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B.B.A., LL.B.(Hons.)
SEMESTER 3
RACHIT MUNJAL
SAP ID:
500047862
ROLL NO:
R760215045
INRODUCTION:
The importance of the Partnership Act 1890 in the historical development of partnership
law in the United Kingdom is beyond question. Drafted in 1879 and finally enacted in 1890
after much debate and amendment, this seminal piece of Victorian legislation with its "rather
limpid prose" and the "deceptive simplicity, born of clear and elegant expression" in which
Sir Frederick Pollock clothed its provisions, 1 was intended as partial codification of the
considerable number of common law and equitable principles developed by the law courts. It
has served as an example for most Commonwealth jurisdictions and has strongly influenced
the American Uniform Partnership Act of 1914 (UPA). In fact, in irrespective of the UPA, the
Partnership Act has served as a model for more than 30 other partnership Acts and ordinances
with implementation dates ranging from 1891 to at least 1981.
The Indian law of partnership in India is based on the provisions of the English law of
partnership. Until the English Partnership Act of 1890 was passed, the law of partnership
even in England was largely based on legal decisions and custom. There were very few acts
of parliament relating directly to partnership. The Indian Partnership Act of 1932 (Partnership
Act) was the result of a Report of a Special Committee consisting of Shri Brojender Lal
Mitter, Sir Dinshaw Mulla, Sir Alladi Krishnaswami Iyer and Sir Arthur Eggar.2
Prior to the enactment of the Partnership Act, the law relating to partnership was
contained in Chapter XI (sections 239 to 266) of the Indian Contract Act, 1872 (Contract
Act). These provisions contained in the Contract Act were not found adequate. As a result,
Chapter XI of the Contract Act was repealed and replaced by the Partnership Act of 1932.
The limited liability partnership (LLP) concept originated in the US in the early 90s in
unincorporated form. It was inspired by litigation against professional firms that had done
work for failed savings and loan associations. Claims against all partners, including many
who had nothing to do with the failed associations, were a strong incentive for the
1 J.J. Henning, Partnership Law Review : The Joint Consultation Papers and the Limited Liability Partnership
Act in Brief Historical and Comparative Perspective, Comp. Law. 2004, 25(6), 163-170,
2 Law Commission of India, 178th Report, 2001, Recommendations for amending various
enactments, both Civil & Criminal
BASIC CONCEPTS:
1.
Partnership
A Partnership is the relation between persons who have agreed to share the profits of
a business carried on by all or any of them acting for all.4 Under the Indian
Partnership Act, 1932, every partner is jointly and severally liable for all the acts of
the firm.5
2.General Partnership
A general partnership is formed when two or more people intend to work together to
carry on a business activity. The distinguishing feature of a partnership is the
unlimited liability of the partners. Each partner is personally liable for all of the debts
of the partnership. That includes any debts incurred by any of the other partners on
behalf of the partnership. Any one partner is able to bind the partnership by entering
into a contract on behalf of the partnership.
3.
Limited Partnership
A limited partnership consists of one or more general partners and one or more
limited partners. The general partner is responsible for the management of the affairs
of the partnership, and he has unlimited personal liability for all debts and obligations.
Limited partners have no personal liability. The limited partner stands to lose only the
amount which he has contributed and any amounts which he has obligated himself to
contribute under the terms of the partnership agreement.
4.
LLP V LLC:
LLC
LLP
Professional businesses
Decentralized
Members
Single Taxation
Yes
Limited Liability
Partnership
Separate from those of
partners
2 or more
Not necessary
May not be required in
some states.
Not much paperwork is
required.
Yes
LLC
Continuity of life Indefinite term
LLP
With LLPs with no definite
term, death of partners will
not cause dissolution.
entities can join together to engage in business as an LLP. The owners of an LLP are called
"partners." Partners essentially own the LLP in much the same way as partners own a general
partnership and shareholders own a corporation. When an LLP engages in business activities,
it is the LLP itself which actually owns and operates the business from a legal sense. Both
follow a decentralized form of management.
Liabilities
An LLP in UK provides its partners with limited personal liability for the obligations of the
business. Of course, if a business operated by an LLP has financial difficulties, each partner
of the LLP could lose the amount of his or her investment in the LLP, as well as the equity
built up in the business. Beyond this, however, no partner risks the loss of his or her other
personal assets and income.
