Unit 3
INDIAN PARTNERSHIP ACT- 1932
When we discuss about the forms a business organization can take, one of the most prominent ones is a partnership. In India mainly it is a very popular entity to carry out business. Let us take a look at some important elements of a partnership and also some types of partners.
Concept Partnership
In India, we have a definite law that covers all factors and functioning of a partnership, The Indian Partnership Act 1932. The act also defines a partnership as “the relation between two or more persons who have agreed to share the profits from a business carried on by either all of them or any of them on behalf of/acting for all”
Persons who have entered into partnership with one another are called individually "partners" and collectively of "firm", the name under which their business is carried on is called the "firm name". The definition in section 4 contains 3 elements:
1. There must be an agreement entered into by all the persons concerned.
2. The agreement must be to share the profits of a business; and
3. The business must be carried on by all or any of the person's concerned acting for all.
So in such a case two or more (maximum numbers will differ according to the business being carried) persons come together as a unit to achieve some common objective. And the profits earned in pursuit of this objective will be shared amongst themselves.
The entity is collectively called a “Partnership Firm” and all the person members are the “Partners”. So let us look at some important features.
1] Formation/Contract
A partnership firm is now not a separate legal entity. But according to the act, a firm must be fashioned via a legal agreement between all the partners. So a contract must be entered into to form a partnership firm.
Its business activity must be lawful, and the motive has to be one of profit. so two people forming an alliance to carry out charity and/or social work will not constitute a partnership. Similarly, a partnership contract to lift out illegal work, such as smuggling, is void as well.
2] Unlimited Liability
In a unique feature, all partners have unlimited liability in the business. The partners are all individually and jointly liable for the firm and the payment of all debts. This means that even personal assets of a partner can be liquidated to meet the debts of the firm.
If the money is recovered from a single partner, he can, in turn, sue the other partners for their share of the debt as per the contract of the partnership.
3] Continuity
A partnership cannot carry out in perpetuity. The death or retirement or bankruptcy or insolvency or insanity of a partner will dissolve the partnership. The remaining partners may continue the partnership if they so choose, but a new contract must be drawn up. Also, the partnership of a father cannot be inherited by his son. If all the other partners agree, he can be added on as a new partner.
4] Number of Members
As we know that there should be a minimum of two individuals for a partnership. However, the maximum number will vary according to a few conditions. The Partnership Act itself is silent on this issue, but the Companies Act, 2013 provides clarity.
For a banking business, the number of partners must now not exceed ten. For a business of any other nature, the maximum number is twenty. If the number of partners increases, it will become an illegal entity or association.
5] Mutual Agency
In a partnership, the business must be carried out by all the partners together. Or alternatively, it can be carried out by any of the partners (one or several) acting for all of them or on behalf of all of them. So this means every partner is an agent as properly as the principal of the partnership.
He represents the other partners in some cases so he is their agent. But in different circumstances, he is bound by the actions of any of the other partners aking him the principal as well.
- Types of Partners
Active Partner: As the name suggests he takes active participation in the business of the firm. He contributes to the capital, has a share in the income and also participates in the daily activities of the firm. His liability in the company will be unlimited. And he often will act as an agent for the other partners.
Dormant Partner: Also known as a sleeping partner, he will not participate in the daily functioning of the business. But he will still have to make his share of contribution to the capital. In return, he will have a share in the profits. His liability will additionally be unlimited.
Secret Partner: Here the partner’s association with the firm is not public knowledge. He will not signify the firm to outside agents or parties. Other than this his participation with respect to capital, profits, management and liability will be the same as all the other partners.
Nominal Partner: This partner is solely a partner in name. He allows the firm to use the name of his firm, and the connected goodwill. But he in no way contributes to the capital and hence has no share in the profits. He does not involve himself in the firm’s business. But his liability too will be unlimited.
Partner by Estoppel: If a person makes it out to be, through their conduct or behavior, that they are partners in a firm and he does not correct them, then he becomes a partner by estoppel. However, this partner too will have unlimited liability.
The true test of a partnership is a way for us to determine whether a group or association of persons is a partnership firm or not. It also helps us recognize the partners of the firm and separate them from the third parties.
The idea behind such a true test is to examine the relevant facts and determine the real relations between parties and conclude about the presence of a partnership.
Let us take a look at the three important aspects of a real test of a partnership, namely agreement, profit sharing and mutual agency.
1] Agreement/Contract between Parties
For there to be a partnership between two or more people there has to be an agreement of partnership between them. The partnership cannot arise family status or any operation of law. There has to be a specific agreement between the partners.
So if family members of a HUF are running a business together this is not a partnership. Because, there is no agreement of partnership between them. The members of HUF are born into the HUF, so they cannot be partners.
2] Profit Sharing
Sharing of profits is an aspect of the true test of a partnership. However, profit sharing is only a prima facie evidence of a partnership. The Act does not consider profit sharing as a conclusive evidence of a partnership. This is because there are cases of profit sharing that are still contradictory to a partnership. Let us see some such cases
Sharing of profits/ gross receipts from a property that two or more persons own together or have a joint interest in is not a partnership
A share of profits given to an agent or servant does not make him a partner
If a share of the profit is given to a widow or child of a deceased partner does not make them partners
Part of the profits shared with the preceding owner as a part of goodwill or as a form of consideration will not make him a partner.
Now ascertaining this rationale becomes difficult if there is no express agreement between the concerned parties. In such a case we will consider the cumulative effect of all relevant facts. This will help us to determine the true relationship between the parties.
3] Mutual Agency
True Test of Partnership: Mutual Agency
This is the truest test of a partnership, it I the cardinal principle of a partnership. So if a partner is both the principle as well as an agent of the firm we can say that mutual agency exists. This means that the actions of any partner/s will bind all the other partners as well.
So whenever there is confusion about the existence of a partnership between people we check for the presence of a mutual agency. If such an agency exists between the parties who run a business together and share profits it will be deemed that a partnership exists.
Partnership is an agreement between persons to carry on a business. The agreement entered into between partners may be either oral or written. But, it is always suitable to have a written agreement so as to avoid misunderstandings and unnecessary litigations in future. When the agreement is in written form, it is known as ‘Partnership Deed.’ It must be duly signed by the partners, stamped and registered. Any alteration in partnership deed can be made with the mutual consent of all the partners.
