Before the introduction of Limited Liability Partnerships (LLPs), businesses in India commonly operated through structures such as sole proprietorships, partnership firms and companies, including private and public companies. LLPs were introduced later through the Limited Liability Partnership Act, 2008. An LLP combines the flexibility of a partnership with the benefit of limited liability for its partners.
The liability of the partners comprising an LLP is generally limited, subject to provisions of Act and certain exceptions. If you are planning to start an LLP, it is extremely important to understand the law that governs it. In this article, we will discuss the key provisions of the Limited Liability Partnership Act, 2008 and explain them in simple terms.
The Limited Liability Partnership Act, 2008, also called the LLP Act, is the main law that governs LLPs in India. An LLP is a type of business structure that gives partners the benefit of limited liability. At the same time, it gives them flexibility to manage the business and decide how they will work together through an LLP agreement. The need for a separate law for LLPs was discussed for many years before the Act was finally introduced. Many different committees and expert groups recommended bringing a separate law for LLPs in India.
For example, the Abid Hussain Committee in 1997 recommended LLP legislation in the context of small-scale industries. Later, the Naresh Chandra Committee in 2003 and the Dr. Irani Committee in 2005 also recommended having a separate law for LLPs. Based on these recommendations, the Ministry of Corporate Affairs decided to introduce the Limited Liability Partnership Bill, 2008, in Parliament.
After the Bill was passed by Parliament and received Presidential assent on 7 January 2009, it became the Limited Liability Partnership Act, 2008. The Act then came into force on 31 March 2009. It provides the legal framework for the formation, registration, management and regulation of LLPs in India. The Limited Liability Partnership Act, 2008 is said to be broadly based on the United Kingdom's Limited Liability Partnership Act, 2000 and Singapore's Limited Liability Partnership Act, 2005.
Chapter I of the Limited Liability Partnership Act, 2008 is titled “Preliminary.” Section 2 of this chapter contains important definitions of terms used in the Act. Some of the key definitions are listed below:-
| Section | Term | Definition |
|---|---|---|
| Section 2(k) | Entity | “Entity” means any body corporate and includes, for the purposes of sections 18, 46, 47, 48, 49, 50, 52 and 53, a firm set up under the Indian Partnership Act, 1932 (9 of 1932). |
| Section 2(l) | Financial year | “Financial year”, in relation to a limited liability partnership, means the period from the 1st day of April of a year to the 31st day of March of the following year. Provided that in the case of a limited liability partnership incorporated after the 30th day of September of a year, the financial year may end on the 31st day of March of the year next following that year. |
| Section 2(m) | Foreign limited liability partnership | “Foreign limited liability partnership” means a limited liability partnership formed, incorporated or registered outside India which establishes a place of business within India. |
| Section 2(n) | Limited liability partnership | “Limited liability partnership” means a partnership formed and registered under this Act. |
| Section 2(o) | Limited liability partnership agreement | “Limited liability partnership agreement” means any written agreement between the partners of the limited liability partnership or between the limited liability partnership and its partners which determines the mutual rights and duties of the partners and their rights and duties in relation to that limited liability partnership. |
| Section 2(q) | Partner | “Partner”, in relation to a limited liability partnership, means any person who becomes a partner in the limited liability partnership in accordance with the limited liability partnership agreement. |
Note:- The definitions above have been kept close to language used u/s 2 of LLP Act, 2008.
The key provisions of the LLP Act, along with their relevant sections, are explained below:-
Under Section 6(1) of the Limited Liability Partnership Act, every limited liability partnership must have at least two partners. Under Section 6(2) of the Act, if the number of partners in an LLP falls below two and the LLP continues to carry on business for more than a period of six months, the person who remains the only partner during that period can be held personally liable for obligations of LLP incurred after those six months. This applies when the person knows that the LLP is carrying on business with only one partner.
Under Section 7(1), every LLP must have at least two designated partners. Such partners must be individuals and at least one of them must be an Indian resident. In case all the partners of an LLP are companies or other bodies corporate, or if the LLP has both individuals and bodies corporate as partners, at least two individuals must act as the designated partners. These individuals can either be partners themselves or nominees of the body corporate partners.
