A limited liability partnership is a partnership formed and registered under the Limited Liability Partnership Act, 2008. It is a body corporate with a legal entity separate from its partners and with perpetual succession. The LLP was created to give professionals and small businesses the internal flexibility of partnership together with the limited liability of a company.
Legal Framework
| Provision | Subject | Key Rule |
|---|---|---|
| S.2(1)(n) | Limited liability partnership defined | A partnership formed and registered under the Act |
| S.3(1) | Body corporate | An LLP is a body corporate formed and incorporated under the Act, a legal entity separate from its partners |
| S.3(2) | Perpetual succession | An LLP has perpetual succession |
| S.3(3) | Partnership Act not applicable | The Indian Partnership Act 1932 does not apply to an LLP |
| S.5 | Who may be a partner | Any individual or body corporate may be a partner; a minor and an undischarged insolvent cannot |
| S.6(1) | Minimum partners | Every LLP must have at least two partners |
| S.7 | Designated partners | At least two designated partners who are individuals, at least one of whom must be resident in India |
| S.23 | LLP agreement | Mutual rights and duties are governed by the LLP agreement; in its absence, the First Schedule applies |
| S.26 | Partner as agent | Every partner is an agent of the LLP, but not of the other partners |
| S.27(3) | Liability of the LLP | The LLP is liable for wrongful acts or omissions of a partner in the course of its business |
| S.27(4) | Liability of partners | An obligation of the LLP is solely its obligation, met out of its property |
| S.28(1) | Partner not personally liable | A partner is not personally liable for an obligation of the LLP solely by reason of being a partner |
| S.28(2) | Exception | A partner remains liable for his own wrongful act or omission |
| S.30 | Unlimited liability in case of fraud | Where the LLP or a partner acts with intent to defraud, liability of the LLP and the partners concerned is unlimited |
Salient Features
| Feature | Content |
|---|---|
| Separate legal personality | The LLP is distinct from its partners and may hold property, sue and be sued in its own name |
| Limited liability | A partner's liability is limited to his agreed contribution |
| Perpetual succession | Changes in partners do not affect the LLP's existence, rights or obligations |
| Compulsory registration | Incorporation with the Registrar is mandatory, unlike a partnership firm |
| Minimum two partners | No maximum limit, unlike a partnership firm which is capped |
| Designated partners | At least two individuals responsible for statutory compliance |
| Flexibility | Internal governance is by the LLP agreement rather than by rigid statutory provisions |
| Audit | Required only above prescribed turnover or contribution thresholds |
Why limited liability required a separate legal personality: Liability can be limited only if the obligations belong to someone other than the members. In an ordinary partnership the firm is merely a collective name for the partners, so the firm's debts are their debts. Making the LLP a body corporate under S.3 creates a distinct legal person to whom the obligations attach, which is what makes S.28(1) possible.
Facts: Salomon incorporated a company and sold his business to it, taking shares and secured debentures. On the company's insolvency, unsecured creditors argued the company was a mere sham and that Salomon should be personally liable.
Held: The company was a separate legal person distinct from its members, notwithstanding that Salomon controlled it. Its debts were its own and he was not personally liable, and as a secured debenture holder he ranked ahead of the unsecured creditors.
Relevance: The foundational authority on separate legal personality and limited liability, the principles S.3 and S.28 of the LLP Act apply to the LLP form. Cite when explaining why an LLP's obligations are its own.
Liability of Partners
The General Rule (S.27, S.28)
| Provision | Rule |
|---|---|
| S.27(3) | The LLP is liable for the wrongful act or omission of a partner acting in the course of its business or with its authority |
| S.27(4) | An obligation of the LLP is solely its obligation and is met out of its property |
| S.28(1) | A partner is not personally liable, directly or indirectly, for an obligation of the LLP solely by reason of being a partner |
| S.28(2) | A partner is liable for his own wrongful act or omission |
Why S.28(2) preserves personal liability for one's own wrongs: Limited liability protects a partner from obligations he did not create, arising from the acts of colleagues or the ordinary trading of the business. It was never intended to license a partner's own misconduct. A professional who gives negligent advice remains answerable for it, and the LLP is liable alongside him under S.27(3).