Although it is left to the choice of the partners of the firm to decide themselves as to what should be mentioned in their partnership deed, yet a partnership deed usually contains the following:
1. Name of the firm.
2. Nature of the business.
3. Names of partners.
4. Place of the business.
5. Amount of capital to be contributed by each partner
6. Profit sharing ratio between the partners.
7. Loans and advances from the partners and the price of interest thereon.
8. Drawings allowed to the partners and the rate of interest thereon.
9. Amount of salary and commission, if any, payable to the partners.
10. Duties, powers and obligations of partners.
11. Maintenance of accounts and arrangement for their audit.
12. Mode of valuation of goodwill in the event of admission, retirement and demise of a partner.
13. Settlement of accounts in the case of dissolution of the firm.
Various types of partnerships exist, including limited partnership, limited liability partnership, joint liability, limited liability, and joint ventures. The most important thing to understand is that partnerships are agreements between two or more parties to achieve a particular business goal. General partnerships are:
Equal agreements
Various responsibilities can be delegated among members
Partnerships force all parties to share sure risks and rewards during business endeavors
For instance, a partner can handle the investment angle by pouring capital in the business, while another can act in a management capacity. In addition, a single partner can bind group partners into a single legal obligation. Under partnerships, each party takes responsibility for individual obligations or debts.
Limited Partnerships (LPs)
A limited partnership allows each partner to avoid personal liability to the amount of his or her business investment. Such an arrangement requires one individual to take the role of general status, opening his or herself up to potential personal liabilities, while the limited partner takes less of a risk. However, the accepted partner retains control of the business, and the limited partner is generally not involved in management operations.
Limited Liability Partnerships (LLP)
LLPs come with tax advantages in the same manner as general partnerships combined with liability protections. For example, individuals are not responsible for any debts or liabilities arising from the business. LLPs are usually found among law or accounting partnerships. Where taxation is concerned, the IRS recognizes such businesses as partnerships and approves members to file taxes individually on personal returns. GPs, LLPs, and LPs are taxed in the same manner, however partnerships do not pay taxes.
LLPs permit members to work together while retaining a measure of independence when it comes to liability. With that, not all parties are held equally responsible, and other members are not held liable for the actions of others. Before engaging in any type of partnership, know the terms before agreeing or signing any document.
Limited Liability Protection
If you are concerned about limited liability protection, remember that general partnerships do not afford you any protective measures. In a general capacity, partners can be held responsible for movements or decisions of other partners. General partnerships pose the highest risk to general partners, but they are the easiest to create. LLCs have become a popular alternative to general partnerships. LLCs are ideal for those who wish to invest in a business, but do not want face exposure to any legal ramifications.
Joint Ventures as Partnerships
According to the Small Business Administration, a joint venture is another form of partnership. Joint ventures occur when a range of entities converge in pursuit of a set goal. For example, businesses may forge a partnership to construct a building.
Qualified joint ventures are a special partnership that allows spouses to co-own a business but to file separate returns to avoid partnership returns.
Joint Liabilities
A joint liability partnership holds all partners equally liable for any financial and legal issues. Joint liability partnerships bind all parties into equal liability. Moreover, each party can be held responsible in pending lawsuits or other legal consequences. Joint liabilities are different than several liability principles in the respect that partnerships are held on equal footing at all times.
Several liabilities, on the other hand, is the agreement to settle any legal disputes and is based on a partner’s standing or contribution to a partnership.
Limited Liability Company
A limited liability company (LLC) offers each the most benefits and the most protection for a business owner.
A limited liability company allows members to forge a single entity while taking benefits of liability protection. LLCs provide the same tax havens as partnerships, but with the brought liability benefits of a corporation. Corporate law dictates that corporations are held liable for startup investments only. For example, a $10 million business does not give others the right to sue you for over $2 million if you started that business for only $2 million.
The LLC provides for the same tax protection as a partnership, but also gives the liability protection of a corporation. Under corporate law, a corporation is only liable for the total startup investment in the company. Also, certain states allow members to create what is recognized as a Professional LLC, which gives certain professionals such as doctors or lawyers more limitations than regular businesses.
Broadly, the provisions of the Act regarding rights, responsibilities and powers of partners are as under:
(a) Every partner has a right to take part in the habits and management of business.
(b) Every partner has a right to be consulted and heard in all matters affecting the business of the partnership.
(c) Every partner has a right of free access to all records, books and accounts of the business, and additionally to examine and copy them.
(d) Every partner is entitled to share the profits equally.
(e) A partner who has contributed more than the agreed share of capital is entitled to interest at the rate of 6 per cent per annum. But no interest can be claimed on capital.
(f) An associate is entitled to be indemnified by the firm for all acts done by him in the direction of the partnership business, for all payments made by him in respect of partnership debts or liabilities and for expenses and disbursements made in an emergency for protecting the firm from loss provided he acted as a person of regular prudence would have acted in similar circumstances for his own personal business.
(g) Every partner is, as a rule, joint owner of the partnership property. He is entitled to have the partnership property used exclusively for the purposes of the partnership.
(h) A partner has power to act in an emergency for protecting the firm from loss, but he must act reasonably.
(i) Every partner is entitled to prevent the introduction of a new partner into the firm without his consent.
(J) Every partner has a right to retire according to the Deed or with the consent of the other partners. If the partnership is at will, he can retire by giving note to other partners.
(k) Every partner has a right to continue in the partnership.
(l) A retiring partner or the heirs of a deceased partner are entitled to have a share in the profits earned with the aid of the proportion of assets belonging to such outgoing partner or interest at six per cent per annum at the option of the outgoing partner (or his representative) until the accounts are finally settled.
- Duties and liabilities of partners are as under:
1. To carry on the business to common advantage: Every partner is bound to -
a. Carry on the business of the firm to the greatest common advantage.
b. Be just and faithful to each other.
c. Use reasonable care and skill in the performance of his duties, and
d. Render true accounts and full information of all the things affecting the firm to any partner, or his legal representative (Sec. 9). This duty is an absolute one and no partner can contract himself out of it.
2. To indemnify: Every partner shall indemnify the firm for any loss caused to it by.
a. His fraud in the conduct of the business of the firm (Sec. 10). The partner cannot contract himself out of his liability.
b. His willful neglect in the conduct of the business of the firm [Sec. 13 (f)]. The partner will not be liable for acts done in good faith.
3. To be diligent: Every partner is bound to attend diligently to his duties in the conduct of the business [Sec. 12 (b)].
4. No remuneration: A partner is not entitled to receive remuneration for taking part in the conduct of the business [Sec. 13 (a)]. He is not entitled to claim remuneration for services rendered to the firm.
5. To account for personal profits made: Every partner shall make over to the film any personal profits made by him without the consent of the other partners. The relationship between the partners being a fiduciary one, no partner is entitled to make any personal profit.
6. Not to carry on competing business: No partner shall carry on any business of the same nature as competing to the business of the partnership firm. If the partner carries on the competing business, then subject to the contract between the partners, he shall account for and pay to the fir m all the profits made by him in that business.
