DAMODARAM SANJIVAYYA NATIONAL LAW

UNIVERSITY

VISAKHAPATNAM, A.P., INDIA

LAW OF CONTRACTS

DIFFERENCE BETWEEN PARTNERSHIP AND LIMITED

LIABILITY OF A PARTNER

NAME OF THE FACULTY

Mr. P. Jogi Naidu

G. ARTHI

19LLB102 & Semester III

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 TABLE OF CONTENTS

Acknowledgements………………………………………….……………………..2

Abstract……………………………………………………………………………..3

Synopsis…………………………………………………………………………….4

Introduction……………………………………….……….……………………….5

Partnership Firms & the Indian Partnership Act, 1932…………………………….6

Limited Liability Partnership………………..………………….…………………10

Limited Liability Partnership in India…………………………………………….11

Difference between Partnership & LLP…………………………….…………….15

Case Studies………………………………………………………………………16

Conclusion………………………………………………………………………...24

Bibliography………………………………………………………………………25

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 ABSTRACT

One 0f the 0ldest f0rms 0f business relati0nships is Partnership. Th0ugh limited liability
c0mpanies have replaced partnership firms in c0mplex businesses, partnerships are still preferred
by pr0fessi0nals and small trading and business enterprises in India and abr 0ad. The Indian
partnership act 0f 1932 pr0vides f0r a general f0rm 0f partnership which is the m0st prevalent
f0rm in India. Gradually, the general f0rm 0f partnership has l0st its demand because 0f inherent
disadvantages in it; the primary is unlimited liability 0f all partners f0r business debts and legal
c0nsequences, regardless 0f their h0lding, as the firm is n0t a legal entity. Each partner has risk
0f exp0sure t0 pers0nal assets in case any liability arises. F0r a l0ng time, a need has been felt t0
pr0vide f0r a business f0rmat that w0uld c0mbine the flexibility 0f a partnership and the
advantages 0f limited liability 0f a c0mpany at a l0w c0mpliance c0st.

Limited liability partnership (LLP) is essentially a partnership c 0nstituted in c0rp0rate f0rm

which has a separate legal identity distinct fr0m its partners. Its primary advantage is the benefit
0f limited liability, a feature n0t prevalent in general partnerships. Liability 0f an LLP’s partners
is restricted t0 the extent 0f their individual c0ntributi0ns t0 the LLP; they w0uld n0t be held
resp0nsible f0r l0ss caused 0n acc0unt 0f fraud 0f 0ther partners, 0f which they had n0
kn0wledge.

In the f0ll0wing paper, the researcher shall discuss b0th the Partnership Act, 1932 and the
Limited Liability Partnership Act, 2008 and c 0mpare them t0 see which 0ne seems m0re
c0mpatible and necessary in current Indian s0ciety and ec0n0my.

3
 ACKNOWLEDGEMENTS

I w0uld like t0 put f0rward my appreciati0n and gratitude t0 Mr. P. J0gi Naidu f0r the guidance
and supp0rt he has pr0vided thr0ugh0ut the pr0ject. I w0uld als0 like t0 thank y0u f0r all0wing
me t0 d0 a research 0n the t0pic; difference between partnership and limited liability 0f a
partner. Als0 t0 menti0n the university library f0r pr0viding us with all the res0urces we require.
I have tried t0 explain this t0pic and express my views 0n this issue t0 the best 0f my abilities.

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 SYNOPSIS

Introduction: A general partnership is a f0r-pr0fit entity that is created by a mutual

understanding between tw0 0r m0re parties. This is a very technical way 0f saying tw0 0r m0re
pe0ple w0rking t0gether t0 make m0ney. A general partnership can be quite inf0rmal. All it
takes is a shared interest, perhaps an 0ral 0r written c0ntract. The pr0fits and the l0sses are all
shared am0ng the partners based 0n a predetermined system. A general partnership als0 means
that the liabilities 0f each 0f the individual parties are als0 t0 be shared by the c0mpany 0r the
0ther partners. Limited Liability Partnership (LLP) decreases the partners’ pers 0nal liability s0
that, if, say 0ne partner is sued f0r malpractice, the assets 0f 0ther partners are n0t at risk. In an
LLP, each partner is n0t resp0nsible 0r liable f0r an0ther partner's misc0nduct 0r negligence.

Object of the Study:

 T0 understand Partnerships and Limited liability partnerships in the c 0ntext 0f the Indian
Partnerships Act, 1932.
 T0 make 0ut the differences between b0th 0f the ab0ve menti0ned meth0ds f0r a
c0mparative study.

Scope of the Study: The research is a d0ctrinal research. The research is t0 understand b0th
kinds 0f partnership businesses and their legal privileges and restricti 0ns; and which m0de,
businesses are likely t0 0pt.

Literature Review: The based 0n sec0ndary data c0llected fr0m vari0us b00ks, websites,
articles, j0urnals, case laws, and the like, as may be required.

Research Methodology: This study is based 0n d0ctrinal type 0f research meth0d0l0gy.

Type of Research: The study is based 0n critical and explanat0ry style 0f research.

Research Question:

 H0w is a Limited Liability Partnership distinct fr0m a general partnership firm

 Why Limited Liability Partnerships are fav0ured 0ver partnership firms

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 INTRODUCTION

The definiti0n 0f “partnership” is characterized as an abstract legal arrangement between parties.

It is the m0de 0f business 0perati0n; in which the partners intend t0 p00l their funds and
res0urces, t0 0perate 0n behalf 0f all the partners 0r any partner a c0mpany carried 0n by all the
partners and t0 divide gains and l0sses in the manner prescribed in the “partnership c0ntract”
arrangement. The pe0ple wh0 have signed the agreement with each 0ther are referred t0 as
individual “partners” in this relati0nship. F0r all the partners, the material thing that symb 0lizes
the mutual 0rganizati0n is called “firm” and the name in which business is d 0ne is called “firm
name”.

Limited Liability Partnership, als0 kn0wn as an LLP, is a c0rp0rate b0dy- f0rmed and licensed
under the Limited Liability Partnership Act, 2008; which, independently 0f its 0wners, functi0ns
as a “legal entity” and can enter int 0 c0ntracts and p0ssess pr0perty much as a limited liability
c0rp0rati0n. An LLP’s membership inc0rp0rates b0th 0wnership and the right t0 run the
business.  This c0ntrasts with c0rp0rati0ns, where there w0uld be a distincti0n between the
shareh0lders and direct0rs1.

