Syllabus topics (RTMNU)
- Definition of Partnership
- Types of partners
- Rights and liabilities of partners
- Dissolution of a firm
- Consequences of non-registration of partnership firm
- Salient features of LLP
- Difference between LLP and partnership
- LLP and company
- LLP agreement
- Nature of LLP
- Partners and designated partners
- Incorporation by registration
- Change in name and registered office
- Partners and their relations
- Extent and limitation of liability of LLP and partners
- Basic taxation provisions of LLP
- Conversion of LLP to a company
Definition of Partnership
Definition (Section 4, Indian Partnership Act, 1932): 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. Persons who join are called partners and together they are called a firm.
Essential elements:
- Two or more persons – maximum 50 (Companies (Miscellaneous) Rules, 2014).
- Agreement – oral or written contract, not status.
- Lawful business must be carried on.
- Sharing of profits among partners.
- Mutual agency – each partner is principal and agent; this is the real test of partnership.
Types of Partners
| Type | Meaning |
|---|---|
| Active partner | Takes part in day-to-day business. |
| Sleeping partner | Invests capital, shares profit, no active role; liable to outsiders. |
| Nominal partner | Lends only his name; liable to outsiders. |
| Partner by estoppel (Sec 28) | Represents himself as a partner; liable to those who gave credit on that belief. |
| Minor (Sec 30) | Admitted only to benefits with consent of all; liability limited to his share. |
Rights and Liabilities of Partners
Rights (subject to the partnership deed):
- Take part in business and be consulted (Sec 12).
- Inspect and copy books of account.
- Share profits equally if deed is silent (Sec 13(b)).
- Interest on advances at 6% p.a.; interest on capital only if agreed.
- Indemnity for payments made in proper conduct of business.
Liabilities / duties:
- Be just, faithful and render true accounts (Sec 9).
- Indemnify the firm for loss by fraud or wilful neglect.
- Hand over personal profits earned from firm's business (Sec 16).
- Unlimited, joint and several liability for acts of the firm (Sec 25).
Dissolution of a Firm
Dissolution of partnership means only a change in relation (e.g. a partner retires); dissolution of the firm means the relation between all partners ends and the business is closed (Sec 39).
- By agreement (Sec 40).
- Compulsory (Sec 41) – insolvency of all/all but one partner, or business becomes unlawful.
- On contingencies (Sec 42) – expiry of term, completion of venture, death or insolvency of a partner.
- By notice (Sec 43) – in partnership at will.
- By Court (Sec 44) – unsound mind, permanent incapacity, misconduct, persistent breach, business only at loss, just and equitable ground.
Consequences of Non-registration of a Firm
Registration is not compulsory, but Section 69 creates disabilities for an unregistered firm:
- The firm cannot file a suit against a third party to enforce a contract.
- A partner cannot sue the firm or other partners to enforce rights arising from the contract or the Act.
- The firm cannot claim a set-off of more than ₹100 in a suit against it.
Exceptions: suit for dissolution or accounts of a dissolved firm; claims up to ₹100; third parties can always sue the firm.
Salient Features and Nature of LLP
Limited Liability Partnership (LLP) is a body corporate formed and registered under the LLP Act, 2008, having a separate legal entity from its partners. It combines the flexibility of a partnership with the limited liability of a company.
- Body corporate with separate legal entity (Sec 3).
- Perpetual succession.
- Limited liability of partners.
- Minimum 2 partners, no maximum.
- At least 2 designated partners, one resident in India.
- Internal matters governed by the LLP agreement.
- Annual filings: Statement of Account and Solvency (Form 8) and Annual Return (Form 11).
Difference between LLP, Partnership and Company
| Basis | Partnership firm | LLP | Company |
|---|---|---|---|
| Law | Partnership Act, 1932 | LLP Act, 2008 | Companies Act, 2013 |
| Legal entity | No separate entity | Separate entity | Separate entity |
| Liability | Unlimited | Limited to agreed contribution | Limited to shares/guarantee |
| Registration | Optional | Compulsory | Compulsory |
| Members | 2 to 50 | Minimum 2, no maximum | Pvt: 2–200; Public: min 7; OPC: 1 |
| Internal rules | Partnership deed | LLP agreement | MoA and AoA |
| Management | By partners | By designated partners | By Board of Directors |
| Compliance | Very low | Moderate | High (audit, meetings, filings) |
LLP Agreement
An LLP agreement is a written agreement between partners, or between the LLP and partners, deciding their mutual rights and duties (Sec 2(1)(o)). It is filed with the Registrar within 30 days of incorporation and covers capital, profit ratio, admission/retirement and powers of partners. If there is no agreement, the First Schedule of the Act applies.
Partners and Designated Partners
- Any individual or body corporate may be a partner (Sec 5); not a person of unsound mind or an undischarged insolvent.
- Every LLP needs at least two individual designated partners, one resident in India (Sec 7) – resident means stayed in India at least 120 days in the previous financial year (2021 amendment).
- They need a DPIN/DIN and are responsible for all legal compliance and filings.
Incorporation by Registration; Change in Name and Registered Office
- Reserve name (RUN-LLP); it must end with 'LLP'.
- File incorporation document (FiLLiP) signed by two or more persons (Sec 11).
- Registrar issues Certificate of Incorporation with LLPIN (Sec 12).
- File LLP agreement within 30 days.
Change in name (Sec 16–17): by notice to the Registrar; the Central Government can direct a change if the name is too similar to an existing one. Registered office (Sec 13): may be changed by filing notice with the Registrar within 30 days.
Partners and their Relations; Extent and Limitation of Liability
- Mutual rights are governed by the LLP agreement (Sec 23).
- Every partner is an agent of the LLP, not of other partners (Sec 26).
- The LLP is liable for wrongful acts of a partner done in the course of business (Sec 27).
- A partner is not personally liable for LLP's obligations, only for his own wrongful acts (Sec 28).
- In case of fraud, liability becomes unlimited (Sec 30).
Basic Taxation Provisions of LLP
- Taxed like a partnership firm at 30% plus surcharge and cess.
- Partners' share of profit is exempt (Sec 10(2A), Income-tax Act).
- Interest on capital (up to 12% p.a.) and remuneration to working partners are deductible within limits (Sec 40(b)).
- Alternate Minimum Tax (AMT) may apply.
- No tax on distribution of profits to partners.
Conversion of LLP to a Company
An LLP with at least seven members can register as a company under Section 366 of the Companies Act, 2013 with consent of the majority of partners and no-objection of secured creditors. On registration, all property and liabilities of the LLP vest in the company.
Likely exam questions
- (Long, 8/16 marks) Define partnership. Explain its essential elements and the different types of partners.
- (Long, 8/16 marks) What is a Limited Liability Partnership? Explain its salient features and distinguish between LLP, partnership firm and company.
- (Short, 4 marks) Explain the consequences of non-registration of a partnership firm.
- (Short, 4 marks) Who is a designated partner? State his responsibilities.
- (Short, 4 marks) Write a note on the taxation of LLP.