7. To share losses: Subject to the contract between the partners, a partner is liable to contribute equally to the losses sustained by the firm [Sec. 13(b)]. The partners may by contract exclude their liability to share losses and only one or two of them may be liable to share the losses wholly. However, liability to third parties of all the partners continues.
8. Liable for acts of the firm: Every partner is liable, jointly with all the other partners and also individually for all the acts of the firm done while he is a partner (Sec. 25).
A partner is liable to pay the tax arrears due from the partnership firm pertaining to the period when he was a partner (Third Income Tax Officer, Circle I, Salem v. Arunagiri Chettiar - AIR 1996 SC 2160). 9. Not to assign his rights: No partner should assign his rights and interest in the firm to an outsider so as the constitute him the partner in the firm. But a partner may assign his share of profits and assets in the firm to outsiders.
The main points of differences between a partnership and HUF business are as follows.
1. Basis of formation
A partnership arises out of a contract between partners. Whereas a HUF arises by means of the operation of Hindu Law. It is created by status or birth in the family, no agreement is wanted for it.
2. Regulating law
A partnership is governed by the provisions of the Indian Partnership Act, 1932. An HUF business is governed by way of Hindu Law Succession Act.
3. Number of members
In a partnership business, the number of members cannot exceed 20 in case of non-banking business and 10 in case of banking business. But there is no such ceiling on the number of members (coparceners) in HUF.
4. Admission of new members
No new partner can be admitted to the existing partnership without the consent of all the different partners. In case of HUF firm, a person becomes a member (coparcener) merely by his birth.
5. Minor member
A minor can't become a full-fledged partner in a firm; he can be admitted only to the benefits of partnership. In an HUF, a male child becomes a full-fledged member by birth.
6. Rights of females
In a partnership, women can become partners and they enjoy the same rights and privileges, as do male partners. In case of an HUF business, on the other hand, the membership is restricted to male members only. However, as per Hindu Law Succession Act,1956, a female relative of a deceased male member gets a coparcenary interest in the event of his death.
7. Implied agency
In a partnership, each partner has implied authority to represent the firm and bind the other partners by his acts. In HUF this right rests with the Karta only, other members may additionally be allowed by Karta expressly or impliedly to contract debts on behalf of the firm.
8. Liability of members
In a partnership, the liability of all the partners is unlimited. Every partner is jointly and severally liable to third parties for the full debts of the firm. Whereas in case of HUF, liability of each member, except the Karta, is limited to the extent of his share in the property of the family.
9. Right to accounts
Each partner not only enjoys a right to inspect the books of account of the company and demand a copy thereof, he can even demand the accounts of the past dealings. But a coparcener has no right to ask for the accounts of past dealings. He can ask for the position of the existing assets only.
10. Mode of dissolution
A partnership company is dissolved on the insolvency or death of a partner. But the death, lunacy or insolvency of a coparcener does not affect an HUF. It continues to operate even after the loss of life of a coparcener.
Sec. 30: Minor's admitted to the benefits of partnership
A person who is a minor according to the law to which he is subject may not be a partner in a firm but, with the consent of all the partners for the time being, he may be admitted to the benefits of partnership. According to Sec. 11 of the Indian Contract Act, an agreement by or with a minor is void. As such, he is incapable of entering into a contract of partnership. But with the consent of all the partners for the time being a minor may be admitted to the benefits of partnership. However, there cannot be partnership of minors among themselves as they are incapable of entering into a contract (Shriram V. Gourishankar, A.I.R. (1961) Bom. 136).
I. Position of Minor before attaining Majority Rights of a minor:
1. He has a right to such share of the property and profits of the firm as may have been agreed upon.
2. To have access to accounts: A minor may have access to and inspect and copy any of the accounts of the firm. However, he has no right to copy other books of the firm.
3. To sue: When he is not given his due share of profit, he has a right to file a suit for his share of the property of the firm. But he can do so
only if he wants to sever his connection with the firm.
- Liabilities:
(a) The liability of the minor partner is confined only to the extent of his share in the profits and property of the firm. Over and above this, he
is neither personally liable nor is his private estate liable.
(b) He cannot be declared insolvent, but if the firm is declared insolvent his share in the firm vests in the Official Receiver or Official Assignee.
II. Position of Minor on attaining Majority
At any time within six months of his attaining majority, or on his obtaining knowledge that he had been admitted to the benefits of partnership whichever date is later, such person may give public notice that he has been elected –
i) to become a partner in the firm,
ii) not to become a partner in the firm.
If he fails to give such a public notice, he shall become a partner in the firm on the expiry of the said six months. The burden of proof that he had no knowledge of his admission until a particular date after the expiry of six months of his attaining majority lies on the person asserting that fact.
- Where he elects to become a partner
(a) He becomes personally liable to third parties for all acts of the firm done since he was admitted to the benefits of partnership.
(b) His share in the property and profits of the firm is the share to which he was entitled as a minor partner.
- Where he elects not to become a partner
(a) His rights and liabilities continue to be those of minor up to the date of the notice.
(b) His share is not liable for any acts of the firm done after the date of the public notice.
(c)He is entitling to sue the partners for his share of the property and profits in the firm.
When the partnership between all the partners of a firm is dissolved, then it is called dissolution of a firm. It is important to word that the relationship between all partners should be dissolved for the firm to be dissolved. Let us look at the legal provisions for the dissolution of a firm.
The dissolution of a firm means discontinuance of its activities. When the working of a firm is stopped and the assets are realized to pay a range of liabilities it amounts to dissolution of the firm. The dissolution of a firm should not be confused with the dissolution of partnership. When a partner agrees to continue the firm underneath the same name, even after the retirement or death of a partner, it amounts to dissolution of partnership and not of firm.
The remaining partners may purchase the share of the outgoing or deceased partner and proceed the business under the same name; it involves solely the dissolution of partnership. The dissolution of firm includes the dissolution of partnership too. The partners have a contractual relationship among themselves. When this relationship is terminated it is an end of the firm.
- A firm may be dissolved under the following circumstances:
(A) Dissolution by Agreement (Section 40):
A partnership firm can be dissolved by an agreement among all the partners. Section 40 of Indian Partnership Act, 1932 approves the dissolution of a partnership firm if all the partners agree to dissolve it. Partnership concern is created by settlement and similarly it can be dissolved by agreement. This type of dissolution is known as voluntary dissolution.
