(Editor’s note: The Limited Liability Partnership Bill 2006 is currently under the consideration of Rajya Sabha. Indian industry body Confederation of Indian Industry has called it a path-breaking legislation. A hybrid between a limited liability company and a partnership firm, the new structure as envisaged in the bill – once cleared by the Parliament – is expected to benefit entrepreneurs, professionals and companies immensely.
Here is a guest column by Shantanu Surpure, partner at Economic Laws Practice, a Mumbai-based law firm, on the topic. Yashojit Mitra and Devyani Singh, associates at ELP, have assisted Shantanu in writing this article. This legal column is meant for public discussion and informational purposes only and is not to be construed as legal advice.)
Oudated Partnership Act
As the Indian economy has continued to expand, the features of the traditional partnership governed by the Indian Partnership Act, 1932 (the “Partnership Act”) have increasingly become out-dated. The main problems with the current Partnership Act are that (i) it does not recognise the distinction between a partnership and its members (i.e. the partners); (ii) it restricts the maximum number of partners in a partnership to 20; (iii) and it imposes unlimited liability on each partner for acts committed by any other partner and by the partnership as a whole.
LLP In Delaware
A Limited Liability Partnership (“LLP”) is an alternative corporate entity that provides the benefits of limited liability but allows its members the flexibility of organizing their internal structure as a partnership.
An example is a Delaware limited liability partnership which is governed by the Delaware Revised Uniform Partnership Act (the “Act”). The Act was amended in 1993 to allow for LLPs. Pursuant to Chapter 15 of the Act, by becoming an LLP, the partners of a Delaware general partnership are able to limit their liability. In order to become an LLP, the partnership needs to file a Statement of Qualification with the Delaware Division of Corporations. Examples of LLPs include law firms, accounting firms and other professional services firms.
There is a further distinction between an LLP and a limited partnership (“LP”). In an LP, there must be at least one limited partner and one general partner. Whereas the liability of the general partner is unlimited, the liability of a limited partner is only to the extent of the amount invested by the limited partner. The rights of management and ownership vest with the general partner whereas limited partners generally only have financial interest. The limited partnership structure is often utilized in establishing venture capital funds.
In addition, amendments were enacted in July 2006 to permit limited liability limited partnerships (“LLLPs”) in Delaware which limits the general partner’s liability for the debts and obligations of the limited partnership. This has the effect of making an LP more similar to an LLP.
Proposed Indian LLP
While the government of India has not addressed the issue of LPs or LLLPs, there is currently before the Rajya Sabha a Limited Liability Partnership Bill, 2006 which inter alia incorporates the following features:
–An LLP will be a body corporate with an identity distinct from its partners and will have perpetual existence;
–A minimum of two partners will be required for the formation of an LLP with no limit on the maximum number of partners;
–Every partnership will have at least two designated partners of which one shall be a resident of India. The designated partners shall be answerable for the doing of all acts, matters and things as are required to be done by the LLP in respect of compliance of the provisions of the proposed legislation and be liable for penalties for non- compliance;
–Liability of the partners of an LLP will be limited to the extent of investment made by them in the LLP. A partner shall not be personally liable for the wrongful acts or omission of any other partner except in the case of unauthorized acts, fraud and negligence. The liabilities of an LLP shall be borne out of the property or assets of the LLP; and
–The mutual rights and duties of the partners of an LLP inter se and those of the LLP and its partners shall be governed by a registered agreement between partners or between the LLP and the partners.
The tabling and hopeful eventual passing of this Bill will assist in bringing Indian partnership provisions more in line with international practices.
About the author
Shantanu Surpure is a partner at Economic Laws Practice (ELP) in Mumbai. He focuses on venture capital and private equity transactions. He has previously practiced law with a large US law firm in Silicon Valley. Shantanu holds a BA from Brown University/London School of Economics, an MA Juris from Oxford University and a Juris Doctor from Columbia Law School. Shantanu is admitted to practice law in India, California, New York and England and Wales. He can be reached at email@example.com.