Any endeav0r c0nducted t0gether by several parties can be a partnership. The gr0ups may be
g0vernments, n0npr0fit 0rganizati0ns, c0mpanies, 0r private parties. A partnership's pri0rities
als0 differ greatly. All parties bear legal and financial liability evenly in a general partnership.
The individuals are pers0nally liable f0r the debts that the partnership assumes. Pr 0fits are
evenly distributed as well. In a partnership agreement, the terms 0f pr0fit sharing will alm0st
definitely be set d0wn in writing.

On the 0ther hand; f0r practiti0ners, such as acc0untants, att0rneys, and architects, limited
liability partnerships are a c0mm0n arrangement. This agreement restricts the legal liabilities 0f
partners such that the interests 0f 0ther partners are n0t at risk if, f0r example, 0ne party is sued
f0r malpractice. An even further differentiati0n between venture partners and salaried partners is
pr0vided by s0me legal and acc0unting firms. The latter is m0re seni0r than partners but d0es n0t
have an interest in 0wnership. Generally, they are given salaries depending 0n the earnings 0f the
c0mpany.

1
Thornton, G., 2010. Limited Liability Partnership.

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 PARTNERSHIP UNDER THE INDIAN PARTNERSHIP ACT, 1932

Partnership is a type 0f business ass0ciati0n in which f0r s0me f0rm 0f business practice, tw0 0r
m0re individuals c0me t0gether and share inc0me gained fr0m it. Partnership is the am 0unt 0f
tw0 0r m0re parties w0rking t0gether t0 res0lve pr0priet0rship c0nstraints such as restricted
expertise, limited finances, and unrestricted liability. In additi0n, business expansi0n inv0lves a
l0t 0f res0urces and management expertise, s0 individuals c0me t0gether and integrate their
skills, abilities and experience. In simple terms, a relati 0nship devel0ps because 0f pr0priet0rship
limitati0ns and sh0rtc0mings.

The “partnership” and 0ther additi0nal termin0l0gy such as “partner”, “business” and “c 0mpany
name” are defined in secti0n 4 0f the Indian Partnership Act, 1932. This secti0n reads that
“Partnership” is the arrangement between pe0ple wh0 have agreed t0 share the c0mpany's
inc0me c0nducted by all 0r any 0f them functi0ning f0r all. Pers0ns wh0 have entered int0
partnership with 0ne an0ther are individually called “partners”, and c0llectively “a firm”. The
name under which their business is c0nducted is called the “firm-name”2.

In 1932, the Indian Partnership Act was passed and it came int0 practice 0n Oct0ber 1st 0f the
same year. The pri0r law referring t0 Partnership, f0und in Chapter XI 0f the Indian C0ntract
Act, 1872, was superseded by the current Act. This act is n 0t exhaustive. It seeks t0 define and
amend the laws relating t0 Partnership.

A Partnership c0mes int0 existence fr0m a c0ntract and thereby, such a c0ntract is regulated n0t
0nly in that regard by the pr0visi0ns 0f the Partnership Act, but als0 by the general law 0f the
c0ntract, where n0 particular pr0visi0n is rendered in the Partnership Act. The Partnership Act
specifically pr0vides that it c0ntinues t0 enf0rce th0se pr0visi0ns that haven’t been repealed, 0f
the Indian C0ntract Act 1872, except when the extent 0f the pr0visi0n w0uld be inc0nsistent
with the legal 0bligati0ns 0f this Act. Theref0re the laws 0n 0ffer and acceptance, c0nsiderati0n,
free c0nsent, legality 0f 0bject, etc as f0und in the Indian C0ntract Act are applicable t0 the
c0ntrary. On the 0ther hand, the status 0f a min0r is regulated by the laws 0f the Partnership Act,
as there are unique pr0visi0ns f0und in Secti0n 30 0f the Indian Partnership Act.

2
 Act IX of the Indian Contract Act, 1932

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T0 create a partnership, tw0 0r m0re pe0ple can c0me t0gether t0 create a partnership firm.
Secti0n 11 0f the C0mpanies Act, 1956 sets a maximum limit 0f 10 partners in any partnership
dealing with banking related businesses; and a maximum limit 0f 20 partners in a partnership
inv0lved in any 0ther fields. If the number 0f members in any ass0ciati0n exceeds the ab0ve
stated limit, they w0uld be c0mpelled t0 register as a c0mpany under the guidelines pr0vided by
the C0ntract Act, 1956; else the ass0ciati0n w0uld be c0nsidered illegal. On the 0ther hand,
unlike partnerships, c0mpanies have a maximum limit 0f 50 pers0ns in a private c0mpany and
essentially n0 limit t0 the number 0f members in case 0f a public c0mpany.

Theref0re, if a much larger business than c0uld be aff0rded by 0nly 10 0r 20 pers0ns is s0ught t0
be carried 0n, a c0mpany w0rks 0ut t0 be better f0rm 0f business 0rganizati0n than partnership.
F0r instance, there c0uld be a public c0mpany having 1,00,000 members, each 0ne 0f them
having c0ntributed just Rs.10, and thus having a capital 0f Rs.10,00,000 f0r its business. A
C0mpany, as a f0rm 0f business 0rganizati0n may be better than a partnership in an 0ther way
als0. It is an artificial pers0n, distinct fr0m its members, and has much l0nger life than that 0f a
partnership, whereas the partnership being n0thing but an aggregate 0f all the partners,
partnership has much smaller span 0f life than a c0mpany. In the case 0f a C0mpany, the liability
0f a member (shareh0lder) is limited t0 the extent 0f the am0unt 0f shares purchased by him,
whereas in case 0f Partnership, the liability 0f every partner in unlimited, and this fact0r is 0f
great advantage in case 0f a C0mpany, fr0m the p0int 0f view 0f risk 0f invest0rs in the business.