Unlimited Liability for Fraud (S.30)
Where an LLP or any of its partners carries out an act with intent to defraud creditors or for any fraudulent purpose:
| Consequence | Content |
|---|---|
| Liability of the LLP | Unlimited |
| Liability of the partners concerned | Unlimited, for all or any of the debts or other liabilities |
| Protection for innocent partners | Partners who acted without knowledge are not affected |
| Additional liability | The LLP and the partners concerned are liable to pay compensation to any person who has suffered loss |
Partner as Agent (S.26)
Every partner of an LLP is, for the purpose of the business of the LLP, the agent of the LLP, but not of the other partners.
Why this is the central departure from partnership law: In a firm, S.18 of the Partnership Act makes every partner the agent of the firm, and since the firm has no personality of its own, each partner is in substance the agent of the others, which is why liability is joint and several. In an LLP, agency runs only to the LLP as a distinct person, so a partner's acts create obligations of the LLP alone and not of his fellow partners. This single change is what converts unlimited mutual liability into limited liability.
LLP Agreement (S.23)
The mutual rights and duties of the partners, and of the LLP and its partners, are governed by the LLP agreement. Where the agreement is silent on any matter, the provisions of the First Schedule apply.
| Default position under the First Schedule | Content |
|---|---|
| Profit sharing | Equally |
| Remuneration | No partner entitled to remuneration for managing the business |
| Introduction of a partner | Requires the consent of all existing partners |
| Decisions | Ordinary matters by a majority; each partner has one vote; consent of all for a change in the nature of the business |
| Access to books | Every partner may have access to and inspect the books |
| Duty to render accounts | Partners must render true accounts and full information |
| Personal profits | A partner must account for profits from any transaction of the LLP or use of its property, name or business connection |
| Competing business | A partner must account for profits of a competing business carried on without consent |
Comparison Tables
LLP Compared with Partnership Firm
| Basis | Partnership Firm | LLP |
|---|---|---|
| Governing statute | Indian Partnership Act 1932 | LLP Act 2008 |
| Legal personality | None | Separate legal person (S.3(1)) |
| Liability of partners | Unlimited, joint and several | Limited to agreed contribution (S.28(1)) |
| Perpetual succession | Absent | Present (S.3(2)) |
| Registration | Optional | Compulsory |
| Maximum partners | Capped | No limit |
| Agency | Partner is agent of the firm and in effect of the other partners | Partner is agent of the LLP only, not of other partners (S.26) |
| Property | Held by the partners jointly | Held by the LLP in its own name |
| Capacity to sue | Firm sues through partners; S.69 disability if unregistered | LLP sues in its own name |
| Minor as partner | May be admitted to benefits under S.30 | Cannot be a partner |
LLP Compared with Company
| Basis | LLP | Company |
|---|---|---|
| Governing statute | LLP Act 2008 | Companies Act 2013 |
| Legal personality | Separate | Separate |
| Liability | Limited to contribution | Limited to shares or guarantee |
| Internal governance | LLP agreement, flexible | Memorandum and articles, statutory framework |
| Management | By partners themselves | By a board of directors distinct from members |
| Statutory compliance | Lighter | Extensive |
| Minimum members | Two partners | Two for a private company, seven for a public company |
| Audit | Only above prescribed thresholds | Compulsory |
| Suitability | Professional firms and small businesses | Larger enterprises raising capital |
Illustrations
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Obligations belong to the LLP: An LLP of architects owes a supplier Rs. 15 lakhs. The supplier cannot proceed against the partners personally. Under S.27(4) and S.28(1) the obligation is solely that of the LLP and is met out of its property.