(B) Dissolution by way of Notice (Section 43):
If a partnership is at will, it can be dissolved by any partner giving a notice to other partners. The notice for dissolution must be in writing. The dissolution will be effective from the date of the notice, in case no date is mentioned in the notice, and then it will be dissolved from the date of receipt of notice. A notice as soon as given cannot be withdrawn without the consent of all the partners.
(C) Compulsory Dissolution (Section 41):
- A firm may be compulsorily dissolved beneath the following situations:
(i) Insolvency of Partners:
When all the partners of a firm are declared insolvent or all but one partner are insolvent, then the firm is compulsorily dissolved.
(ii) Illegal Business:
The activities of the firm may end up illegal under the changed circumstances. If government enforces prohibition policy, then all the firms dealing in liquor will have to close down their business because it will be an unlawful undertaking under the new law. Similarly, a firm may be trading with the businessmen of any other country. The trading will be lawful under present conditions.
After some time, a war erupts between the two countries, it will become a trading with an alien enemy and further trading with the same events will be illegal. Under new circumstances the firm will have to be dissolved. In case a firm carries on more than one type of business, then illegality of one work will not amount to dissolution of the firm. The firm can continue with the activities which are lawful.
(D) Contingent Dissolution (Section 42):
In case there is no agreement among partners related to certain contingencies, partnership firm will be dissolved on the happening of any of the situations:
(i) Death of a Partner:
A partnership firm is dissolved on the demise of any of the partner.
(ii) Expiry of the Term:
A partnership firm may be for a fixed period. On the expiry of that period, the firm will be dissolved.
(iii) Completion of Work:
A partnership concern may be formed to carry out a specified work. On the completion of that work the company will be automatically dissolved. If a firm is formed to construct a road, then the second the road is completed the firm will be dissolved.
(iv) Resignation by Partner:
If a partner does not want to continue in the firm, his resignation from the concern will dissolve the partnership.
(E) Dissolution via Court (Section 44):
A partner can apply to the court for dissolution of the firm on any of these grounds:
(i) Insanity of a Partner:
If a partner goes insane, the partnership firm can be dissolved on the petition of different partners. The firm is not automatically dissolved on the insanity of a partner. The court will act only on the petition of a partner who himself is not insane.
(ii) Misconduct by the Partner:
When a partner is guilty of misconduct, the other partners can move the court for dissolution of the firm. The misconduct of a partner brings bad name to the firm and it adversely affects the reputation of the concern. The misconduct can be in business or otherwise. If a partner is jailed for committing a theft, it will also affect the good name of the firm though it has nothing to do with the business.
(iii) Incapacity of a Partner:
If a partner other than the suing partner becomes incapable of performing his duties, then partnership can be dissolved.
(iv) Breach of Agreement:
When a partner willfully commits breach of agreement relating to business, it will become a ground for getting the firm dissolved. Under such a situation it becomes hard to carry on the business smoothly.
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(v) Transfer of Share:
If a partner sells his share to a third party or transfers his share to another person permanently, other partners can pass the court for dissolving the firm.
(vi) Regular Losses:
When the firm cannot be carried on profitably, then the firm can be dissolved. Though there may also be losses in every type of business but if the firm is incurring losses continuously and it is not possible to run it profitably, then the court can order the dissolution of the firm.
(vii) Disputes amongst Partners:
Partnership firm is based on mutual faith. If partners do not have faith each other, then it will not be possible to run the business. When the partners quarrel with every other, then the very basis of partnership is lost and it will be better to dissolve it.
When dissolved, the firm comes to an end. The period of limitation for a suit for an account and a share of the profits of a dissolved partnership is3 years from the date of dissolution, in case of dissolution by order of the Court the firm stands dissolve from the date of the judgement, unless the judgement provides otherwise.
- RIGHTS OF A PARTNER ON DISSOLUTION
1. Right to an equitable lien: (Sec. 46) Lien means 'retention.' Lien may 1 be either equitable or possessory, in equitable lien, partner has the right to deal with the goods, while in possessory lien; the right is only to hold the goods and not to deal with the goods. Every partner or his representative is entitled to have the property of the firm applied in payment of the debts and liabilities of the firm and to have the surplus distributed among the partners or their representatives in accordance with their rights.
2. Continuing authority of partners for purposes of winding up: (Sec. 47) After the dissolution of a firm, the authority of each partner to bind the firm and the other mutual rights and obligations of the partners continue to wind up the affairs of the firm and to complete transactions begun but unfinished at the time of dissolution. Winding up ends when final decree for accounts is passed.
3. Right to have the debts of the firm settled out of the property of the firm: [(Sec- 49)]
4. Right to restrain from use of firm name or firm property: After the firm is dissolved, every partner or his representative may restrain any other partner or his representative from carrying on a similar business in the firm name or from using any of the property of the firm for his own benefit, until the affairs of the firm have been completely wound up.
However, where any partner or his representative has bought the goodwill l of the firm, or where there is a contract to the contrary between the partners, his right to use the firm name shall not be restricted.
- LIABILITIES OF A PARTNER ON DISSOLUTION (Sec. 45)
1. Until public notice of the dissolution is given, partners continue to be liable as such to third parties for any act done by any of them after the dissolution, except for the partner who dies, or who is adjudicated an insolvent, or dormant partner retiring, for no notice is necessary in such cases.
2. After dissolution of the firm, the authority of each partner to bind the firm continues in two cases.
(i) To wind up the affairs of the firm; and
(ii) to complete the transactions begun but unfinished at the time of dissolution. (Sec-47)
3. If any partner/earns any profit from any transaction connected with
the firm after its dissolution, he must share it with the other partners.
- Liability to Share Personal Profits [S. 50]
Personal profits earned after dissolution - Subject to contract between the partners, the provisions of clause (a) of Section 16 shall apply to transactions by any surviving partner or by the representatives of a deceased partner, undertaken after the firm is dissolved on account of the death of a partner and before its affairs have been completely wound up:
Payment of firm debts and of separate debts S. 49- Where there are joint debts due from the firm, and also separate debts due from any partner, the property of the firm shall be applied in the first instance in payment of the debts of the firm, and, if there is any surplus, then the share of each partner shall be applied in payment of his separate debts or paid to him. The separate property of any partner shall be applied first in the payment of his separate debts, and the surplus (if any) in the payment of the debts of the firm.
The Indian Partnership Act does not make registration of a firm compulsory nor does it impose any penalty for non-registration. It is optional for a firm to get itself registered or not. A partnership firm may be registered at any time. Non-registration of a firm will not make the partnership agreement or any transaction between the partner and the third parties void. Registration provides the proof of the existence of the partnership firm and accords protection to the outsiders.