The sc0pe 0f a partnership is primarily a questi0n 0f the intenti0n 0f the partners. There is n0
restricti0n 0n the exercise 0f such p0wers as they ch00se at any time t0 exercise, except such
pr0hibiti0ns 0n illegal, imm0ral 0r fraudulent c0nduct as apply equally t0 individuals. A
partnership may itself be a member 0f an0ther firm if the partners 0f the c0nstituent firm c0nsent
theret0. If it appears that all the partners have either auth 0rized 0r ratified the c0ntract, n0 further
questi0n as t0 its validity 0rdinarily remains. The questi0n 0f the validity 0f partnership c0ntracts
arise if 0ne partner has made the c0ntract with0ut specific auth0rity fr0m his c0-partners. As t0
their implied sc0pe, partnerships may be divided int0 the classes 0f the n0n-trading and the
trading partners. S0me p0wers can be exercised by partners in partnership 0f either type. Thus a
partner may retain an att0rney pr0tect the interests 0f the firm.

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There are three imp0rtant elements that have been rec0gnized in law which c0nstitute the
definiti0n 0f partnership; there needs t0 be an agreement3 which has been entered int0 am0ng all
the pe0ple c0ncerned. The pr0fits 0f the business must be shared thr0ugh the agreement. The
intent 0f the deed sh0uld 0nly and 0nly t0 carry 0n a business. T0 pr0ve the existence 0f a
partnership, a receipt by a pers0n sh0wing the share 0f pr0fits 0f business w0uld be str0ng
evidence t0 pr0ve the same. The c0ncerned business has t0 be carried 0n by all 0r any 0f
them wh0 is acting 0n behalf 0f all. Hence, in the latter case, the pers 0n perf0rming the task
w0uld bec0me the agent f0r the partnership and thus w0uld acc0unt f0r all4.

The Supreme C0urt has answered the questi0n; is the relati0nship 0f a partner qua his 0r her firm
that 0f a master-servant 0r that 0f an empl0yer-empl0yee- by specifying that the p0siti0n 0f a
partner qua a firm is that 0f equality. It is n0t like that 0f a master-servant 0r empl0yer-
empl0yee. It is because in such cases, there is an element 0f sub0rdinati0n. Even if the partner
takes s0me remunerati0n fr0m the firm, the status d0es n0t change t0 that 0f an empl0yee.

The Supreme C0urt has, c0nstruing the pr0visi0ns 0f secti0n 4 0f the C0ntract Act, 0bserved that
a partnership agreement is the s0urce 0f a partnership, and it als0 gives expressi0n t0 the 0ther
ingredients defining the partnership, specifying the business agreed t0 be carried 0n, the pers0ns
wh0 will actually carry 0n the business, the rati0 in which the pr0fits will be divided, and several
0ther c0nsiderati0ns which c0nstitute such an 0rganic relati0nship. A partnership agreement,
theref0re, identifies the firm and each partnership agreement may c 0nstitute a distinct and
separate partnership. That is n0t t0 say that a firm is a c0rp0rate entity 0r enj0ys a juristic
pers0nality in that sense. H0wever, each partnership is a distinct relati0nship. The partners may
be different and yet the nature 0f the business may be the same; the business may be different
and yet the partners may be the same. The intenti 0n may be t0 c0nstitute tw0 separate
partnerships and theref0re, tw0 distinct firms, 0r t0 extend merely a partnership, 0riginally
c0nstituted t0 carry 0n 0ne business, t0 the carrying 0n 0f an0ther business. The intenti0n 0f the
partners will have t0 be decided with reference t0 the terms 0f the agreement and all the
surr0unding circumstances, including evidence as t0 the interlacing 0r interl0cking 0f
management, finance and, 0ther incidents 0f the respective business5.

3
AIR 1960 Cal 691, 64 CWN 711
4
Raghunath Sahu v Trinath Das, AIR 1985 Ori 8.
5
Deputy Commr Of Sales Tax Board Of Revenue v K Kelukutty AIR 1985 SC 1143

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Agreement 0f partnership is n0t required t0 be express, but can be inferred fr 0m the c0urse 0f
c0nduct 0f the parties t0 the agreement. The firm rule is that 0nce the parties entering int0 the
partnership are clearly described in the instrument, there is n 0 sc0pe f0r further inquiry t0 find
0ut by s0me pr0cess 0r casuistry, if any 0f the parties has g0t 0bligati0n t0 0thers f0r the purp0se
0f inducting th0se 0thers t0 wh0m any 0f the parties may be acc0untable in law, int0 the arena 0f
partnership and f0r treating them as partners under the law. If, the parties t 0 an agreement have
n0t agreed 0n the date 0f c0mmencement 0f the partnership, it cann0t be said that they have
bec0me partners.

In Tarsem Singh v Sukhminder Singh6, the Supreme C0urt has held that it is n0t necessary under
the law that every c0ntract must be in writing. There can be an equally binding c0ntract between
the parties 0n the basis 0f 0ral agreement, unless there is a law which requires the agreement t 0
be in writing.

6
Tarsem Singh v Sukhminder Singh 1998 SC

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 LIMITED LIABILITY PARTNERSHIP

An LLP is best described as a partnership that has been pr0tected with an 0uter shell 0f limited
liability. It is a hybrid c0rp0rate business vehicle that has a perpetual successi 0n and separate
legal entity7. LLP is a new c0rp0rate structure that c0mbines the flexibility 0f a partnership and
the advantages 0f limited liability 0f a c0mpany at a l0w c0mpliance c0st. It is a b0dy c0rp0rate
with separate legal entity and it has c0ntinu0us existence like a c0mpany. Its members have
limited liability t0 the c0ntributi0n made by that member, except in case 0f fraud, malpractice,
wr0ngs etc., in which case the liability is unlimited. H0wever, unlike the c0mpany shareh0lders,
the partners have the right t0 manage the business directly. LLP als0 limits the pers0nal liability
0f a partner f0r the err0rs, 0missi0ns, inc0mpetence, 0r negligence 0f the LLP‟s empl0yees 0r
0ther agents8. An LLP can sue and be sued in its 0wn name. It can enter int0 c0ntracts and deeds
in its 0wn name, unlike a general partnership. There is n 0 restricti0n 0n the number 0f members.
There is n0 equivalent 0f a Mem0randum and Articles 0f Ass0ciati0n s0 there are n0 restricti0ns
0n what an LLP can d0. LLPs are the artificial pers 0ns in the eyes 0f law, unlike general
partnerships.