Section 8 of the LLP Act states that a designated partner, unless the Act expressly provides otherwise, shall be responsible for conducting all acts, matters and things as are required to be done by an LLP in respect of compliance of the provisions of the Act. This includes filing of necessary documents, return, statement and reports. In case the LLP breaks any of these rules, the designated partner can be held responsible for penalties imposed on LLP.
Section 15 of the Act states that every LLP must have either the words “Limited Liability Partnership” or “LLP” at the end of its name. For example, if the partners want to register an LLP named “Sharma and Sons,” the name should be either “Sharma and Sons LLP” or “Sharma and Sons Limited Liability Partnership.”
The Central Government has the right to deny registration of an LLP if its name is undesirable or if it is identical to or too closely resembles the name of any existing LLP or company or a registered trademark of any person under the Trade Marks Act, 1999.
According to this section, every partner of an LLP is considered an agent of the LLP for the purpose of its business. However, a partner is not considered an agent of the other partners.
This section defines the extent of liability an LLP has. It states that an LLP is not responsible if a partner does something without authority and the third party knows that the partner has no authority or does not even know that the person is a partner of the LLP. The LLP will be held responsible if any of its partners engages in wrongdoing or neglects their duties while conducting the LLP’s business or acting with the LLP’s authority.
Any obligations of the LLP, whether they arise from a contract or other circumstances, are the responsibility of the LLP itself. The liabilities of the LLP will be settled using the property and assets belonging to the LLP.
Section 30 of the Limited Liability Partnership Act, 2008 provides for unlimited liability in events of fraud. The section states that if an LLP or any of its partners acts with the intention of defrauding the creditors of the LLP or any other person, or for any fraudulent purpose, the liability of the LLP and the partners involved in the fraud shall be unlimited for all or any of the debts/liabilities of LLP.
According to Section 42(1) of the Act, a partner's rights to share in the profits and losses of the limited liability partnership as well as to receive distributions according to the limited liability partnership agreement can be transferred either in full or partially. Section 42(2) states that transferring any rights under sub-section (1) does not, by itself, lead to the disassociation of the partner or the dissolution and winding up of the limited liability partnership.
Such a transfer, u/s 42(3), does not automatically grant the transferee or assignee the right to participate in the management or conduct of the limited liability partnership's activities nor does it provide access to information regarding the LLP transactions.
Under Section 63 of the Act, an LLP can be wound up either voluntarily or by the Tribunal. Once the winding-up process is completed, the LLP may be dissolved, which means it legally comes to an end.
You May Also Like: Indian Partnership Act, 1932: A Complete Guide
The primary law governing LLPs in India is the Limited Liability Partnership Act, 2008. This Act came into force on 31 March 2009, and allows individuals to set up and operate LLPs as partners. The LLP Act is a comprehensive law that covers the registration, management, winding up, rights and duties of partners and other essential aspects of LLPs.
Want to set up an LLP in India? Get in touch with our consultants at Registrationwala for complete assistance with the LLP registration process with the ROC, MCA.
Q1. Which is the primary law governing LLPs in India?
A. The Limited Liability Partnership Act, 2008 is the primary act governing LLPs in India.
Q2. When did the LLP Act come into force?
A. The LLP Act came into force on 31 March 2009.
Q3. Which was the first LLP to be incorporated in India?
A. The first LLP to be incorporated in India was Handoo and Handoo Legal Consultants LLP, a New Delhi-based law firm. This LLP was incorporated on 2 April 2009.
Q4. What is a foreign limited liability partnership?
A. A foreign limited liability partnership is an LLP that is formed, incorporated or registered outside India but has a place of business within India.
Q5. Which laws is India’s LLP Act, 2008 based on?
A. India’s LLP Act, 2008 is broadly based on the UK’s Limited Liability Partnerships Act, 2000 and Singapore’s Limited Liability Partnerships Act, 2005.
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