CONSEQUENCES OR EFFECTS OF NON-REGISTRATION
1. No suit by partners: A partner of an unregistered firm cannot file a suit to enforce any contractual right or a right conferred by the Partnership Act:
i) Against the firm; or
ii) Against any past or present partner of the firm.
2. No suit by a firm: No suit to enforce a right arising from a contract shall be instituted in any Court by or on behalf of a firm against any third party unless the firm is registered and the persons suing are or have been shown in the Register of firms as partners in the firms, nor can the partner file a suit in his own name instead of the name of the firm, in a suit against the third parties, names of all the partners must be shown in the register of the firm.
3. No right to counter claim or set off: No unregistered firm and no partner of such unregistered firm shall when sued be entitled to counter claim or set-off or institute other proceedings to enforce right arising from a contract. (Set-off means a claim by the firm, which would reduce the amount of money payable to the claimant). However, as registration of a firm can be effected at any time, a firm or a partner desiring to institute a suit may get over this disability by effecting the registration before filing a suit.
- Exception: Non-registration of the firm, however, does not affect the following rights:
- The right of third parties to sue the unregistered firm or its partners.
- The right of partner to sue for the dissolution of a firm or for accounts a dissolved firm, or any right or power to realize the property of dissolved firm.
- The power of an Official Assignee, Receiver or Court, to realize the property of an insolvent firm.
- The rights of a firm or partners of a firm having no place of business in India.
- The right to any suit or claim of set-off not exceeding rupees 100 in value.
- To enforce a right arising otherwise than out of a contract.
- One partner can bring a suit for damages for misconduct against another partner.
A Limited Liability Partnership or LLP is an alternative corporate business form which offers the benefits of limited liability to the partners at low compliance costs. It also allows the partners to organize their internal structure like a traditional partnership. A limited liability partnership is a legal entity, liable for the full extent of its assets. The liability of the partners, however, is limited. Hence, LLP is a hybrid between a company and a partnership.
- Salient Features of LLP
- LLP is a body corporate
According to Section 3 of the Limited Liability Partnership Act (LLP Act), 2008, an LLP is a body corporate formed and incorporated under the Act. It is a legal entity separate from its partners.
2. Perpetual Succession
Unlike a partnership firm, a limited liability partnership can proceed its existence even after the retirement, insanity, insolvency or even death of one or more partners. Further, it can enter into contracts and hold property in its name.
3. Separate Legal Entity
It is a separate legal entity. Further, it is absolutely liable for its assets. Also, the liability of the partners is limited to their contribution in the LLP. Hence, the lenders of the limited liability partnership are not the creditors of individual partners.
4. Mutual Agency
Another difference between an LLP and a partnership firm is that independent or unauthorized actions of one partner do not make the other partners liable. All partners are agents of the LLP and the actions of one partner do not bind the others.
5. LLP Agreement
The rights and duties of all partners are governed by an agreement between them. Also, the partners can devise the agreement as per their choice. If such an agreement is not made, then the Act governs the mutual rights and duties of all partners.
6. Artificial Legal Person
For all legal purposes, an LLP is an artificial legal person. It is created by a legal process and has all the rights of an individual. It is invisible, intangible and immortal but not fictitious since it exists.
7. Common Seal
If the partners decide, the LLP can have a common seal [Section 14(c)]. It is no longer mandatory though. However, if it decides to have a seal, then it is necessary that the seal remains under the custody of a responsible official. Further, the common seal can be affixed only in the presence of at least two designated partners of the LLP.
8. Limited Liability
According to Section 26 of the Act, every partner is an agent of the LLP for the purpose of the business of the entity. However, he is not an agent of other partners. Further, the liability of each partner is limited to his agreed contribution in the Limited Liability Partnership.
9. Minimum and Maximum Number of Partners
Every Limited Liability Partnership need to have at least two partners and at least two individuals as designated partners. At any time, at least one designated partner should be resident in India. There is no maximum limit on the number of maximum partners in the entity.
10. Management of Business
The partners of the Limited Liability Partnership can manage its business. However, only the certain partners are responsible for legal compliances.
11. Business for Profit Only
A Limited Liability Partnership cannot be created for charitable or non-profit purposes. It is essential that the entity is formed to carry on a lawful business with a view to incomes a profit.
12. Investigation
The power to investigate the affairs of a Limited Liability Partnership resides with the Central Government. Further, they can appoint a competent authority for the same.
13. Compromise or Arrangement
Any compromise or arrangement like a merger or amalgamation desires to be in accordance with the Act.
- Concept of LLP:
Limited Liability Partnership enterprise, the world wide recognized form of business organization, has now been brought in India by enacting the Limited Liability Partnership Act, 2008. LLP Act was notified on 31.03.2009.
A Limited Liability Partnership, popularly known as LLP combines the advantages of both the Company and Partnership into a single form of organization. Limited Liability Partnership (LLP) is a new corporate form that enables expert knowledge and entrepreneurial skill to combine, organize and operate in an revolutionary and proficient manner.
It provides an alternative to the traditional partnership association with unlimited liability. By incorporating an LLP, its members can avail the benefit of limited legal responsibility and the flexibility of organizing their internal management on the basis of a mutually-arrived agreement, as is the case in a partnership firm.
- Advantages of LLP:
The first LLP was registered on 2nd April, 2009 and till 25th April, 2011, 4580 LLPs were registered. This form of Organization offers the following benefits:
1. The process of formation is very simple as compared to Companies and does not involve much formality. Moreover, in terms of cost, the minimum fee of incorporation is as low as f 800 and maximum is f 5600.
2. Just like a Company, LLP is also body corporate, which means it has its own existence as compared to partnership. LLP and its Partners are distinct entities in the eyes of law. LLP is known through its own name and not the name of its partners.
3. An LLP exists as a separate legal entity different from the lives of its partners. Both LLP and persons, who own it, are separate entities and both function separately. Liability for repayment of debts and law incurred by the LLP lies on it, the owner. Any business with potential for lawsuits should think about LLP form of organization and it will offer an added layer of protection.
4. LLP has perpetual succession. Notwithstanding any changes in the partners of the LLP, the LLP will remain the same entity with the same privileges, immunities, estates and possessions. The LLP shall proceed to exist till it is wound up in accordance with the provisions of the relevant law.
5. LLP Act 2008 gives an LLP flexibility to manage its very own affairs. Partners can decide the way they want to run and manage the LLP, as per the form of LLP Agreement. The LLP Act does now not regulate the LLP to large extent rather than allows partners the liberty to manage it as per their agreement.
6. It is easy to join or leave the LLP or in any other case it is easier to transfer the ownership in accordance with the terms of the LLP Agreement.
