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. A partnership may either be:
Partnership at will– Where no provision is made by contract between the partners for the duration of their partnership, or for the determination of their partnership.
Particular partnership– Where a person has partnered with another person for a specific/ particular undertaking.
Partnership with a limited liability– Where two or more persons have partnered under a partnership deed which limits the liability of such persons towards the partnership.
It is essential to mention that the above-mentioned concepts in relation to partnerships are not exclusive of each other and may overlap at most times.
The most important distinction between the types of partnerships came into picture in India, with the introduction of the Limited Liability Partnership Act, 2008 (“LLP Act”). Prior to this, partnerships in India were governed by the provisions of the Indian Partnership Act, 1932 (“Partnership Act”).
WHY LLP ACT?
Under the Partnership Act, the partners are liable jointly and severally. Further, liability of the partners with respect to a partnership constituted under the Partnership Act, is unlimited. Hence, personal assets of the partners are exposed to, inter alia, meet the debt and capital contributed requirements of a partnership. This acted as a deterrent to the growth and expansion of partnerships.
The LLP Act was introduced as an alternative that provided the benefits of, inter alia, (a) limited liability of partners; (b) organizing the internal structure as per a partnership deed; and (c) opening doors for investment by venture capital. A partnership registered and governed under the Limited Liability Partnership Act, 2008 (“Act”) and Limited Liability Partnership Rules, 2009 (“Rules”), as amended from time to time, came to be known as a limited liability partnership (“LLP”).
An LLP registered under the LLP Act is a legal person, separate from its partners, and any change in the partners of an LLP does not affect the existence, rights or liabilities of the LLP.
WHO CAN/ CANNOT FORM LLP/ BECOME A PARTNER?
Any two or more persons (partners) associated for carrying on a lawful business with a view to earn profit, can form an LLP. However, any individual or a corporate body may not become a partner in an LLP if it: (a) has been found to be of unsound mind by a court of competent jurisdiction and the finding is in force; (b) is an undischarged insolvent; and/or (c) has applied to be adjudicated as an insolvent and his/its application is pending.
RIGHTS AND LIABILITIES OF AN LLP PARTNER
Equal share in the profits and losses of the LLP– Each partner shall have the right to an equal share in the profits and losses of the LLP, unless otherwise agreed in the LLP Agreement.
Right to be indemnified– Unless otherwise agreed in the LLP Agreement, each partner shall have a right to be indemnified by the LLP for (a) all payments made and personal liabilities incurred by such partner in the ordinary course of business of the LLP; and (b) in or about anything necessarily done by such partner for the preservation of the business or property of the LLP.
Right to take part in the management of the LLP– Each partner shall have an equal right to take part in the conduct of the business of the LLP. However, partners can curtail this right to allow only some of them to contribute to the functioning of the business, if the LLP Agreement states so.
Right to receive remuneration– The LLP Act specifically states that unless otherwise agreed between the partners in the LLP Agreement, no partner shall be entitled to remuneration for acting in the business or management of the LLP.
Right to vote– Unless otherwise agreed in an LLP agreement, any matter or issue relating to the LLP shall be decided by a resolution passed by a majority in number of the partners, and for this purpose, each partner shall have one vote. However, no change may be made in the nature of business of the LLP without the consent of all the partners.
Right to withdraw from partnership– Unless otherwise agreed in an LLP agreement, a partner may cease to be a partner of an LLP by giving a notice in writing of not less than 30 (thirty) days to the other partners of his intention to resign as partner. The cessation of a partner from the LLP shall not by itself discharge the partner from any obligation to the LLP or to the other partners or to any other person which he incurred while being a partner.
Right to transfer– The right of a partner to a share of the profits and losses of the LLP is transferable either wholly or in part. Such transfer of right by any partner shall not by itself cause the disassociation of the partner or a dissolution and winding up of the LLP. Further, such transfer of right shall not entitle the transferee or assignee to participate in the management or conduct of the activities of the LLP, or access information concerning the transactions of the LLP.
Right of investigation– An application may be filed by not less than 1/5th of the total number of partners of an LLP to the Tribunal, for the investigation of the affairs of LLP.
Right of winding up– The partners reserve a right to file an application for the voluntary winding up of an LLP. This can be done by passing a resolution to wind up the LLP with approval of at least 3/4th of the total number of its partners. However, in case an LLP has creditors, whether secured or unsecured, the winding up shall not take place unless 2/3rd of the creditors give their consent to do so.
Right to remuneration-A partner, unless otherwise stated and agreed in the LLP agreement, is not entitled to receive remuneration for acting in the business or management of the LLP.
Liabilities– Despite the structural and operational flexibility of an LLP, certain liabilities of the partner still remain. This includes the following: (a) every partner shall indemnify the LLP for any loss caused to it by her/ his fraud in the conduct of the business of the LLP; (b) each partner shall render true accounts and full information of all things affecting the LLP to any partner or her/ his legal representatives; (c) if a partner, without the consent of the LLP, carries on any business of the same nature as and competing with the LLP, (s)he must account for and pay over to the LLP all profits made by her/him in that business; and (d) every partner shall account to the LLP for any benefit derived by her/him without the consent of the LLP from any transaction concerning the LLP, or from any use by her/him of the property, name or any business connection of the LLP.
CONTRIBUTIONS BY LLP PARTNERS
A partner can make contributions in an LLP in the form of tangible/ intangible/ movable/ immovable property or other benefits including money, promissory notes, other agreements to contribute cash or property, and contracts for services performed or to be performed.
The obligation of a partner to contribute money or other property or other benefit or to perform services for an LLP are governed by the LLP agreement.
DISTRIBUTIONS TO LLP PARTNERS
A partner is entitled to share the profits and losses of an LLP and receive distributions in an LLP in accordance with the LLP agreement. This right of a partner to share profits and losses of the LLP and to receive distributions can be transferred either wholly or in part. However, such a transfer would neither disassociate the partner (transferor) from the LLP, nor lead to dissolution or winding up of the LLP. In case the LLP agreement does not contain a clause in relation to the share of profits and losses and distributions to be received by partners, all the partners shall be entitled to share equally in the capital, profits and losses of the LLP.