In a US LLC, Limited liability means that the owners of the LLC, called "members," are
protected from some liability for acts and debts of the LLC, but can held socially responsible
for other obligations. LLCs in most states are treated as entities separate from their members,
whereas in other jurisdictions case law has developed deciding LLCs are not considered to
have separate juridical standing from their members.
To sum it, the liability shield of LLC is broader than that of LLP. This is so because LLCs do
not make their members liable for any monetary debts of the company while a member of a
LLP may be help responsible for monetary debts.
Taxation
Pass through Taxation structure is followed by the LLCs in the US. An LLC can elect to be
taxed as a sole proprietor, partnership, S corporation or C corporation, providing much
flexibility. There is no double tax structure for LLCs unless they want to be taxed as a
Corporation. UK based LLPs normally are treated as partnerships for tax purposes. LLPs
must elect to be taxed as regular corporations.
Formalities
Though LLCs also do not follow too many formalities for setting up and running but an LLP
requires even lesser formalities. Also, a transfer of real estate to an LLP is exempt from the
real estate transfer fee.
7 Over one-third of all bank failures at the time occurred in the state of Texas. Hamilton, supra note 8, at 1069.
8 Supra 3
9 Jersey is a parliamentary democracy and a dependency of the British Crown. It is not
part of the United Kingdom, nor is it a colony. Her Majesty Queen Elizabeth II of the UK is
the Head of State of Jersey. The Sovereign is represented in the Island by the Lieutenant
Governor. While Jersey makes its own laws, it has pledged allegiance to the English
Crown since 1066.
precipitate the failure of a major firm, that led to the November 1996 decision 10to bring
forward LLP legislation in the UK."11
The concept of LLP was introduced in 1996 in the United Kingdom. The Limited
Liability Partnership Bill, shorn of any limitation on its availability to the regulated
professions, was introduced into the House of Lords late in 1999. The objective of both the
LLP Act and the regulations is to modernise the legal framework for business in the UK,
keeping it at the forefront of international practice by offering firms the ability to incorporate
with limited liability while organizing themselves on partnership lines, subject to provisions
of the Companies Act 1985 and the Insolvency Act 1986 on financial disclosure, fraudulent
trading and winding up similar to those which apply to companies and their directors, thus
providing safeguards to those dealing with the LLP.
The Limited Liability Partnership Act 2000 (the Act) received Royal Assent on July 20,
2000. Subsequently, the Limited Liability Partnerships Regulations and the Limited Liability
Partnerships (Fees) (No.2) Regulations (the Regulations) were promulgated. Since April 6,
2001, LLPs may be registered in the United Kingdom under the Act. Notwithstanding the
term "partnership" in its designation, the law of partnership will in general not be applicable
to an LLP, although it will be taxed as a partnership to ensure that the choice between using
an LLP or a partnership is a tax neutral one. The LLP will be required to disclose information,
inter alia, on its finances and members, similar to that required of companies. 12The Limited
Liability Partnership Act 200013 received royal assent on July 20, 2000. Since April 6, 2001,
limited liability partnerships may be registered in the United Kingdom under the Act.
10 On 7 November 1996, Ian Lang, President of the Board of Trade, announced the UK
government's intention to bring forward legislation at the earliest opportunity to make
LLP available to regulated professions in the UK.
11 House of Commons Select Committee on Trade and Industry Report 1998. H.C. 59, para.82.
12 DTI, Limited Liability Partnerships Bill. A Consultation Document. Regulations to Accompany the Limited
Liability Partnerships Bill (URN 99/1025), Part IV, para. 2.
13 Act 12 of 2000.
LLP in India:
In an increasingly litigious market environment, the prospect of being a member of a
partnership firm with unlimited personal liability is, to say the least, risky and unattractive. In
India, some bodies of professionals have been prohibited from practicing under an
incorporated form. E.g. Development of legal profession in India has been restricted in India
on account of the number of impediments in the current regulatory system which hinders
Indian law firms from competing effectively against foreign firms. 14 This would hamper the
growth of Indian Law Firms in comparison to the Foreign Law Firms once the Legal Sector is
opened.
