Partnership and LLP
Authored By Siddharth Punj
Keywords:- Indian Partnership Act, 1932; Limited Liability Partnership (LLP); Partnership; Small and Medium Enterprises (SMEs)
Business is an activity of making, buying, selling or supplying goods and services in exchange of money and people are committed in businesses from centuries to survive and grow in this dynamic world and in this 21st century, SMEs and large business organizations are popping out looking for various alternatives in businesses. Businesses are categorized in various segments such as Sole Proprietorship, Partnership, Limited Liability Partnership, Joint Stock Company etc. In this article we will discuss primarily about two categories, which are Partnership and Limited liability partnership, tracing their evolution, formation, features and the statutory provisions administrating them in India. This article also attempts to correlate the aforesaid aspects on the basis of their advantages and disadvantages.
Partnership is a voluntary contract between two or more competent persons to place their money, effects, labor, and skill, or some or all of them, in lawful commerce or business, with the understanding that there shall be a proportional sharing of the profits and losses between them. It is an association of two or more persons to carry out business operations for profits.
Partnership is one of the oldest forms of businesses which could be detected from its execution in the Europe and Middle East in Medieval period. Francesco Datini is acknowledged for having implementing the first partnership system in 1383. In India, partnership form of business is governed by the Indian Partnership Act, 1932 and some of the provisions of the India Contract Act, 1872.
Indian Partnership Act, 1932
The India Partnership Act, 1932 was enacted on 1st October 1932 and before enactment of this act the provisions relating Partnership was administered by the Chapter XI of the Indian Contract Act, 1872. The Indian Partnership Act, 1932 is the primary act that governs the Partnership form of business organization in India.
Fundamentals of a Partnership:
By analyzing section 4 of the Indian Partnership Act, 1932, and the judgments in Dulichand Laxminarayan v. CIT, Nagpur and Pratibha Rani v. Suraj Kumar it could be concluded that the following fundamentals are mandatory for structuring a partnership:
1. There must be an agreement oral or written between the persons who wishes to enter in the partnership.
2. The desire of making a partnership must be to carry on businesses which are legit in the eyes of law.
3. The intention of formulating a Partnership must be to earn and share profits.
4. The business operation of the Partnership firm must be carried out by all or any of the partners acting for all.
Limited Liability Partnership (LLP)
The Limited Liability Partnership is best construed as a partnership with a unique feature of limited liability. LLP is a corporate business vehicle that enables professional competence and entrepreneurial initiative to combine and operate in flexible, innovative and optimum manner, providing benefits of limited liability while allowing its members the flexibility for organizing their internal structure as a partnership. The LLP is considered as s substitute corporate business which has both the benefits of limited liability company and the flexibility of a Partnership. It is often termed as a “Hybrid” form of a Joint stock company and a Partnership firm.
The SMEs peeks for a low risk business module and with the influx of LLP which has the appropriate amount of organizational flexibility and a liability which is limited to the extent of the nominal value of their share, the SMEs are more intrigued towards it.
LLP in India
The 7TH Law Commission in 1974 first time rejected the suggestion of limited liability partnership in India due to inherent drawbacks of LLPs which might render the provisions of the Companies Act, 1956 which were recently made rigorous. However in 2003, the Naresh Chandra Committee Report suggested the need of LLP in India. And later on November 2nd, 2005 the Ministry of Corporate Affairs introduced a concept paper on which later presented as the Limited Liability Partnership Bill, 2006.
Limited Liability Partnership Act, 2008
The Limited Liability Partnership Act, 2008 was chiefly based on the UK LLP Act, 2000 and the Singapore LLP Act, 2005. The LLP Act provides for the constitution and governance of the limited liability partnership and matters connected therewith and incidents thereto. The Act construes an LLP as a body corporate assembled and incorporated under Chapter III of the Act.
LLP against traditional partnership firm
Since the time LLP announced in India, it has become a reliable option for entrepreneurs, investors, business proprietors and venture capitalists for commencing a new commerce as an LLP rather than a traditional partnership firm or a company.
In a classic partnership firm, the liability of every partner is unlimited irrespective of their capacity to execute the acts which any partner may or may not perform. But under LLP the liability of every partner is limited to the amount of nominal value of their share.
The partnership firm is not a separate legal entity from its partners which means its partners are collective known as firm whereas an LLP is a body corporate formed and incorporated under LLP Act having legal presence.
The LLP Act is definitely a blessing to the SMEs as it provides them an environment which helps them in sustain in thriving business world. These industries can work more efficiently with the well defined structure and administer their internal operations more flexibly. The limited liability clause is not only beneficial for partners but also provide satisfactory trust to the lenders to these small scale industries. And with the emerging trend of corporate culture, the LLPs will also contribute to the boosting of economy.
 Oxford advanced learners dictionary, 9th edition  Black’s Law Dictionary, revised 4th edition  Francesco di Marco Datini (c. 1335 –1410) was an Italian merchant born in Prato, Italy.  Padgett, John F.; McLean, Paul D. (2006). "Organizational Invention and Elite Transformation: The Birth of Partnership Systems in Renaissance Florence". American Journal of Sociology. 111 (5): 1463–1568. doi:10.1086/498470.  Act No. XI of 1932  Act No. XI of 1872  Section 1 of the Indian Partnership Act, 1932  1956 AIR 354, 1956 SCR 154  985 AIR 628, 1985 SCR (3) 191  http://www.mca.gov.in/MinistryV2/llpact.html  Act No. I of 1956  See The Law Commission of India, Seventh Report on Partnership Act, 1932  http://reports.mca.gov.in/Reports/3-Naresh%20Chandra%20committee%20report%20on%20regulation%20of%20private%20companies%20and%20partnerships,%202003.pdf  Act No. VI of 2009  Section 3(1) of Limited Liability Act, 2008