Limited Liability Partnership: Meaning, Features, Merits and Limitations [Business Organisation and Management Notes NEP Syllabus]

The Partnership Act was enacted during the year 1932. Business environment is changing day by day but the Indian Partnership Act is not compatible with the development of world economy now because it suffers from many limitations such as:

a) Liability of partners is unlimited.

b) The partners are jointly and severally liable for the debts and liabilities of the firm.

c) The partner is not having right to transfer his holding in the partnership.

d) The number of partners is limited.

A need has been felt for a long time to provide for a business format that would combine the flexibility of a partnership and the advantages of the limited liability of the company at a low compliance cost. For this purpose, Limited Liability Partnership Bill, 2006 was introduced in Rajya Sabha on 15-12-2006. It later on it was scraped and New Limited Liability Partnership Bill was introduced with some modification and it was enacted in the Year 2009.

Meaning of LLP

LLP is simply a combination of Partnership and Company form of business organisation. It is a corporate business vehicle that enables profession expertise and entrepreneurial initiative to combine and operate in flexible, innovative and efficient manner. It provides an alternative to the traditional partnership firm with unlimited liability.

Section 2(1) (n) defines the expression ‘limited liability partnership’ as a partnership formed and registered under LLP Act.

Features of LLP:

a) An LLP is a body corporate formed and incorporated under this Act and is legal entity separate from its partners.

b) It is an alternative corporate business from that gives the benefit of limited liability of a company and the flexibility of the partnership;

c) An LLP shall have perpetual succession.

d) Minimum number of members for a LLP is 2 and no limit for maximum numbers.

e) Individuals and Corporate body can be partners in an LLP.

f) It can continue its existence irrespective of changes in partners. Admission, retirement or death of a partner does not affect the existence, rights or liabilities of the LLP.

g) It is capable of entering into contracts and holding property in its own name;

h) The provisions of the Indian Partnership Act, 1932 shall not apply to an LLP.

h) No partner is liable on account of the independent or un-authorized actions of other partners, thus individual partners are shielded from joint liability created by another partner’s wrongful business decisions or misconduct.

i) LLP can be dissolved by complying with the provisions of LLP (Winding up and Dissolution) Rules, 2012.

j) Registration of LLP is compulsory with ROC.

k) The term “LLP” is added with the name of an LLP.

l) Annual Statement of accounts and return is required to be file with ROC by an LLP.

Advantages of LLPs:

1. Limited Liability: The primary advantage of an LLP is that partners are not personally responsible for the debts and liabilities of the business. Their personal assets are protected, and their liability is limited to their investment in the LLP.

2. Flexibility: LLPs provide the flexibility of a partnership in terms of management and operations. Partners can actively participate in decision-making or appoint designated managers.

3. Shared Expertise: Partners in an LLP can bring diverse skills and expertise, enhancing the overall capabilities of the business.

4. Separate Legal Entity: An LLP is a distinct legal entity, which means it can own property, enter into contracts, and sue or be sued in its own name.

5. Perpetual Existence: Unlike traditional partnerships, LLPs have a perpetual existence, unaffected by changes in partners. This ensures business continuity.

6. Easy Transfer of Ownership: Transferring ownership or admitting new partners is relatively simpler in an LLP compared to other business forms.

7. Tax Flexibility: LLPs enjoy the benefit of "pass-through" taxation, where profits are directly attributed to partners and taxed at their individual rates.

8. Less Regulatory Compliance: LLPs often have fewer regulatory obligations compared to corporations, reducing administrative burdens.

Limitations of LLPs:

1. Complex Formation: Establishing an LLP involves specific legal formalities, including registration and filing requirements, which might be more complex than a sole proprietorship or partnership.

2. Shared Liability: While partners' personal liability is limited, they might still be responsible for liabilities arising from their own actions or negligence.

3. Limited Funding Options: LLPs might face challenges when raising significant capital, as they cannot issue shares to the public.

4. Partnership Disputes: Disagreements among partners regarding management, decision-making, or profit sharing can lead to conflicts and impact business operations.

5. Perception and Trust: Some industries and stakeholders might view LLPs as less established than traditional corporations, affecting their credibility.

6. State Regulations: LLP regulations can vary by jurisdiction, potentially leading to differences in legal requirements and compliance standards.

7. Management Complexity: Balancing the involvement of multiple partners in decision-making can sometimes slow down processes and decision implementation.

8. Limited Investor Attraction: LLPs might not be the preferred choice for investors looking for ownership through shares or seeking a voice in management.