The general partnership or partnership simpliciter has traditionally been the entity
of choice to provide services by professionals such as lawyers, accountants, doctors,
architects, and company secretaries.15 The unlimited liability of general partnerships under
the Indian Partnership Act 1932 has become a cause for concern in the light of increase in the
incidence of litigation for professional negligence, the size of the claims and the risk to a
partner's personal assets when a claim exceeds the sum of the assets of the partnership.16
14 A Consultation Paper on Legal Services under GATS (Prepared by Trade and Policy Division, Department of
Commerce, Government of India)
15 Naresh Chandra Committee Report
16
The idea that LLPs should be introduced in India was mooted in the Report of the
Naresh Chandra Committee on Regulation of Private Companies and Partnership and the
May 2005 Report of the Expert Committee on Company Law (J. J. Irani Committee). In
response, on November 2, 2005, the Ministry of Company Affairs in the Government of India
circulated a concept paper on LLPs with a view to stimulating public debate over ideas
which will be incorporated in the proposed Limited Liability Partnership Bill (the "Bill"). The
proposed Bill is drafted on the lines of the United Kingdom's Limited Liability Partnerships
Act 2000.17
ADVANTAGES OF LLP:
1. The main advantage of LLP is that limited partners do not take on personal liability for the
obligations of the entire partnership, but only to the extent of the money contributed to the
firm by such partners. Whereas, under Sec. 25 of the Indian Partnership Act, a partner is
jointly and severally liable.
2. Further, a partners liability is not limited when the misconduct is attributable to him or to
an employee under the supervision or control of that partner. An LLP only protects a partner,
other than a general partner from the liability arising from the misconduct or personal acts of
other partners.
3. The members of an LLP would have the option to have a general partner or more with
unlimited liability, but it would not shield the partners from legal liability arising out of their
own personal acts which are not done for and on behalf of the LLP, that is, any act done
beyond the acts and powers of the partners as laid down in the incorporation document.
17 Aparna Viswanathan, India considers introduction of Limited Liability Partnerships, I.C.C.L.R. 2006, 17(5),
141
4. The main benefit in an LLP is that it is taxed as a partnership, 18 but has the benefits of
being a corporate, or more significantly, a juristic entity with limited liability.
5. An LLP has the special characteristic of being a separate legal personality19 distinct from
its partners.
6. Sec. 11 of the Companies Act bars the formation of a partnership consisting of more than
20 persons. But in a Limited Liability Partnership, a minimum of two partners is required.20
From perspective of a Business:
1. As many owner as you need:
One of the greatest things of a limited liability partnership is that there is no limit on the
amount of owners that can be involved with the business. This is great because it evenly
spreads out the amount of liability that each partner can have if something where to go wrong
with the business.
2. Limited Liability:
Just as the name suggests, limited liability partnerships limit your liability. Since there are
multiple owners involved in the business all of the risks of the business are spread out and
made much smaller than if a single person was responsible for the business on their own.
This generally refers to legal issues, like if the company was sued for any reason.
3. Tax Benefits:
Another one of the great benefits of operating underneath an LLP is how you file taxes. The
partnership itself doesnt have to file taxes as a business, which provides great breaks for the
18 For tax law, income-tax as well as sales tax, partnership firm is a legal entity - State of Punjab v. Jullender
Vegetables Syndicate - 1966 (17) STC 326 (SC), CIT v. A W Figgies - AIR 1953 SC 455, CIT v. G
Parthasarthy Naidu (1999) 236 ITR 350
19 Though a partnership firm is not a juristic person, Civil Procedure Code enables the partners of a partnership
firm to sue or to be sued in the name of the firm. - Ashok Transport Agency v. Awadhesh Kumar 1998(5)
SCALE 730 (SC). [A partnership firm can sue only if it is registered].
20 V. Pattabhi Ram & Mithun D'Souza, Demystifying Limited Liability Partnership, The Business Line, (May
15, 2006)
company. However, each individual partner must file a variety of different tax forms
regarding the business.
4. Great Flexibility:
Flexibility is a defining characteristic of limited liability partnerships. Each partner in the
business has the ability to decide how much they want to contribute and how much of a
partner they truly want to be in the business. They are also not obligated to participate in
business meetings or consultations with anyone that they do not feel the need to.
DISADVANTAGES OF LLP:
1.Though good in parts, the implementation of this concept may give rise to certain tricky
issues. How would one prove that a particular partner is responsible for an act of felony? This
would give rise to disputes amongst the partners themselves. In a situation wherein there are
two or more joint auditors who have signed a problem balance sheet, to whom would one pin
the responsibility? Even if we say that a partner would only be liable for his acts, how can
one distinguish which partner has done which act ? The main problem will arise is to where
should one draw the line ? These are big issues which need to be resolved before
implementing or allowing firms to form LLPs.21
2.Even if the allocation of work amongst the auditors is as clear as crystal, disputes would be
inevitable. Since the LLPs are proposed to disclose financial information a la a private
limited company, a separate format of financial statements would need to be devised.
