Limited Liability Partnership

A Limited Liability Partnership (LLP) is a hybrid legal entity introduced in India by the Limited Liability Partnership Act, 2008. An LLP combines two features: (1) the partnership's flexibility of internal management (governed by an LLP Agreement among the partners, without the rigid statutory requirements applicable to companies); and (2) the corporate form's advantages of limited liability (each partner's liability is limited to their agreed contribution) and separate legal entity (the LLP is a body corporate with perpetual succession, distinct from its partners). The LLP was introduced to provide an alternative business structure particularly suited to professional services firms (chartered accountants, solicitors, architects) where partnership is the traditional form but limited liability is desirable.

Key features of an LLP under the LLP Act, 2008: (1) Section 3 — an LLP is a body corporate and a legal entity separate from its partners, with perpetual succession; it can sue and be sued in its own name, own property, and enter contracts in its own name; (2) Section 27 — a partner is not personally liable for any obligation of the LLP arising from the wrongful acts of another partner or employee; the partner's liability is only to the extent of their contribution to the LLP as agreed; (3) The LLP Agreement — a contractual document among the partners governing internal management, profit sharing, admission of new partners, and resignation/retirement; and (4) Designated Partners — at least two; responsible for regulatory compliance.

The LLP's position in India's insolvency law framework is important. The Insolvency and Bankruptcy Code, 2016 (IBC) applies to LLPs — an LLP can file for voluntary liquidation or be subjected to involuntary insolvency proceedings by creditors. Under the IBC, the designated partners of an LLP have specific obligations during insolvency proceedings (similar to directors in company insolvency). The LLP's assets are applied to discharge its debts in insolvency — but the individual partners' personal assets are generally protected by the limited liability (except where the partner has given a personal guarantee or has committed fraudulent trading).

Tax treatment of LLPs is a significant advantage: LLPs are taxed like partnership firms — the profits are taxed in the LLP's hands at the applicable firm tax rate, and the partners do not pay tax on their share of profits again. This avoids the double taxation that applies to companies (tax on company profits, then tax on dividends distributed to shareholders). However, unlike a partnership firm, the LLP's partners cannot set off the LLP's losses against their personal income — LLP losses are quarantined within the LLP structure. This restriction on loss set-off is one factor that may make the traditional partnership structure preferable for start-up businesses expecting initial losses.

For advocates, LLP law is relevant in: (1) formation — preparing the LLP Agreement and advising on contribution structure; (2) partner disputes — enforcing or challenging the LLP Agreement; (3) insolvency — advising designated partners on their obligations under the IBC; (4) conversion — a traditional partnership or private company can convert to an LLP; and (5) foreign LLPs — which require specific approval under the Foreign Exchange Management Act for carrying on certain businesses in India.