Meaning- Limited Liability Partnership:
Limited Liability Partnership (LLP) is also known as Professional Association, in which the liability of the investor/partner is limited to the amount invested by him/her in the business.
Nature- Limited Liability Partnership:
LLP has elements of partnerships and corporations. In an LLP, all partners have a form of limited liability, similar to that of the shareholders of a corporation. However, the partners have the right to manage the business directly, and a different level of tax liability than in a corporation.
Difference- Limited Liability Partnership and Limited Partnership:
Limited Liability Partnerships (LLP) are distinct from limited partnerships, in that limited liability is granted to all partners, not to a subset of non-managing “limited partners”. As a result the LLP is more suited for businesses where all investors wish to take an active role in management.
LLP- General View:
LLP laws exist in various developed countries like the UK, the US, Australia and Singapore. Introduction of LLP laws in some countries results from the need of professional firms who not only want the tax benefits and traditional structure of a partnership but also the protection from unlimited liability. In the United States, each individual state has its own law governing their formation. Limited liability partnerships emerged in the early 1990s popular among professionals, particularly lawyers, accountants and architects. An obligation of a partnership incurred while the partnership is a limited liability partnership, whether arising in contract, tort, or otherwise, is solely the obligation of the partnership. A partner is not personally liable, directly or indirectly, by way of contribution or otherwise, for such an obligation solely by reason of being or so acting as a partner. As in a partnership or limited liability company (LLC), the profits of an LLP are distributed among the partners for tax purposes, avoiding the problem of “double taxation” often found in corporations.
In the U.K, LLPs are governed by the LL .Pact. A UK Limited Liability Partnership is a Corporate body – that is to say, it has a continuing legal existence independent of its Members, as compared to a partnership which may (in England and Wales they do not) have a legal existence dependent upon its Membership. A UK LLP is tax transparent or pass-through for tax purposes, that is to say it pays no tax but its Members do in relation to the income or gains they receive through the LLP. There is in fact no requirement for the LLP agreement even to be in writing because simple partnership-based regulations apply by way of default provisions. It has to date been closely replicated by Japan and by the financial centers of Dubai and Qatar. It is perhaps closest in nature to the limited liability company although it may be distinguished from that entity by the fact that the LLC, while having a legal existence independent of its Members is not technically a corporate body because its legal existence is time limited and therefore not “continuing”.
Limited liability partnerships were introduced in Japan in 2005 during a large-scale revamp of the country’s laws governing business organizations. Japanese LLPs may be formed for any purpose (although the purpose must be clearly stated in the partnership agreement and cannot be general), have full limited liability and are treated as pass-through entities for tax purposes. However, each partner in an LLP must take an active role in the business, so the model is more suitable for joint ventures and small businesses than for companies in which investors plan to take passive roles. Japanese LLPs may not be used by lawyers or accountants, as these professions are required to do business through an unlimited liability entity.
A Japanese LLP is not a corporation, but rather exists as a contractual relationship between the partners, similarly to an American LLP. A limited liability partnership is a form of organisation which PROTECTS a partner’s assets from limitless liabilities. In LLP, every partner will be an agent of the partnership and not of the other partners,
It promises perpetual succession and a distinct legal identity were it to become law. Further, it requires only a minimum of two partners, having no cap on the maximum number of partners a firm can have.
Limited Liability Partnership: An Indian Prospective
Due to the legal stipulation of unlimited liability among partners, Indian partnerships are mostly restricted to family members and persons who know each other thoroughly. LLP being a form of partnership having characteristics of a company will limit liability in the case of business failure or professional negligence.
Characteristics of LLP Bill, 2008:
1. The LLP will be an alternative corporate business vehicle that would give the benefits of limited liability but would allow its members the flexibility of organizing their internal structure as a partnership based on an agreement.
2. The LLP Act does not restrict the benefit of LLP structure to certain classes of professionals only and would be available for use by any enterprise which fulfills the requirements of the Act.
3. While the LLP will be a separate legal entity, liable to the full extent of its assets, the liability of the partners would be limited to their agreed contribution in the LLP. Further, no partner would be liable on account of the independent or un-authorized actions of other partners, thus allowing individual partners to be shielded from joint liability created by another partner’s wrongful business decisions or misconduct.
4. LLP shall be a body corporate and a legal entity separate from its partners. It will have perpetual succession. Indian Partnership Act, 1932 shall not be applicable to LLPs and there shall not be any upper limit on number of partners in an LLP unlike an ordinary partnership firm where the maximum number of partners cannot exceed 20.
5. The taxation of LLPs shall be addressed in the Income Tax Act, 1961 which regulates taxation of all form of entities.
6. Provisions have been made for corporate actions like mergers, amalgamations etc.
7. While enabling provisions in respect of winding up and dissolutions of LLPs have been made, detailed provisions in this regard would be provided by way of rules under the Act.
8. The Act also provides for conversion of existing partnership firm, private limited company and unlisted public company into a LLP.
By passing the Limited Liability Partnership Bill, 2008 the Indian Partnership has been put to a par with foreign firms.
Concept Limited Liability Partnership:
The LLP Bill has facilitated creation of a new corporate structure that will boost growth in the economy, particularly in professional advisory services in accounting, legal and insurance industries. LLPs make it easier for investors and professionals to jointly do businesses that involve greater risk.
Concept of LLP- Winding Up & Dissolution:
o The partner has fiduciary duties towards LLP and other partners. He should account to the LLP any profit or benefit derived in the conduct and winding up of the LLP activities or use of property and should refrain from competing with the LLP in the conduct or winding up of the LLP.
o A partner’s economic rights in the LLP are freely transferable. A transfer in whole or in part of a partner’s transferable interest is permissible and does not by itself cause the partner’s disassociation or a dissolution and winding up of the LLP. The transfer does not entitle the assignee to participate in the management or conduct of the LLP’s activities nor access to information concerning the LLP’s transactions.
o Winding up of an LLP may be either voluntary or by the Company Law Tribunal.
o Dissolution: An LLP can be dissolved by agreement of the members. When LLP becomes insolvent, creditors can initiate winding up proceedings. In the winding up of LLP, past and present members are liable to contribute to the extent they have agreed to do in the LLP