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Personal liability for one's own wrong: A partner in an LLP of architects negligently certifies a structurally unsafe design and a client suffers loss. Under S.28(2) that partner is personally liable for his own wrongful act, and under S.27(3) the LLP is liable as well.
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Colleague's negligence does not attach: On the same facts, the other partners are not personally liable, since S.28(1) protects them from obligations arising solely from their status as partners.
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Unlimited liability for fraud: Two partners in an LLP transfer assets to a related entity to defeat creditors. Under S.30 the liability of the LLP and of those partners is unlimited, and they must compensate those who suffered loss. Partners who had no knowledge are unaffected.
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Perpetual succession: A partner in an LLP dies. Under S.3(2) the LLP continues unaffected, its contracts and property remaining intact. In a partnership firm, death would ordinarily dissolve the firm under S.42 unless the deed provided otherwise.
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Agency runs to the LLP only: A partner of an LLP orders materials in the LLP's name. The LLP is bound under S.26, but the other partners incur no personal obligation, unlike partners in a firm under S.25.
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First Schedule fills gaps: An LLP agreement is silent on profit sharing. Under S.23(4) the First Schedule applies and profits are shared equally, mirroring S.13(b) of the Partnership Act.
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Minor cannot be a partner: A family wishes to admit a 16 year old as an LLP partner. This is not permitted; unlike S.30 of the Partnership Act there is no mechanism for admitting a minor to the benefits of an LLP.
Recall Check
- Why was separate legal personality necessary in order to limit partners' liability?
- What is the significance of S.26 providing that a partner is an agent of the LLP but not of the other partners?
- In what two situations does a partner in an LLP face liability despite S.28(1)?
Key Cases
Salomon v Salomon and Co Ltd (1897) Salomon v Salomon 1897
Issue: Whether a company controlled by one person is a separate legal entity whose debts are its own.
Rule: An incorporated body is a legal person distinct from its members, and its obligations are its own.
Held: Salomon was not personally liable for the company's debts, the company being a separate person.
Distinctions
| Basis | Partner in a Firm | Partner in an LLP |
|---|---|---|
| Agency | Agent of the firm, and in effect of the other partners (S.18, Partnership Act) | Agent of the LLP only (S.26, LLP Act) |
| Liability for a colleague's acts | Unlimited, joint and several (S.25) | None (S.28(1)) |
| Liability for own wrongful acts | Unlimited | Unlimited (S.28(2)) |
| Liability in fraud | Unlimited | Unlimited (S.30) |
| Effect of death or retirement | May dissolve the firm | LLP continues (S.3(2)) |
| Basis | S.28(1) Protection | S.28(2) and S.30 Exceptions |
|---|---|---|
| Scope | Obligations arising solely from being a partner | The partner's own wrongful act, and fraud |
| Rationale | Partners should not answer for obligations they did not create | Limited liability is not a licence for personal misconduct |
| Effect on other partners | They are protected | Innocent partners remain protected under S.30 |
Flashcards
What is the legal status of an LLP?
Under S.3(1) it is a body corporate, a legal entity separate from its partners, with perpetual succession under S.3(2).
Does the Indian Partnership Act 1932 apply to an LLP?
No. S.3(3) expressly excludes its application.
What is the extent of a partner's liability in an LLP?
Limited to his agreed contribution. Under S.28(1) he is not personally liable for an obligation of the LLP solely by reason of being a partner.
When is a partner in an LLP personally liable?
For his own wrongful act or omission (S.28(2)), and where he has acted with intent to defraud, in which case liability is unlimited (S.30).
Whose agent is a partner in an LLP?
The agent of the LLP only, and not of the other partners (S.26).
How many designated partners must an LLP have?
At least two individuals, of whom at least one must be resident in India (S.7).
What governs the mutual rights of partners in an LLP?
The LLP agreement (S.23). Where it is silent, the First Schedule applies.
Can a minor be a partner in an LLP?
No. Unlike S.30 of the Partnership Act, the LLP Act contains no provision admitting a minor to the benefits.
