The Limited Liability Partnership Act, 2008

What it does

The Act makes a form of organisation that did not exist in Indian law before 2009. A limited liability partnership is incorporated with the Registrar, is a body corporate with perpetual succession, holds property in its own name, sues and is sued in its own name, and continues whatever happens to the people in it. In that it behaves like a company. What it borrows from partnership is the inside: the relations between the partners, and between the partners and the LLP, are whatever their agreement says, and the Act supplies terms only where the agreement is silent.

Two consequences follow from the separate personality and they are the reason the form is chosen. A partner is not liable, directly or indirectly, for an obligation of the LLP solely by being a partner, and a partner is not liable for the wrongful act or omission of another partner. Liability falls on the LLP and is met out of its property.

The limit is narrower than it is often read to be. A partner remains personally liable for their own wrongful act or omission. Where the LLP or its partners carry on business with intent to defraud creditors or for any fraudulent purpose, liability is unlimited for every person who was knowingly a party to it, and the LLP is liable as well unless the act was without its authority. Separate personality answers for the acts of others. It does not answer for your own, and it does not survive fraud.

The agreement is the constitution

A company has a memorandum and articles, and a body of case law about what those documents can and cannot do. An LLP has an agreement between the partners and the LLP, and the Act leaves most of the content to them: who contributes what, how profits are shared, who may bind the LLP, how a partner comes in and goes out, how a deadlock is broken, how the agreement itself is amended.

Where the agreement is silent, the First Schedule applies. Its terms are defaults written for the simple case: partners share profits and losses equally, every partner may take part in management, no partner is entitled to remuneration, no new partner may be introduced without the consent of all, and ordinary matters are decided by a majority with every partner having one vote. Each of those is sensible and each is wrong for a venture where one side puts in the money and the other side runs the business. The default position is the one that applies when the drafting was not done, and on this Act that is a position the parties chose by not choosing.

The agreement, and any change to it, is filed with the Registrar. So the constitution of an LLP is public in a way a partnership deed is not.

Who answers for compliance

Every LLP has at least two designated partners, at least one of whom is resident in India, and the obligation to do what the Act requires sits on them. They are liable to the penalties the Act imposes for a default. A body corporate may be a partner, and where it is, a nominated individual is the designated partner.

The annual filings are two: a statement of account and solvency, and an annual return. Accounts are audited only above the thresholds the rules set, which is why the form is used for professional firms and for holding structures where a company's audit and board machinery would be out of proportion to the activity. Filing is not optional below the threshold, and the penalty for late filing runs per day.

The Limited Liability Partnership (Amendment) Act, 2021 changed the character of enforcement rather than the substance of the form. It converted a group of offences from criminal to civil, so that a default that once carried a prosecution now carries a penalty imposed by an adjudicating officer; it created the small limited liability partnership, defined by contribution and turnover, with lower penalties; it allowed compounding by a Regional Director; and it gave appeals a route through the Appellate Tribunal. The direction of the change is that routine failures to file are treated as administrative, and the serious provisions are left where they were.

Coming in, converting and going out

A firm, a private company or an unlisted public company may convert into an LLP, and the schedules to the Act set what each conversion requires. On conversion the property, assets, liabilities and obligations of the earlier entity vest in the LLP and the earlier entity is deemed dissolved. That is a statutory vesting, not a transfer, which is the point of doing it this way, but it does not displace what other statutes require of the same event: stamp duty under the Indian Stamp Act, 1899 is assessed on the instrument and the position differs between States, and where immovable property is involved the Registration Act, 1908 still asks its own question.

Foreign investment in an LLP is possible and is confined. Under the exchange control rules made under the Foreign Exchange Management Act, 1999, a person resident outside India may invest in an LLP only where the sector permits one hundred per cent foreign investment on the automatic route and carries no investment-linked performance conditions. An LLP in a sector that carries such conditions, or that is open only with approval, is not available as the vehicle, and that question is answered before the structure is chosen, not after.

At the other end, an LLP is a corporate person for the purposes of the Insolvency and Bankruptcy Code, 2016, so the corporate insolvency resolution process and liquidation under that Code apply to it. A solvent LLP may instead be struck off or wound up voluntarily under the Act and the rules made under it. The two routes answer different questions, and the one that is available depends on whether the LLP can pay its debts, not on what the partners would prefer.

What turns on it in practice

The form is chosen for three reasons and misread for a fourth. It is chosen because the internal arrangement can be written freely, because the Act sets no minimum capital and takes contribution in tangible or intangible form, and because the annual machinery a company must run is not required of it. It is misread as a general shield against liability, which it is not: professional negligence by a partner is the partner's own act, and the Act says so.

Where a dispute arises it is almost always about the agreement rather than the Act. Whether a partner could be expelled, whether a transfer of economic rights carried management rights with it, whether a deadlock clause was triggered, whether an outgoing partner's contribution must be returned and when. Those are questions of construction, and they are decided on the document the partners signed and filed, read with the Indian Contract Act, 1872. The Act decides very few of them, which is the freedom the form offers and the exposure it carries.