A typical partnership form of the business suffers from the problem of unlimited liability. Liabilities of partners of a firm extend right up to their personal assets. This makes regular partnerships undesirable for a lot of entrepreneurs. One solution for this issue exists in the form of Limited Liability Partnerships, better known as LLP.
Limited Liability Partnerships (LLP)
Partners of typical partnership firms have unlimited liability towards their collective debts and legal consequences. This means that their own assets are liable for attachment for meeting the firm’s debts and liabilities. And limited liability partnerships (LLP) solves this problem.
An LLP has all basic features of a regular partnership firm, except that of same legal entity status and unlimited liability of partners. Consequently, limited liability partnerships have legal existence and identity separate from that of its partners. Furthermore, its partners have limited liabilities.
Definition of LLP
The Parliament of India passed the Limited Liability Partnership Act in 2008 to govern LLP businesses in India. According to Section 2 of this law, an LLP is a partnership registered under the Act. Further, an LLP agreement means a written agreement either between an LLP’s partners or between the LLP itself and its partners. This agreement defines the rights, liabilities, duties, and powers of the partners.
Since the Limited Liability Partnership Act, 2008 specifically governs limited liability partnerships in India, the provisions of the Indian Partnership Act, 1932 are not applicable to LLPs. They only apply to traditional partnership firms.
Browse more Topics under Introduction To Partnership Accounting
- Definition and Features of Partnership
- Partnership Deed
- Profit and Loss Appropriation Account
- Fixed and Fluctuating Capital
Distinct Features of an LLP
A limited liability partnership contains the following peculiar features:
1. Separate legal entity
Unlike regular partnership firms, limited liability partnerships are treated as separate legal entities. This means that LLPs can own assets and incur liabilities in their own names. They can also enter into contracts and sue and be sued in their own names.
2. Limited liability of partners
The liabilities of partners of an LLP are separate and limited. Their personal assets will not liable to attachment in case the LLP is winding up or suffering certain legal consequences of repayment of debt.
Partners’ liabilities, however, can become unlimited in cases of offenses like fraud, the commission of an offense, or any other wrongful and illegal act.
3. Sharing of profits
All partners of limited liability partnerships share profits of business just as partners of regular firms. They are, however, free to decide the ratio in which they will share profits.
4. Partners of LLPs
Partners of a limited liability partnership can be either natural persons, i.e. individuals, or even body corporates. Furthermore, an individual cannot be a partner if he suffers from unsoundness of mind or he is insolvent.
LLPs must have a minimum of two partners at all times. Also, the maximum number of partners is unlimited, while it is restricted to 50 for regular partnership firms. If at any time, the number of partners in an LLP becomes less than two, and the sole partner carries on business for more than six months under such circumstances, his liability towards the firm’s business will become unlimited.
Partnerships vs. LLPs
Let’s take a look at how a limited liability partnership differs from traditional partnerships.
|Differences||Traditional partnerships||Limited liability partnerships|
|Governing law||Indian Partnership Act, 1932||Limited Liability Partnerships Act, 2018|
|Unlimited liability of partners?||No||Yes|
|Nature of partners||Only natural persons, i.e. individuals||Individuals as well as body corporates|
|Number of partners||Minimum 2, maximum 50||Minimum 2, maximum unlimited|
|Assets||Only partners can own assets of the firm||A firm can own assets in its name|
Solved Question for You
Question: Consider the following statements and explain whether they apply to a limited liability partnership.
- Liabilities of partners is unlimited: This statement does not apply to an LLP as it has its own liabilities. Accordingly, the extent of its partners’ liabilities is limited.
- LLPs are body corporates: This is true because LLPs are distinct legal entities having an existence separate from their partners.
- Partners can invoke rights under the Partnership Act: False. Partners of LLPs can only invoke rights under the Limited Liability Partnerships Act, 2008.
- An agreement between partners is sufficient for creating a partnership: This statement is not true. Unlike traditional partnerships, a partnership agreement is not the only requirement of LLPs. Therefore, partners have to register their LLP.
- Partners need not be parties to a contract: This is true for LLPs as they can enter into their own contracts. Hence, unlike traditional partnerships, partners do not have to be parties to contracts in the LLP’s name.