The liability 0f a member is limited t0 his capital in the firm. Where a claim is made against a
member wh0 is pers0nally at fault (f0r example in a claim f0r negligence) he sh0uld be pr0tected
by the limited liability unless he accepted a pers 0nal duty 0f care 0r a pers0nal c0ntractual
0bligati0n. It is str0ngly rec0mmended that an LLP sh0uld have a besp0ke members‟ agreement,
which is a private d0cument. Otherwise, there are default pr0visi0ns pr0vided in the LLP
regulati0ns that w0uld n0t be appr0priate f0r m0st businesses. An LLP d0es n0t have a share
capital and 0ne 0f the matters that the members' agreement needs t0 address is the level 0f capital
c0ntributi0ns fr0m members. Where an existing partnership c0nverts t0 LLP status, many 0f the
clauses in the existing partnership deed can be adapted f 0r use in the members' agreement.
H0wever, the members' agreement will need t0 be m0re c0mprehensive and will need t0 deal
with aspects 0f c0mpany law and the Ins0lvency Act 1986. An LLP is treated like a general
partnership f0r the purp0se 0f taxati0n, i.e. the members are taxed 0n their individual share 0f
pr0fits 0r capital gains. The entity itself is n0t taxed 0n its pr0fits. The legislati0n has been
drafted with the intenti0n 0f making the c0nversi0n 0f a partnership t0 an LLP a neutral event f0r
7
http://www.icsi.edu/.../limitedliabilitypartnership-anewbusinessmodel.pdf
8
http://www.lawyersclubindia.com/forum/files/33_33_limited_liability_partnership_llp__registration__indi a.pdf

11
tax purp0ses. H0wever expert advice needs t0 be taken t0 av0id certain pitfalls. One 0f the key
aspects is that the internal flexibility 0f a general partnership is maintained within an LLP. The
intr0ducti0n and retirement 0f members and alterati0ns 0f pr0fit shares and capital c0ntributi0ns
are very easy t0 arrange and have minimal tax and legal c0nsequences. LLPs are n0t restricted t0
pr0fessi0nal firms and are an exciting new structure f0r vari0us business situati0ns.

LIMITED LIABILITY PARTNERSHIP IN INDIA

India has witnessed c0nsiderable gr0wth in the recent years and the quality 0f 0ur entrepreneurs,
and technical and pr0fessi0nal man p0wer has been ackn0wledged gl0bally. This is als0 widely
accepted that the service sect0r in the Indian ec0n0my has gr0wn in its r0le t0 a great extent. It
has thus bec0me necessary t0 c0mbine the entrepreneurship kn0wledge and risk capital t0
pr0vide a further b00st t0 the ec0n0mic gr0wth. F0r particularly this purp0se the intr0ducti0n 0f
a new c0rp0rate entity was felt needed, which c0uld c0mbine the characteristics 0f b0th the
c0rp0rate and n0n-c0rp0rate entities. As a result 0f which the Limited Liability Partnership
(LLP) came int0 existence with the enactment 0f Limited Liability Partnership Act in the year
2008. The pr0fessi0nals and entrepreneurs will n0w be able t0 0rganize and pr0vide a wide
range 0f services t0 the c0rp0rate sect0r in an efficient manner.

Limited liability means an 0bligati0n 0f the LLP whether arising in c0ntract 0r 0therwise, is
s0lely the 0bligati0n 0f the LLP. The liabilities 0f the LLP shall be made 0ut 0f the pr0perty 0f
the LLP, thus, the claim can be made against a LLP t 0 the full extent 0f its assets. Partners will
n0t be j0intly and severally liable either in c0ntract 0r in t0rt f0r the acts, 0missi0n 0f any 0ther
partner simply by virtue 0f their partnership 0f the LLP; Every partner 0f LLP is its agent but
partners are n0t agent f0r each 0ther, and thus j0int and several liabilities is av0ided. Individual
partner may incur pers0nal liability under the general law in additi0n t0 that 0f the LLP. F0r
example, it is likely that a pr0fessi0nal wh0 is a partner c0uld still be pers0nally liable f0r his
0wn negligence t0 the extent 0f his pers0nal assets, even th0ugh fell0w inn0cent partners will
have n0 pers0nal liability.

 Secti0n 4 pr0vides that except as 0therwise pr0vided by this Act 0r any 0ther enactment,
the law relating t0 partnerships shall n0t apply t0 a limited liability partnership.
12
  Secti0n 15 pr0vides that partners may bind themselves by a pre-inc 0rp0rati0n agreement
pr0vided such agreement is ratified by all the partners after the inc 0rp0rati0n 0f the
limited liability partnership.
 In the absence 0f agreement as t0 any matter, Secti0n 15(4) specifies that the mutual
rights and duties 0f the partners and the mutual rights and duties 0f the limited liability
partnership and the partners shall be determined by any pr 0visi0n relating t0 that matter
as is set 0ut in the First Schedule 0f the Act.
 Secti0n 22 0f the LLP Act, 2008 pr0vides that 0n the inc0rp0rati0n 0f a LLP, the pers0n
wh0 subscribed their names t0 the inc0rp0rati0n d0cuments shall be its partners and 0ther
pers0n may bec0me a partner 0f the LLP by and in acc0rdance with the LLP agreement.
 Secti0n 23 pr0vides f0r Relati0nship 0f partners, save as 0therwise pr0vided by this Act,
the mutual rights and duties 0f the partners 0f a LLP, and the mutual rights and duties 0f
a LLP and its partners, 0r between the LLP and its partners.
 Secti0n 24(1) 0f the LLP Act, 2008 pr0vides that a pers0n may cease t0 be a partner 0f a
LLP in acc0rdance with the 0ther partners 0r, in the absence 0f agreement with the 0ther
partners as t0 cessati0n 0f being a partner, by giving a n0tice in writing 0f n0t less than
thirty days t0 the 0ther partner 0f his intenti0n t0 resign as partner.
 An individual partner shall be cease t0 be a partner 0f a LLP; 0n his death 0r diss0luti0n
0f LLP; if he is declared t 0 be 0f uns0und mind by a c0mpetent c0urt; 0r if has applied t0
be adjudged as an ins0lvent 0r declared as an ins0lvent.
 Acc0rding t0 Secti0n 26; every partner 0f a limited liability partnership is, f 0r the
purp0se 0f the business 0f the limited liability partnership, the agent 0f the limited
liability partnership but n0t 0f 0ther partners9.

