a corporation. So, emerged the concept of LLPs or Limited Liability Partnerships.

In India, based on the recommendations made by the Gupta Committee and the JJ Irani Committee recommendations, Limited Liability Partnership Bill was introduced in the Parliament in 2005. According to Entry 44 List I of the VII Schedule of the Constitution, Corporate Laws are in the Union List which means that the Centre is empowered to make laws on the subject.

LLPs: Finest features of Corporation and Partnerships incorporated

Simply put, a Limited Liability Partnership or LLP is a partnership with the two significant features of a Company viz limited liability and perpetual existence. Thus, unlike in a Partnership wherein the Partnership has to re-formed with the death of any of its partners or any of its member leaving the partnership or going bankrupt or insane, a LLP is insulated from such vagaries. Concurrently, it carries the benefit of a Partnership that is it is not subject to public scrutiny such as inspection of accounts. LLP also has the tax benefits like a normal partnership. Infact in Indian, the Finance Minister while delivering his budget 2009 speech, specially made a mention that the LLPs would get the same tax-benefits as partnerships. Unlike a Corporation, wherein the shareholders elect a Board of Directors to manage the affairs of the company and there is separation of ownership and management, the partners in a LLP have a right to manage it directly and there is no separation of ownership from management. Unlike a partnership, where the liability of the members may be joint and several, in case of an LLP, one partner is not responsible for the acts of negligence or default on the part of the other partner. With these basic common features, LLPs have their specific structural variants based on the jurisdiction in which they are incorporated.

An Emerging Concept

The concept is a recent and emerging one. In US the concept has been recognized and been in vogue since the early 90’s. Delaware’s model of LLP is the most commonly used for obvious tax benefits. UK enacted the LLP Legislation in the year 2000, the Ontario province in Canada in 1998 and Singapore as recently as 2005. The approach in UK is liberalised wherein all kinds of entities can register as LLPs whereas as per the provisions of New York State Law, only certain kinds of entities can register as LLPs. Once the Act was incorporated all the accountants and major law firms jumped on to the bandwagon to benefit from the legislation. Today all the top accounting firms and over 60% of the Top 50 Law Firms in UK are LLPs.

German Partnerschaftsgesellschaft

Passed on 10th June 1994, Gesetz zur Schaffung von Partnerschaftsgesellschaften , the Acty came into force on 1st July 1995. It enables Partnerschaftsgesellschaft or Part G, an association of non-commercial Professionals to be registered at the local ‘Amtsgericht’. It is the German equivalent of a LLP. The basic features of a Partnerschaftsgesellschaft are that it can own property, act under the Partner’s name and can sue or be sued. Important advantages like it is not subject to any corporate or business tax and if the Partnerschaftsgesellschaft has taken the mandatory professional liability insurance, then in case a particular partner misconduct causes damage to a third party, then only that particular partner is liable, make this form of association attractive. However, in case of partnership’s debt, all the members of the Partnerschaftsgesellschaft are jointly and severally liable. As for taxation, the respective partners have to file their individual income-tax returns.

Special General Partnerships in China

In China there is concept similar to LLP. Known as Special General Partnership, it was introduced in the Partnership Law of the People’s Republic of China vide Amendment dt 27th August 2006. Effective June 1st 2007, Special Partnership is a kind of ‘limited partnership’, which must have at least one general partner and the remaining partners are limited partners. The limited partner bears unlimited joint and several liabilities for the debts of the limited partnership, whereas the liability of the limited partners is limited to the extent of capital contribution they have made to the partnership. In case of bankruptcy, the General Partner is subject to unlimited joint and several liability for the debts of the partnership. According to the Act, professional service institutions such as law firms, that provide clients with paid services based on their professional knowledge and special skills, can incorporate a Special General Partnership Enterprise. As for taxation, there is no taxation at partnership enterprise level. All profits of the partnership firm are “passed-through” and the partners have to pay their respective income-tax. Even the Foreign Enterprises or individuals too, are authorized to set-up their Special Partnerships, however the same being foreign-invested are subject to separate regulations issued by the State Council.

Limited Liability Partnership in UK

A very simple and straightforward Act, with just 19 Sections, The Limited Liability Partnership Act 2000, introduced LLPs in UK. It is referred to as a body Corporate in the Act, an LLP can be incorporated by registration as per the procedure laid down in Section 2 & 3 of the Act. Section 6 of the Act states that the Partners are the Agents of the LLP which means that the LLP is liable to the same extent as the erring member of the LLP, where a member is liable to any person(other than another member of the limited liability partnership) as a result of a wrongful act or omission in the course of his business of the LLP or with his authority. However, if the member does something in his individual capacity or does something for which he is authorized to do so as a member of the LLP, then the LLP is not liable for any such act or omission on the part of the member. Section 10 of the Act deals with Income Tax and Chargeable gains. Referring to the Incomes and Corporation Taxes Act, 1988, the Section lays down, the treatment is similar as in case of a partnership.

Limited Liability Partnerships in India

The Indian LLP Act borrows copiously from the UK LLP Act 2000 and Singapore LLP Act 2005. Under the Indian Act, any two or more persons with a view to conduct a lawful business as a profitable venture may form an LLP. It is a body corporate and legal entity with an existence separate from its members. The Act does not restrict LLP to Professional Services alone.

To be designated as an LLP, it has to be registered with the Registrar of Companies(as appointed under the Companies Act, 1956), according to the provisions laid down in the LLP Act.

The Act envisages appointment of atleast two Partners as “Designated Partners” who shall be accountable for all regulatory and legal compliances. Amongst these two, atleast one of them must be a resident of India. In case all the members are body corporate, or the LLP is a mix of individuals and bodies corporate, then the nominees of such body corporate can act as designated partners. To be eligible as ‘Designated Partners’, they have to fulfill certain conditions laid down in the Act and on fulfillment of the same, the Designated Partner are required to obtain a “Designated Partner’s Identification Number”(DPIN). The concept and role pf DPIN is similar to the DIN (“Director’s Identification Number”) in case of Corporations.

As for the all important issue of taxation, the Minister of Finance, clearly mentioned that the Partners will file their returns as per the provisions of the Income Tax, 1961.

As for the mutual right and liabilities of the parties in a LLP, they may enter into a specific agreement detailing the same. In the absence of any such agreement, the same shall be defined as per the provisions laid down in Schedule I to the Act.