7. An LLP, as legal entity, is capable of owning its Separate Property and funds. The LLP is the real person in which all the property is vested and through which it is controlled, managed and disposed of. The property of LLP is not the property of its partners. Therefore, partners cannot make any claim on the property in case of any dispute amongst themselves.
8. Another main benefit of incorporation is the taxation of a LLP. LLP is taxed at a lower rate as in contrast to Company. Moreover, LLP is also not subject to Dividend Distribution Tax as compared to company, so there will now not be any tax while you distribute profit to your partners.
9. Financing a small business like sole proprietorship or partnership can be difficult at times. An LLP being a regulated entity like company can attract finance from Private Equity Investors, financial institutions etc.
10. As a juristic legal person, an LLP can sue in its name and be sued by others. The partners are not liable to be sued for dues in opposition to the LLP.
11. Under LLP, only in case of business, where the annual turnover/contribution exceeds Rs. 40 lakh Rs. 25 lakhs are required to get their accounts audited yearly by a chartered accountant. Thus, there is no mandatory audit requirement.
12. In LLP, Partners, unlike partnership, are not marketers of the partners and therefore they are not liable for the character act of other partners, which protects the interest of individual partners.
13. As compared to a private company, the numbers of compliances are on a lesser side in case of LLP.
- Disadvantages of LLP:
The major Disadvantages of Limited Liability Partnership are listed below:
1. An LLP cannot raise cash from Public.
2. Any act of the partner without the other may bind the LLP.
3. Under some cases, liability may extend to personal assets of partners.
4. No separation of Management from owners.
5. LLP may not be a choice due to certain extraneous reasons. For example, Department of Telecom (DOT) would approve the application for a leased line solely for a company. Friends and relatives (Angel investors), and venture capitalists (VC) would be comfortable investing in a company.
6. The framework for incorporating a LLP is in place but currently registrations are centralized at Delhi.
For forming an LLP, some of the important steps and matters are given below:
Partner:
There should be at least 2 people (natural or artificial) to form an LLP. In case any Body Corporate is a partner, then he will be required to nominate any person (natural) as its nominee for the purpose of the LLP. Following entities and/or persons can end up a partner in the LLP:
(a) Company incorporated in and outside India
(b) LLP incorporated in and outside India
(c) Individuals resident in and outside India.
Process of Formulation of LLP:
Capital Contribution:
In case of LLP, there is no concept of any share capital, but every partner is required to contribute towards the LLP in some manner as specified in LLP agreement. The said contribution can be tangible, movable or immovable or intangible property or different benefit to the limited liability partnership, including money, promissory notes, and different agreements to contribute cash or property, and contracts for services performed or to be performed.
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In case the contribution is in intangible form, the fee of the same shall be certified by a practicing Chartered Accountant or by a practicing Cost Accountant or via approved value from the panel maintained by the Central Government. The monetary cost of contribution of each partner shall be accounted for and disclosed in the accounts of the limited liability partnership in the manner as may be prescribed.
Designated Partners:
Every limited liability partnership shall have at least two designated partners to do all acts under the law who are individuals and at least one of them shall be a resident in India. ‘Designated Partner’ means a partner who is designated as such in the incorporation documents or who becomes a designated partner by and in accordance with the LLP Agreement.
In case of a limited liability partnership in which all the partners are bodies corporate or in which one or more partners are individuals and bodies corporate, at least two individuals who are partners of such limited liability partnership or nominees of such bodies corporate shall act as designated partners.
Designated Partner Identification Number (DPIN):
Every Designated Partner is required to obtain a DPIN from the Central Government. DPIN is aneight-digit numeric number allotted by the Central Government in order to identify a particular partner and can be acquired by making an online application in Form 7 to Central Government and submitting the physical application along with necessary identity and Address proof of the person applying with prescribed fees.
However, if an individual already holds a DIN (Director Identification Number), the same number could be dispensed as your DPIN also. For that the users while submitting Form 7 needs to fill their existing DIN No. in the application.
It is not necessary to apply Designated Partner Identification Number every time you are appointed partner in a LLP, once this number is allotted it would be used in all the LLP’s in which you will be appointed as partner.
Digital Signature Certificate:
All the forms like e Form 1, e Form 2, e Form 3 etc. which are required for the motive of incorporating the LLP are filed electronically through the medium of Internet. Since all these forms are required to be signed by the partner of the proposed LLP and as all these forms are to be filed electronically, it is not possible to sign them manually. Therefore, for the purpose of signing these forms, at least one of the Designated Partner of the proposed LLP wants to have a Digital Signature Certificate (DSC).
The Digital Signature Certificate once obtained will be useful in filing more than a few forms which are required to be filed during the course of existence of the LLP with the Registrar of LLP.
LLP Name:
Ideally the name of the LLP must be such which represents the business or activity intended to be carried on by the LLP. LLP not select similar name or prohibited words.
LLP Agreement:
For forming an LLP, there ought to be agreement between/among the partners. The said Agreement contains name of LLP, Name of Partners and Designated Partners, Form of Contribution, Profit Sharing Ratio, and Rights and Duties of Partners.
In case no agreement is entered into, the rights and duties as prescribed under Schedule I to the LLP Act shall be applicable. It is possible to amend the LLP Agreement but each change made in the said agreement must be intimated to the Registrar of Companies.
Registered Office:
The Registered workplace of the LLP is the place where all correspondence related with the LLP would take place, though the LLP can also prescribe any other for the same. A registered office is required for maintaining the statutory records and books of Account of LLP. At the time of incorporation, it is essential to submit proof of ownership or right to use the office as its registered office with the Registrar of LLP.
- Process for the Incorporation of an LLP
The following things need to be ensured for the incorporation of LLP:
• Appoint/nominate partners and designated partners.
• Obtain the DPINs and Digital Signature Certificates (DSCs)
• Register a unique LLP name (applicant can indicate up to 6 choices)
• Draft the LLP Agreement
• File the required documents, electronically
• Apply for the Certificate of Incorporation along with LLPIN (Limited Liability Partnership Identification Number)
• The contents of an LLP agreement
• Name of the LLP
• Names and addresses of the partners and unique partners
• The form of contribution and interest on contribution
• Profit sharing ratio
• Remuneration of partners
• Rights and duties of partners
• The proposed business
• Rules for governing the LLP
- Steps for the Incorporation of an LLP
• Reserve the name of the LLP. Applicant documents e-Form 1 to ascertain the availability and register the name of the LLP. Once the Ministry approves the name, it reserves it for the applicant for a period of 90 days. Also, if the LLP is now not incorporated within that time frame, the reservation is removed and the name is made available to other applicants.