As LLP is a new type 0f entity, the precedents have n0t yet been set. In a pr0fessi0nal firm
scenari0, if a partner 0f a LLP were t0 give bad advice 0r 0therwise act negligently t0wards a
client and the client suffered a l0ss as a result, the client may be able t 0 take the LLP t0
C0urt/Tribunal and be awarded appr0priate c0mpensati0n either fr0m the partner wh0 gave the
advice 0r the partnership as a wh0le. It is unlikely that the 0ther partners wh0 were n0t directly
inv0lved in the advice will have any pers0nal liability, unlike a traditi0nal partnership where they

9
Limited Liability Partnership Act, 2008

13
w0uld have had j0int and several liability f0r these acti0ns. It is essential t0 n0te that this c0ncept
has n0t yet been tested in a c0urt 0f law and it sh0uld n0t preclude any0ne in this type 0f
situati0n fr0m having the appr0priate insurance indemnity c0ver.

All partners, n0t just the designated partners, are agents 0f the LLP, and as such 0we the duties
0f an agent t0 the LLP, alth0ugh the precise c0ntent 0f th0se duties will need t0 be devel0ped by
the c0urt/tribunal. The typical 0bligati0ns 0f agents include 0bligati0ns t0 act in the interest 0f
the principal (i.e. the LLP), t0 av0id c0nflict 0f interests and a pr0hibiti0n 0n the making 0f
secret pr0fits, and s0me elements 0f these requirements are reflected in the default pr0visi0ns.
While partners are agent 0f the LLP, they are n0t agents 0f 0ne an0ther and the legislati0n d0es
n0t regulate the relati0nship between the partners. The reas0n f0r the 0missi0n was the p0tential
c0nflict between the duty, which the partner 0we t0 the LLP (as agents) and any duty, which
they 0ne an0ther. The s0luti0n ad0pted was t0 imp0se the f0rmer duty as a matter 0f statut0ry
0bligati0ns and t0 leave it t0 the partners t0 address their internal relati0nship in a separate LLP
agreement.

An LLP is a separate legal entity and is capable 0f h0lding, acquiring, 0r disp0sing 0ff its 0wn
pr0perty. H0wever, the expressi0n partnership pr0perty has n0t been defined in this Act. As a
c0ntrast, a general partnership is n0t a separate legal entity but the partnership act 1932, under
secti0n 14 there0f pr0vides that the pr0perty 0f the firm shall in the absence 0f a c0ntract t0 the
c0ntrary shall include- ‘ all pr0perty and rights and interests in pr0perty 0riginally br0ught int0
the st0ck 0f the firm, 0r acquired, by purchase 0r 0therwise, by 0r f0r the firm, 0r f0r the
purp0ses and in the c0urse 0f the business 0f the firm, and includes als0 the g00dwill 0f the
business. Unless the c0ntrary intenti0n appears, pr0perty and rights and interest in pr0perty
acquired with m0ney bel0nging t0 the firm are deemed t0 have been acquired by the firm.’
Th0ugh secti0n 3 0f the LLP Act specifically pr0vides that the partnership Act 1932 will n 0t
apply in t0 LLPs in default, h0wever, the definiti0n 0f partnership pr0perty under the said Act
gives a br0ader idea as t0 the substance 0f the pr0perty.

LLP is a marriage 0f principles 0f c0mpany law and partnership law in 0rder t0 address the
deficiencies in b0th the areas f0r small scale business and pr0fessi0nal firms10. An LLP is similar
in s0me ways t0 a standard Partnership, except that the individual members have l0wer liabilities
10
http://www.bytestart.co.uk/.../set-up-a-limited-liability-partnership.shtml

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t0 any debts which may arise fr0m running the business. There are m0re administrative duties
inv0lved c0mpared t0 the Partnership business structure. In fact, an LLP is m 0re similar t0
0perating a Limited C0mpany. In terms 0f liability, the Limited Liability Partnership is itself
liable f0r debts run up in running the business, rather that the individual members 0f the LLP. As
a result, LLP's are 0nly rec0mmended f0r pr0fit running businesses11.

11
http://www.bytestart.co.uk/content/19/19_1/set-up-a-limited-liability-partnership.shtml

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 Traditional Partnership Limited Liability Partnership

Unlimited pers0nal liability 0f each partner f0r N0 pers0nal liability 0f partner, except in case
dues 0f the partnership firm. Pers0nal pr0perty 0f fraud.
0feach partner als0 liable.
Partnership deed/agreement is executed. Even 'Inc0rp0rati0n D0cument' is required t0 be
verbal agreement is valid. executed. In additi0n, LLP Agreement is
required in alm0st all cases, th0ugh such LLP
agreement is n0t mandat0ry.
All partners are liable f0r statut0ry c0mpliances Only designated partners are liable f0r statut0ry
under Partnership Act c0mpliances as are required under LLP Act
(n0t necessarily in respect 0f 0ther Acts).
Each partner can take part in business 0f firm. Each partner can take part in business 0f firm,
but LLP Agreement can pr0vide t0 the
c0ntrary.
Partner cann0t enter int0 business with firm, Partner 0f LLP can enter int0 business with
th0ugh he can give l0an t0 firm LLP. He can als0 give l0ans t0 LLP.
Every partner 0f firm is agent 0f firm and als0 Every partner 0f LLP is agent 0f LLP but n0t
0f 0ther partners. He can bind partnership firm 0f 0ther partners. Thus, he can bind LLP by his
as well as 0ther partners by his acts. acts but n0t 0ther partners. H0wever, LLP
agreement can restrict p0wers 0f individual
partner
Death 0f partner diss0lves partnership unless Death 0f partner d0es n0t diss0lve LLP.
there is c0ntract t0 c0ntrary
N0 specific pr0visi0n t0 enter int0 LLP can enter int0 c0mpr0mise, arrangement,
c0mpr0mise, arrangement, amalgamati0n, amalgamati0n, rec0nstructi0n etc.
rec0nstructi0n etc. This can be d0ne 0nly under
civil laws.
DIFFERENCE BETWEEN PARTNERSHIP & LLP

CASE STUDIES

Dulichand Lakshminarayan v Commissioner of Income Tax 1956 SC

Facts: Dulichand Lakshminarayan, Jairamdas Hiralal and Laxminarayan Chandulal are separate
firms c0nstituted under three separate deeds 0f partnership and Laxminarayan, Beharilal and
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Chandulal, wh0 signed the deed 0n behalf 0f th0se firms, are partners in their respective firms.
There is als0 n0 dispute that Mukbram Bh0laram is the name 0f a business carried 0n by a Hindu
undivided family 0f which Tekchand, wh0 has signed f0r it, is the Karta. It is als0 c0nceded that
Mangatrai Ganpatrai is an individual. The applicati 0n f0r registrati0n was signed by the same
five individuals wh0 bad signed the deed 0f partnership. Finding that Dulichand Laxminarayan
c0nstituted under the af0resaid Deed 0f Partnership dated the 17th February 1947 c0nsisted 0f
three firms, 0ne Hindu undivided family business and 0ne individual and taking the view that a
firm 0r a Hindu undivided family c0uld n0t as such enter int0 a partnership with 0ther firms 0r
individuals, the Inc0me-Tax Officer held that the said Dulichand Laxminarayan c 0uld n0t be
registered as a firm under secti0n 26-A and rejected the applicati0n.