Provisions relating to authorised capital, stocks, and so on, would be irrelevant in a
professional firm. With the new-age insurance companies offering a slew of innovative
insurance products, it may not take a long time before a comprehensive policy is devised that
protects all risks for a partnership. A partner being held responsible to the extent of his
contribution in the case of a felony is bad enough for him. 22
21 Mohan R. Lavi, Little Utility of Limited Liability, The Business Line, (21st August, 2005)
22 Ibid
3.But the situation is not that bad after all. If the Partnership Act is amended to permit
unlimited partners, clauses in the partnership deed fit together limited liabilities of the
partners, there is an insurance policy that covers all business risks associated with a
partnership and corporate governance practices are introduced for partnerships above a predefined size, would then there be a requirement for a separate law relating to LLPs? Your
guess is as good as mine.
Because this concept has not been implemented or allowed in India, there are no Case Laws
as such. So, we will refer to some U.S Case Laws where LLP is already a full-fledged
practice.
1.
The plaintiff sued a law firm LLP and its partners for malpractice and breach of fiduciary
duty. The court granted the defendants summary judgment on the malpractice claim but
determined there were fact issues regarding a breach of fiduciary duty claim. The breach of
fiduciary duty claim was premised on alleged misrepresentations by the firm to the plaintiff
that the plaintiff had a viable claim against the Orange County Transportation Authority
(OCTA) when the firm knew that limitations had run on the claim and the firms continued
representation and receipt of fees for worthless legal representation. The court also
determined that there were fact issues relating to the personal liability of the partners. The
court cited the California LLP provisions for the proposition that partners in an LLP do not
have vicarious liability for the torts of another partner, and the court stated that the plaintiff
could only hold a partner liable who was involved in the handling of the matter. All three
partners claimed that one of them was the sole attorney who handled the matter and that the
other two had no involvement. However, the court found there were fact issues as to the
involvement of the other two. The fact issues were raised by the admittedly-involved
attorneys testimony that there might have been discussions with the other two partners that
the plaintiff had a viable malpractice claim against the lawyers that had previously
represented the plaintiff on their claim against OCTA. The court said these discussions could
support an inference that the partners knew the plaintiffs claim against OCTA was timebarred and that they participated in the decision not to tell the plaintiff while the firm
continued its representation. In addition, the name of one of the partners who claimed he was
not involved appeared on the caption page of the claim filed with OCTA, suggesting his
involvement in the case.
2.Schaufler v. Mengel, Metzger, Barr & Company, LLP,24
Apparently confusing LLP with limited partnership in stating that defendants had submitted
insufficient evidence to establish that managing partner of accounting firm had no liability as
a matter of law on buy-out agreement negotiated with plaintiff partner because the limited
partnership act imposes joint and several personal liability on a general partner and on a
limited partner who participates in the control of the business).
23 No. B213137, 2002 WL 31112563 (Cal. App. Sept. 21, 2002).
24 745 N.Y.S.2d 291
BIBLIOGRAPHY:
TABLE OF CASES:
Megadyne Information Systems v. Rosner, Owens & Nunziato No. B213137, 2002 WL
31112563 (Cal. App. Sept. 21, 2002).
State of Punjab v. Jullender Vegetables Syndicate - 1966 (17) STC 326 (SC),
Williams v. Natural Life Health Foods Ltd [1998] 1 WLR 830; [1998] 2 All ER 57
TABLE OF LEGISLATIONS:
OTHER SOURCES:
.J. Henning, Partnership Law Review : The Joint Consultation Papers and the
Limited Liability Partnership Act in Brief Historical and Comparative Perspective,
Comp. Law. 2004, 25(6), 163-170,
A Consultation Paper on Legal Services under GATS (Prepared by Trade and Policy
Division, Department of Commerce, Government of India)
Larry E. Ribstein,
Mohan R. Lavi, Little Utility of Limited Liability, The Business Line, (21st August,
2005)
V. Pattabhi Ram & Mithun D'Souza, Demystifying Limited Liability Partnership, The
Business Line, (May 15, 2006)