• Incorporation of a new LLP. Applicant files e-Form 2 which contains the details of the proposed LLP alongside with details of the partners and designated partners
• Consent of the partners and detailed partners to act in the said role.
• File the LLP Agreement with the Registrar within 30 days of incorporation of the LLP. Applicant files e-Form 3. According to Section 23 of the LLP Act, 2008, execution of LLP Agreement is mandatory.
- Conversion of LLP into Private Limited Company
Registration of LLP is on the rise in India due to various factors. LLP registrations in India has risen by 55% during the Financial Year 2014-15 and is to set to upward shove even further with rising awareness about LLP. Most of the Entrepreneurs opting for LLP registration are small businesses that do not foresee any requirement for raising equity funds. However, some of these small businesses may at some point have a requirement to convert to a private limited company due to various reason. Therefore, in this article, we look at the method for conversion of LLP into a private limited company.
- Choice of LLP vs Private Limited Company
LLP is mainly ideal for small organizations that have and will continue to have for a reasonable amount of time, an annual sales turnover of fewer than Rs.40 lakhs and a capital contribution of fewer than Rs.25 lakhs. LLPs that satisfy the above condition do not require an audit each year, whereas a private confined company irrespective of turnover and capital requires an audit of financial statements – additional cost and compliance. However, if an LLP crosses an annual turnover of Rs.40 lakhs or a capital contribution of more than Rs.25 lakhs, the compliance requirements for LLP and Private Limited Company become almost similar, making the private limited company a better choice.
- Reasons for LLP Registration
The following are reasons some small businesses decide for an LLP registration:
• The awareness about Limited Liability Partnership (LLP) introduced in 2010 has steadily increased amongst Entrepreneurs over the year and many small businesses are opting to start an LLP now instead of a Private Limited Company.
• An audit is no longer required for an LLP annual sales turnover is less than Rs.40 lakhs and the LLP has a capital contribution of fewer than Rs.25 lakhs. Whereas, for a Private Limited Company, an audit is mandatory irrespective of sales turnover or capital.
• LLP there is no idea of dividend distribution tax. Whereas, for a Private Limited Company, dividends are taxed at 15%.
• In LLP, there is no concept of Board Meetings or Annual General Meetings. So annual compliance is comparatively lesser.
• The process for incorporation of LLP also involves fewer documents and is less cumbersome.
The above reasons have led to strong growth in the no.'s of LLPs registered in India.
Reason for Private Limited Company Registration
The above reasons may be good enough for many small companies to opt for starting an LLP instead of a Private Limited Company. However, LLP still lacks a few considerable advantages over a Private Limited Company as follows:
LLPs do not have the concept of shareholders. Hence, all the owners of an LLP would be a Partner in the LLP. This shape is not suitable for Venture Capitalists and Private Equity Investors – who do not wish to actively take part in the management of the Company. Hence, equity investors will only make investments in a Private Limited Company. Therefore, if the startup or promoters have plans for expanding the business by raising equity capital, then the entity must be registered as a private limited company.
- Procedure for Conversion of LLP into Company
Follow the below process for the conversion of an LLP into Private Limited Company:
Obtain Name Approval
Step 1: Obtain name approval from the Registrar of Companies (ROC) by submitting Reserve Unique Name (RUN) form, which is in e-format.
Securing DSC and DIN
Step 2: After obtaining name approval, apply for Digital Signature Certificate (DSC) and Director Identification Number (DIN) for the member of the LLP who will be the directors of the Private Limited Company after conversion.
Note: In case of non-applicability of DIN, the applicant needs to provide address proof, identity proof and photographs along with the application. Therefore, obtain DIN directly through filing incorporation form.
Filing of Form URC-1
Step 3: Further, Form URC-1 needs to be filed by the applicant; furnish the following list of files along with the form URC-1.
• Provide details such as name, address and shares held through the members along with the member’s list.
• Provide details such as Name, Address, DIN, passport number along with an expiry date of all the directors of the Private Limited Company.
• An affidavit is required from the first directors of the Private Limited Company stating that they are not banned from being a director.
• Also, file all mandatory documents with the Registrar of Companies for the registration of the company.
• Note: The details provided by the company should be complete, correct and accurate to the best of their knowledge.
• Copy of Limited Liability Partnership settlement with a list containing the name and address of the partners of LLP and a certified copy of registration which is duly verified by at least two designated partners of LPP is required.
• The statement with the details of the nominal share capital of the firm and the number of shares separated, the variety of shares taken and the amount remitted for each share and the name of the firm with the phrase private limited to be provided.
• The no-objection certificate from all the creditors has to be provided.
• Duly certified accounts statement of the company by the auditor, which must not be less than six days from the date of application and the copy of the newspaper commercial is required.
Memorandum of Association & Articles of Association
Step 4: Draft the Memorandum of Association (MOA) and Articles of Association (AOA) and submit to the Registrar of Companies. After the approval of the company name, the Register of Companies sanctions the form URC-1.
Mutual Rights and Liabilities of Partners in a Partnership Firm
Section 4 of Indian Partnership Act, 1932 defines Partnership as, “Partnership is the relation between people who have agreed to share the profits of a business carried on by all or any of them acting for all”.
The rights, duties and liabilities of partners make the mutual relationship between the partners clearer. Partners can themselves determined their rights by contract, but the partnership act confers certain rights upon the partners. The rights and liabilities of partners can be illustrated as: -
- Rights of Partners
i) Right to take part in the Conduct or Management of Business: Every partner, irrespective of the amount contributed by him, has an inherent right to participate in the conduct of enterprise of the firm. However, by mutual agreement, some partners may be restricted to take section but, the right to participate in the management must be on hand to all
ii) Right to be Consulted & To Take Decisions by Majority: Before taking up any major decisions, it is the right of the partners to be consulted and heard. Any disagreement be solved by majority decision. But, no change in the nature or constitution of the business can be performed without the consent of all partners.
iii) Right of Access to Books: Every partner has a right to have access to and to check out and copy the books of firm.
iv) Right to Share the Profits: Every partner has a right to share the profits equally, unless otherwise agreed upon, and bear the losses as well.
v) Right to Receive Interest on Capital: If the partnership deed so decides that a partner is entitled to obtain interest on capital at a fixed or certain rate, he has a right to receive it but, only out of profits.
vi) Right to be Indemnified: Every partner has a right to claim indemnity from the association in respect of payments made or liabilities incurred by him in the ordinary and suited conduct of business and in emergency to protect the company from loss, provided the act should be such as would have been done by a individual of ordinary prudence, in his own case and under similar circumstances.
vii) Right to Receive Interest on Advances: If an associate makes any advances beyond the amount of capital he has agreed to subscribe, he has a right to claim an interest at the rate of six percent per annum.