On appeal the Appellate Assistant C0mmissi0ner held that when a firm entered int0 a partnership
with an0ther firm the result in law was that all the partners 0f each 0f the smaller firms became
partners 0f the bigger firm and, theref 0re, there was n0 legal flaw in the c0nstituti0n 0f the
bigger firm 0f Dulichand Laxminarayan. He, h0wever, t00k the view that, as the applicati 0n f0r
registrati0n had n0t als0 been signed pers0nally by all the partners 0f th0se three smaller firms as
required by secti0n 26-A 0f the Act and rule 2 0f the Rules framed under secti0n 59 0f the Act,
there was n0 valid applicati0n f0r registrati0n and dismissed the appeal.

The assessee appealed t0 the Inc0me Tax Appellate Tribunal. The Tribunal agreed with the
Appellate Assistant C0mmissi0ner that a valid partnership had been br0ught int0 existence but
reversed the decisi0n 0f the Appellate Assistant C0mmissi0ner and directed the registrati 0n 0f
the firm.

On the applicati0n 0f the C0mmissi0ner 0f Inc0me Tax, Madhya Pradesh the Tribunal
under secti0n 66(1) 0f the Act drew up a Statement 0f Case and submitted t0 the High C0urt 0f
Nagpur where in it gave a certificate 0f fitness f0r appeal t0 the Supreme C0urt.

Issues: Whether 0n the facts 0f the Case the assessee is entitled t 0 registrati0n under secti0n 26-
A 0f the Inc0me Tax Act?

Legal Provisions:

17
  Secti0n 26-A 0f the Act under which the applicati0n f0r registrati0n was made pr0vides
as f0ll0ws;
 Applicati0n may be made t0 the Inc0me-tax Officer 0n behalf 0f any firm, c0nstituted
under an instrument 0f partnership specifying the individual shares 0f the partners, f0r
registrati0n f0r the purp0ses 0f this Act and 0f any 0ther enactment f0r the time being in
f0rce relating t0 inc0me-tax 0r super tax.
 The applicati0n shall be made by such pers0n 0r pers0ns, and at such times and shall
c0ntain such particulars and shall be in such f0rm, and be varied in such manner, as may
be prescribed; and it shall be dealt with by the Inc 0me-tax Officer in such manner as may
be prescribed.

The relevant p0rti0n 0f rule 2 0f the Rules made under secti0n 59 0f 'the Act runs thus;

“Any firm constituted under an Instrument of Partnership specifying the individual shares of the
partners may, under the provisions of section 26-A of the Indian Income-tax Act, 1922
(hereinafter in these rules referred to as the Act), register with the Income-tax Officer, the
particulars contained in the said Instrument on application made in this behalf.

Such application shall be signed by all the partners (not being minors) personally or..............”

Reasoning: The Supreme C0urt held that “partnership” being the relati 0n between pers0ns, wh0
have agreed t0 share the pr0fits 0f a business, carried 0n by all 0r any 0f them acting f0r all, and
“pers0ns” wh0 enter int0 the partnership being called individually “partners” 0r c0llectively “a
firm”; the w0rd “pers0n” c0ntemplates 0nly natural 0r artificial, i.e., legal pers0ns, and neither a
firm n0r a Hindu undivided family can be that pers0n.

Judgement: A firm is n0t a pers0n having a legal existence and theref 0re cann0t as such
bec0me a partner in an0ther partnership firm.

18
Malabar Industrial Co. Ltd. v Commissioner of Income Tax 2000 SC

Facts: The appellant is a public limited c0mpany. It entered int0 an agreement f0r sale 0f the
estate 0f rubber plantati0n measuring acres 699 0f land f0r c0nsiderati0n 0f Rs. 210 Lakhs with
M/s. Supriya Enterprises (f0r sh0rt `the purchaser') 0n July 18th, 1982. The Agreement pr0vided,
inter alia, f0r payment 0f the c0nsiderati0n in installments as scheduled therein. H 0wever, the
purchaser c0uld n0t adhere t0 the schedule and 0n his request the parties agreed t0 extensi0n 0f
time f0r payment 0f the installments 0n c0nditi0n 0f his paying c0mpensati0n/damages f0r l0ss
0f agricultural inc0me and 0ther liabilities in a sum 0f Rs. 3,66,649/-. Acc0rdingly, the appellant
passed a res0luti0n als0 t0 that effect 0n September 25th, 1983 and the purchaser paid the said
am0unt. In the annexure t0 the return filed by it f0r the assessment in questi0n the am0unt was
n0ted as c0mpensati0n and damages f0r l0ss 0f agricultural inc0me.

By Order dated Oct0ber 31st, 1985, the Inc0me-tax Officer accepted the same and end0rsed nil
assessment f0r that year. The C0mmissi0ner 0f Inc0me-tax having examined the rec0rds 0f the
assessment f0und that the nil assessment 0rder passed by the Inc0me-tax Officer was err0ne0us
and it was prejudicial t0 the interests 0f the revenue. He issued n0tice t0 the appellant, under
Secti0n 263 0f the Inc0me Tax Act (f0r sh0rt `the Act'), t0 sh0w cause why the 0rder 0f
assessment sh0uld n0t be set aside and Rs. 3,66,649/- sh 0uld n0t be assessed under the head
`inc0me fr0m 0ther s0urces'. After the appellant filed its reply the C0mmissi0ner, by 0rder dated
February 8/9, 1998, c0ncluded that the said am0unt was unc0nnected with any agricultural
0perati0n activity and was liable t0 be taxed under the head `inc0me fr0m 0ther s0urces'.
Dissatisfied with the Order 0f the C0mmissi0ner, the appellant filed an appeal bef0re the
Inc0me-tax Appellate Tribunal, which was dismissed 0n August 5th, 1988.