Is registration of an LLP optional?
No. Incorporation with the Registrar is compulsory, unlike registration of a partnership firm.
Exam Scenario
Problem: Four chartered accountants practise as Meridian Advisors LLP with contributions of Rs. 5 lakhs each. Their LLP agreement is silent on profit sharing and remuneration. Three difficulties arise. The LLP owes an office landlord Rs. 18 lakhs in arrears and the LLP's assets are only Rs. 6 lakhs. Partner Wasim negligently prepared a client's tax filings, exposing the client to a penalty of Rs. 9 lakhs. Partners Xavier and Yamini, without the knowledge of the others, diverted LLP receipts to a personal account shortly before the arrears accrued, intending to keep them from the landlord. The landlord and the client both seek to recover from all four partners, and Wasim additionally claims a salary for having managed the practice full time. Advise.
Step 1: The landlord's Rs. 18 lakh arrears
Apply S.27(4) and S.28(1). The rent obligation is solely that of the LLP and is to be met out of its property. No partner is personally liable merely by reason of being a partner.
The landlord can recover only Rs. 6 lakhs from the LLP's assets and cannot proceed against the partners for the shortfall on this ground alone.
This outcome is possible only because S.3(1) makes the LLP a separate legal person, applying the principle in Salomon v Salomon and Co Ltd (1897).
Step 2: The client's Rs. 9 lakh penalty, partner by partner
| Party | Provision | Liability |
|---|---|---|
| The LLP | S.27(3) | Liable for Wasim's negligence in the course of its business |
| Wasim | S.28(2) | Personally liable without limit for his own wrongful act |
| Xavier, Yamini, fourth partner | S.28(1) | Not personally liable for a colleague's negligence |
The protection of the other three is precisely what the LLP form provides, and is the sharpest contrast with S.25 of the Partnership Act.
Step 3: The diverted receipts
Apply S.30. Xavier and Yamini acted with intent to defraud a creditor, so the liability of the LLP and of those partners becomes unlimited, and they must additionally compensate the landlord for his loss.
The landlord may therefore recover the Rs. 12 lakh shortfall from Xavier and Yamini personally, notwithstanding the general rule in S.28(1).
S.30 protects partners who acted without knowledge, so Wasim and the fourth partner remain shielded from the landlord's claim.
Step 4: Wasim's salary claim
Apply S.23(4). The LLP agreement is silent, so the First Schedule governs, and it provides that no partner is entitled to remuneration for managing the business, mirroring S.13(a) of the Partnership Act.
His claim fails. Profits will also be shared equally under the First Schedule, regardless of effort.
Drawing the pattern together, limited liability held for the ordinary trading debt, failed against the partner whose own negligence caused loss, and failed against the partners who acted fraudulently.
S.28(1) is no shield for your own wrong. It protects a partner from obligations arising solely from his status. S.28(2) leaves Wasim fully exposed for his own negligence, with the LLP liable alongside him under S.27(3).
S.30 reaches only the partners concerned. Unlimited liability for fraud attaches to the LLP and to Xavier and Yamini. It does not strip the innocent partners of their protection.
Silence in the agreement is filled by the First Schedule. Under S.23(4) the gap is closed by statute, not by what seems fair, so full time management earns no salary and effort earns no larger profit share.
Conclusion. The landlord recovers Rs. 6 lakhs from the LLP and the Rs. 12 lakh shortfall from Xavier and Yamini under S.30. The client recovers from the LLP under S.27(3) and from Wasim under S.28(2), but from no one else. Wasim gets no salary, and the LLP form protected the innocent partners exactly as intended.
See Also
- Partnership: Definition, Nature and Test : the mutual agency of ordinary partnership which S.26 of the LLP Act deliberately departs from.
- Relations of Partners to Third Parties : the unlimited joint and several liability under S.25 which the LLP form replaces.
- Relations of Partners Inter Se : the internal duties which the First Schedule largely reproduces for LLPs.