The Indian LLP Law: Some Concerns for Lawyers and Chartered Accountants

A limited liability partnership - which is a form of business organization in which the liability of the ‘partners’ is limited to the extent of their interest in the partnership, owing to its company-type separate legal personality and yet having the organizational suppleness and tax treatment of a partnership - constitutes the most recent epitomization of such regulatory tendency. To achieve the principal benefits of both partnership and company as forms of business organization, LLP Law is formulated.

In this article, the authors have visited the recently concluded LLP Act and current status of LLP law in India. They, here, address some of the concerns that the Act seems to have failed to address and present an overview of some of the decisions rendered by the English Court’s on the nature of LLP, as the Indian LLP Act, 2008 draws heavily upon the English LLP Act, 2000. In their opinion, as the LLP Act does not go a long way in addressing several key concerns, it seems more like a framework legislation, the effective attainment of the objective of which is contingent on amending a host of other laws. Some much-needed clarifications - including the removal of the cap of twenty persons, tax treatment and liability of foreign partners at least in respect of assets in India - have not been made in the Act. In respect of the legal services, the continued dogmatism of the Bar Council of India remains an area of major concern. It is hoped that the concerned authorities shall make some desired changes to make the law more clear.

Partnership - constitutes the oldest-known legally-accepted model of business organization involving more than one person. In the crudest (and, indeed, oldest) sense, it reflects ‘any’ sort of association between persons who pool their resources with a view to carrying on business and participating in its profits and/or losses. With growth in human civilization, business organization gets complicated and, this, in turn, required law to respond, sometimes by mere ‘recognition’ and sometimes by ‘creation’ of newer business forms. Capitalistic nature of their economies particularly motivated some States to have a responsive regulatory regime in place. A ‘company’ or a ‘corporation’ in the American sense - best illustrates this responsiveness. While the most successful, a ‘company’ does not reflect all regulatory innovation in this area.

There are several other business forms which are purely the result of such innovation. A limited liability partnership - which, simply put, is a form of business organization in which the liability of the ‘partners’ is limited to the extent of their interest in the partnership, owing to its company-type separate legal personality and yet having the organizational suppleness and tax treatment of a partnership - constitutes the most recent epitomization of such regulatory tendency.

The concept of a limited liability partnership surfaced in response to the great real estate and energy prices crumple in 1980s and the consequent impact it had on the banks and other financial institutions. Since not much could be recovered from these failed financial institutions, attention soon shifted to the lawyers and accountants who had represented the failed financial institutions before their collapse. The plausibility of recovery came across owing to the backing of these professionals by rich and moneyful partnerships and insurers. The saga of the partners 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.

The United States, which was the epicenter of that financial crunch - as it has been for most other, including the present sub-prime credit crunch - spearheaded the process of legislating the concept of LLPs. The initial hesitation - both in the academic and legislative circles - in disturbing the long-settled principles of "unlimited liability" of the partners of a partnership firm on the grounds of its moralistically weak foundations and its discriminatory nature, was soon overcome by the commercial expediency of its legislation. Thus, came on the statute book, the first law on LLP with Texas enacting the Texas House Bill 278 on 26th August, 1991. The other States of the US soon followed.

The objective of the LLP law, if understood in this milieu, 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 co-partners, ‘over whom he has no control’. This, the law does, by providing the ‘shield of limited liability’ by way of a separate legal personality. In other words, it ‘enables professional/technical expertise and initiative to combine with financial risk taking capacity in an innovative and efficient manner.’ The other objective is to allow to the LLP the same organization litheness and freedom from compliance's as are available to a general partnership, thus, calling for a new form of corporate governance. Additionally, an LLP is also conferred with 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.

Before we proceed to visit the provisions of the recently concluded Indian LLP Act and address some of the concerns that the Act seems to have failed to address, we must first distinguish an LLP from certain other forms of business organizations in order to best appreciate the choice of an LLP over other similar forms.

We first distinguish an LLP from its parent concept: a ‘general partnership’. A general partnership enjoys no legal status or existence separate from the partners who constitute it. An LLP, on the other hand, is a legal entity, separate from its partners. This constitutes the foundational distinction between the two entities; the others, being its derivatives. 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-a-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, 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.

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An LLP is also different from a ‘Limited Partnership’ in that unlike the former, at least one of the partners of the latter is a ‘general partner’ 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 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.’

It may, at this point, also be appropriate to distinguish an LLP from a Limited Liability Company (for short ‘LLC’). 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.