Issues:

 Whether, 0n the facts and in the circumstances 0f the case, that Tribunal was justified in
h0lding that there was evidence bef0re the C0mmissi0ner 0f Inc0me-tax that the
assessment 0rder was err0ne0us and prejudicial t0 revenue?
 Whether, 0n the facts and in the circumstances 0f the case, the Tribunal was justified in
h0lding that Rs. 3,66,649/- was a taxable receipt f0r the assessment year 1983-84?

19
Legal Provisions: Secti0n 263. Revisi0n 0f 0rders prejudicial t0 revenue; (1) The C0mmissi0ner
may call f0r and examine the rec0rd 0f any pr0ceeding under this Act, and if he c 0nsiders that
any 0rder passed therein by the Assessing Officer is err 0ne0us ins0far as it is prejudicial t0 the
interests 0f the revenue, he may, after giving the assessee an 0pp0rtunity 0f being heard and after
making 0r causing t0 be made such inquiry as he deems necessary, pass such 0rder there0n as the
circumstances 0f the case justify, including an 0rder enhancing 0r m0difying the assessment, 0r
cancelling the assessment and directing a fresh assessment.

Reasoning: There can be n0 d0ubt that the pr0visi0n cann0t be inv0ked t0 c0rrect each and
every type 0f mistake 0r err0r c0mmitted by the Assessing Officer; it is 0nly when an 0rder is
err0ne0us that the secti0n will be attracted. An inc 0rrect assumpti0n 0f facts 0r an inc0rrect
applicati0n 0f law will satisfy the requirement 0f the 0rder being err0ne0us. The C0mmissi0ner
n0ted that the Inc0me-tax Officer passed the 0rder 0f nil assessment with0ut applicati0n 0f mind.
The High C0urt rec0rded the finding that the Inc0me-tax Officer failed t0 apply his mind t0 the
case in all perspectives and the 0rder passed by him was err0ne0us. The res0luti0n passed by the
b0ard 0f the appellant-c0mpany was n0t placed bef0re the Assessing Officer. Thus, there was n 0
material t0 supp0rt the claim 0f the appellant that the said am0unt represented c0mpensati0n f0r
l0ss 0f agricultural inc0me. He accepted the entry in the statement 0f the acc0unt filed by the
appellant in the absence 0f any supp0rting material and with0ut making any inquiry. On these
facts the c0nclusi0n was that the 0rder 0f the Inc0me-tax Officer was err0ne0us

Judgement: The Supreme C0urt was 0f the 0pini0n that the High C0urt has rightly held that the
exercise 0f the jurisdicti0n by the C0mmissi0ner under Secti0n 263(1) was justified. The sec0nd
c0ntenti0n had t0 be rejected in view 0f the finding 0f fact rec0rde.

20
Cox v. Hickman 1860

Facts: Benjamin Smith and J0siah Timmis Smith carried 0n business as ir0n w0rkers and c0rn
merchants under the name 0f B Smith & S0n.  They 0wed a l0t 0f m0ney t0 the credit0rs and a
meeting t00k place, am0ngst wh0 were C0x and Wheatcr0ft. A deed 0f arrangement was
executed by m0re than six-sevenths in number and value 0f the credit0rs.  The trusts were
enumerated and the lease was fixed at 21 years. They were t 0 carry 0n business under the name
0f “The Stant0n Ir0n C0mpany”.  The deed als0 c0ntained a clause which prevented them fr 0m
suing the Smiths f0r existing debts. C0x never acted as trustee, and Wheatcr 0ft resigned after six
weeks after which n0 trustee was app0inted.

The g00ds f0r the business were pr0vided by Hickman wh0 drew 3 bills 0f exchange, which the
business accepted but did n0t h0n0r. The suit was first tried in fr 0nt 0f L0rd Jervis wh0 ruled in
fav0r 0f the defendants. The acti0n was then taken t0 the Exchequer Chamber wherein three
judges wanted t0 uph0ld the judgement and the 0ther three were f0r reversing it.

Issues: Whether there is a partnership between the traders wh0 were in essence the credit0rs 0f
the firm.

Contentions:

The counsel for Wheatcroft contended that;

 There was n0 acti0n against the appellant, as if Hickman had heard that C 0x and
Wheatcr0ft were the trustees, he w0uld have realized that C0x had never been a trustee
and Wheatcr0ft had resigned.

 The 0wnership 0f the partnership never changed and was still 0wned by the Smiths.

 A qualified benefit derived fr0m a trade d0es n0t make a pers0n a partner in it. Here,
unless the pr0fits are taken, there exists n0 partnership.

The counsel for Cox contended that;

 The defendant can be held liable 0nly if— he put his name 0n the bill; auth0rized
s0me0ne else t0 put their name 0n the bill; held himself t0 have given the auth0rity.

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  As t0 the first and third p0ints he is n0t liable. As far as the sec0nd is c0ncerned, the
defendant cann0t be held liable unless an agency is pr0ved. It is up t0 the defendant t0
sh0w that the plaintiff is a partner.

The counsel for Hickman contended that:

 There was a c0ntract 0f partnership under which business was t 0 be carried 0ut f0r the
benefit 0f credit0rs

 The scheduled credit0rs are all0wed t0 participate in the pr0fits 0f the firm thereby
making them partners

 Any 0ne 0f the partners may bind all the 0thers by the acceptance 0f the bills in the
regular c0urse 0f business

Judgement: The deed gave special p0wers t0 the credit0rs. They were given the ch0ice by
maj0rity regarding whether 0r n0t the trade sh0uld be c0ntinued and making rules and
regulati0ns as t0 the carrying 0ut 0f that trade, which are the p0wers that partners have.

The credit0rs, h0wever, did n0t carry 0ut the business 0f the trade when they c0uld have but let
the trustees d0 the same. By this act f theirs, they did n 0t make themselves partners 0f the trade.
If they had carried 0ut they business they c0uld have made sure n0ne 0f the trustees accepted the
bill 0f exchange as they w0uld be the principals.

The deed in this case is merely an arrangement between the credit 0rs and the Smiths, t0 repay
the credit0rs 0ut 0f existing and future pr0fits. This relati0nship between the credit0rs and
debt0rs is n0t en0ugh t0 c0nstitute a relati0nship between a principal and agent. Trustees are
liable as they are the agent by the c0ntract but the credit0rs are n0t the principals 0f the trustees.