viii) Right to Act in Emergency: A partner has every proper and authority to act in emergency, in order to protect the firm from loss, and the firm would be bound through such an act, provided the act would similar in his own case, under identical situation.
ix) Right to Apply to the Property of the Firm for Business of the Firm: Subject to contract between the partners, every partner has a right to apply and use the property of the firm exclusively for business of the firm.
x) Right to Apply to the Property of the Firm for Business of the Firm: Subject to contract between the partners, every partner has a proper to apply and use the property of the firm exclusively for business of the firm.
xi) Right to Prevent Introduction of a New Partner: Every partner has a right to prevent the introduction of any new partner in the firm. No person can be admitted into partnership firm without the consent of all the partners.
xii) Right to Retire: A partner has a right to retire with the consent of all the partners. If the partnership is at will, he has the proper to retire by giving due notice in writing to all other partners.
xiii) Right Not to be Expelled: A partner has a proper not to be expelled by any majority of partners without any cause.
xiv) Right of an Outgoing Partner to Carry on a Competing Business: Every partners have a right to carry on a business, similar to the partnership business, after his retirement with certain restrictions being that he cannot use the firm name, represent himself as carrying on the business of the company or solicit the customs of persons who were dealing with the firm before he ceased to be a partner.
xv) Right of Outgoing Partner in Certain Cases to Share Subsequent Profits: If any partner of the firm dies or otherwise ceases to be a partner and the continuing partners continue to carry on business with the property of the firm, without any settlement being given to the outgoing partner, then in the absence of any contract, he himself or his representative are entitled to a share of profits made since he ceased to be a partner, as may be attributable to the use of his share of property or to activity at six percent per annum of his share in the property of the firms.
- Liabilities of Partners
i) Joint & Several: Every partner is liable jointly and severally for all the acts of the company done while he was a partner. The liability of a accomplice is always unlimited.
ii) Liability for Losses causes by HIM: Every associate shall be liable to make good any loss caused to the firm with the aid of his fraud or willful neglect in the conduct of business. No partner can in any way exempt himself from such loss.
iii) Liability for Secret Profits: A partner is accountable to account for and pay to the firm any private profits earned from the business of the association or property or goodwill of the firm.
iv) Liability for Profits from Competing Business: If a partner carries on any business of the same nature and competing with that of the firm, he would be in charge to account for and pay to the firm all profits made by him in that business.
v) Liability to Render True Accounts: A companion is liable to render true accounts to profit to different partners. He is liable to disclose any legal or illegal bills which fall within the scope of business of the firm.
vi) Liability for Losses of the firm: As a partner has a right to share the earnings of the firm so is he liable to share the losses equally unless otherwise agreed upon.
- WINDING UP OF LLP
• Section- 63, 64 and 65 of LLP Act 2008, regulates the process of winding up an LLP.
• A Limited Liability Partnership being an artificial person can't die a natural death. It comes into existence through legal proceedings and therefore ceases to exist in the same manner.
• Winding up means closing up of a company’s concerns, which may be by purpose of insolvency or otherwise, by the realization of assets, payment of liabilities and distribution of surplus if any amongst the partners of LLP.
• The winding up of an LLP can also be either Voluntary or by Tribunal and LLP, so wound up may be dissolved.
• Dissolution is an event whereby the name of LLP is removed from the register of LLP’s and the fact is notified. Dissolution puts an give up to the existence of a company.
- Voluntary Winding Up
LLPs can also be wound-up easily with the approval of 3/4th of the partners. To start the liquidation process for a LLP, a higher part of the designated partners, will have to make a declaration that the LLP has no debt or that it will be competent to pay the debts in full within a period of not more than 1 yr from the start of winding up. Further, the LLP partners must declare that the LLP is not being wound up to defraud any man or woman or persons. This declaration for winding up of the LLP must be prepared along with a statement of assets and liabilities until the most recent practicable date right before the making of declaration for winding up. A valuation of the assets related to the LLP organized by a valued must also be submitted, if there are assets in LLP. Voluntary winding up will be deemed to begin on the date of passing of resolution for the reason of voluntary winding up.
- Striking Off
The Ministry of Corporate Affairs has recently amended Limited Liability Partnership Rules, 2009 by introducing the Limited Liability Partnership (Amendment) Rules, 2017 with impact from 20th May, 2017. With this amendment, LLP Form 24 has been introduced by the MCA and it is now possible to without problems close a LLP by making an application to the Registrar for striking off identify of LLP. Before the introduction of the Limited Liability Partnership (Amendment) Rules, 2017, the procedure for winding up a LLP used to be long and cumbersome. However, with the introduction of LLP Form 24, the procedure has been made easy and simple.
- Winding Up by using Tribunal
Winding up of LLP can be initiated by a Tribunal for the following reasons:
1. The LLP wants to be wound up.
2. There are less than two Partners in the LLP for a period of greater than 6 months.
3. The LLP is not in a position to pay its debts.
4. The LLP has acted against the interests of the sovereignty and integrity of India, the safety of State or public order.
5. The LLP has not filed with the Registrar Statement of Accounts and Solvency or LLP Annual Returns for any five consecutive financial years.
6. The Tribunal is of the opinion that it is just and equitable that the LLP should be wound up.
BASIS FOR COMPARISON | PARTNERSHIP | LIMITED LIABILITY PARTNERSHIP (LLP) |
Meaning | Partnership refers to an arrangement wherein two or more person agree to carry on a business and share profits & losses mutually. | Limited Liability Partnership is a form of business operation which combines the features of a partnership and a body corporate. |
Governed By | Indian Partnership Act, 1932 | Limited Liability Partnership Act, 2008 |
Registration | Optional | Mandatory |
Charter document | Partnership deed | LLP Agreement |
Liability | Unlimited | Limited to capital contribution, except in case of fraud. |
Contractual capacity | It cannot enter into contract in its name. | It can sue and be sued in its name. |
Legal Status | Partners are collectively known as firm, so there is no separate legal entity. | It has a separate legal status. |
Name of firm | Any name | Name containing LLP as suffix |
Maximum partners | 100 partners | No limit |
Property | Cannot be held in the name of firm. | Can be held in the name of the LLP. |
Perpetual Succession | No | Yes |
Audit of accounts | Not mandatory | Mandatory, only if turnover and capital contribution overreaches 40 lakhs and 25 lakhs respectively. |
Relationship | Partners are agents of firm and other partners as well. | Partners are agents of LLP only. |
References
- Business Law 1 Essentials by Mirande Valbrun,
- The Legal and Regulatory Environment of Business by O. Lee Reed