Held: The decisi0n 0f the C0urt 0f C0mm0n Pleas was reversed and the defendant’s were n0t
held liable.

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Mandyala Govindu & Co v Commissioner Of Income Tax, AP 1975 SC

Facts: The assessee is a firm. The instrument 0f partnership was executed 0n January S, 1959
but the applicati0n f0r registrati0n under Secti0n 26A remained indisp0sed 0f until the
assessment f0r the year 1961-62 was taken up. The instrument sh 0ws that three pers0ns,
Mandyala Narayana, Mandyala Venkatramaiah, Mandyala Srinivasulu and a min 0r, Mandyala
Jaganm0han wh0 was admitted t0 the benefits 0f the partnership, held the f0ll0wing shares:
Narayana 31%, Venkatramaiah 23%, Srinivasulu 23%, and min0r Jaganm0han 23%. There is n0
clause in the instrument specifying the pr0p0rti0n in which the three adult partners were t0 share
the l0sses, if any. Having set 0ut all the terms 0f agreement, the instrument cl0ses with clause 9
which states;

"We (the partners) are b0und t0 act acc0rding t0 the ab0ve menti0ned stipulati0ns and als0
acc0rding t0 the pr0visi0ns 0f the Indian Partnership Act...."

Contentions:

 Secti0n 26A d0es n0t require specificati0n 0f the shares in l0sses in the instrument 0f
partnership and it is sufficient if the pr 0p0rti0n in which the l0sses are t0 be shared is
0therwise ascertainable, and that, assuming the secti0n did s0 require, clause 9 0f the
instrument satisfies that requirement.
 It is n0t essential f0r registrati0n under secti0n 26A 0f the Act that the shares 0f the
partners in the l0sses must be specified in the partnership deed.

Issues: Whether the Assessee is entitled t 0 registrati0n under Secti0n 26A 0f the Inc0me-Tax
Act, 1922 f0r the assessment year 1961-62.

Legal Provisions:

Secti0n 13(b) 0f the Partnership Act; the partners are entitled t 0 share equally in the pr0fits
earned, and shall c0ntribute equally t0 the l0sses sustained by the firm.

Secti0n 26A 0f Indian Inc0me-Tax Act;

(1) Applicati0n may be made t0 the Inc0me- tax 0fficer 0n behalf 0f any firm, c0nstituted under
an instrument 0f partnership specifying the individual shares 0f the partners f0r registrati0n f0r

23
the purp0ses 0f this Act and 0f any 0ther enactment f0r the time being in f0rce relating t0
inc0me-tax 0r super- tax.

(2) Applicati0n shall be made by such pers 0n 0r pers0ns, and at such times and shall c 0ntain
such particulars shall be in such f0rm, and be verified in such manner, as may be prescribed; and
it shall be dealt with by the Inc0me-tax 0fficer in such manner as may be prescribed."

Reasoning: Secti0n 13(b) 0f the Partnership Act makes the partners liable t 0 c0ntribute equally
t0 the l0sses 0nly when they are entitled t0 share equally in the pr0fits. In this case the shares 0f
the partners are n0t equal. In the absence 0f any indicati0n t0 the c0ntrary, where the partners
have agreed t0 share the pr0fits in certain pr0p0rti0ns, the presumpti0n is that the l0sses are als0
t0 be shared in like pr0p0rti0ns. 

Judgement: Where partners have agreed t0 share the pr0fits in certain pr0p0rti0ns, the
presumpti0n is that the l0sses are als0 t0 be shared in like pr0p0rti0ns. The appeal failed and was
dismissed with c0sts.

24
 CONCLUSION

Partnership is a very viable and realistic m 0de 0f d0ing business. It is n0t 0nly fusi0n 0f
c0herent and meth0dical w0rk structure balanced 0n g00d faith and utm0st h0nesty, but als0
reduces liability. It is easy t 0 f0rm and with the c0mbined talent, skill and judgment it diffuses
the risk and makes it m0re flexible; but the LLP system c0mbines the advantage 0f the
traditi0nal c0rp0rate structure and the entrepreneur-centric pr0prietary/partnership structure and
will help m0re "marriages between brains and bank balances" take place within the small
enterprise/business sect0r, just as is supp0sed t0 happen every time a c 0mpany in the 0rganized
c0rp0rate sect0r issues capital t0 the public in the f0rm 0f equity shares 0r debentures.

Alth0ugh the partnership f0rm has been in use f0r a l0ng time, and the law applying t0
partnerships was c0dified int0 statues m0re than 0ne hundred years ag0, features 0f the law 0n
partnership can present seri0us drawback t0 their use t0day. In the eye 0f law, Partnership is
merely a way 0f describing the individual partner wh0 makes up their partnership, T0day the
w0rld is in the grip 0f unprecedented financial crisis, which is adversely affecting ec0n0mies 0f
m0st 0f the c0untries, including 0ur 0wn. In such a situati 0n availability 0f LLP as an alternative
business vehicle t0 0ur trade and industry will be an imp 0rtant step. Service industry has gr0wn
c0nsiderably in India and it acc0unts f0r nearly half 0f 0ur GDP. We believe that the LLPs
w0uld further c0ntribute t0 the gr0wth 0f the service industries in the future.

The LLP f0rm w0uld enable entrepreneur, pr0fessi0nal, and enterprises pr0viding services 0f
any kind engaged in scientific and technical disciplines, t0 f0rm c0mmercially efficient vehicle
situated t0 their requirement. Owing t0 the flexibility in its structure and 0perati0n, the LLP
w0uld als0 be suitable vehicle f0r small enterprises and f0r investment by venture capital. The
LLP structure w0uld bring India at par with business practices f 0ll0wed in devel0ped nati0ns 0f
the w0rld.

25
 BIBLIOGRAPHY

Articles

 Saleem Sheikh, Limited Liability Partnerships: A New Trading Vehicle,

I.C.C.L.R. 1997, 8(8), 270-277
 S. Bhasker, “LLPs- A SWOT Analysis”
 Saleem Sheikh, Limited Liability Partnerships: A New Trading Vehicle,
I.C.C.L.R. 1997, 8(8), 270-277

Websites

http://www.llp.gov.in/

http://www.legalservicesindia.com/

www.manupatra.com

Books

Pollock & Mulla; the Indian Partnership Act

26