The Partnership Act of 1932 governs partnerships that are formed as a result of a contract. When the Partnership Act is silent, the partnership is governed by the Indian Contract Act’s general provisions.
It is specifically stated that any section of the India Contract Act that is not abolished will apply to Partnerships until and until such provision is in conflict with any provision of the Partnership Act.
What is Partnership?
Section 4 of the Indian Partnership Act of 1932 defines the term “partnership.” The partnership is defined as a “relationship between people who have consented to share the profits of a company carried on by all or any of them representing all,”
Before 1932, all concerns concerning Indian partnerships were handled with by a chapter of the Indian Contract Act of 1872. Because the Contract Act was unable to meet the needs of the business community, it became necessary to enact a new comprehensive amendment in the form of the Indian Partnership Act, which would meet the needs of the business generation at the time.
Nature of Partnership:
It is a business organization in which two or more people have agreed to work together to run a business in order to make money. It’s a switch from a sole proprietorship. It is preferable to a sole proprietorship because a single proprietorship allows an individual with less cash and experience to run a firm.
A partnership is formed when at least two people join hands to start a business and share its rewards and risks. Partners are people who have formed a partnership with one other on their own. The term “firm” refers to a group of people who work together.
Essentials of a Partnership:
- Two or more persons: At the very least, two persons should get together to frame the collaboration for a common goal. A partnership firm’s base number of partners might be as low as two. The Indian Partnership Act of 1932 places no restrictions on the number of partners in a firm. Regardless, the Indian Companies Act, 2013 imposes a restriction on some of a firm’s partners who are pursuing a business.
Partners in the banking business must not be exactly or equivalent to ten.
Partners in any other business shall not be exactly or equivalent to 20.
- Partnership Deed: The partnership appears to be an agreement between the partners to carry on business. It is possible to have an oral or written partnership agreement. The Partnership Act does not stipulate that the agreement must be written down. However, when the agreement is written down, it is referred to as a “Partnership Deed.”
- For the most part, the partnership deed includes the following nuances. The firm’s name and address, as well as its major business and if all other factors are equal, names and addresses and Each accomplice makes a financial commitment of a certain amount of money etc.
- Sharing of Profit and Loss: Profits and losses will be shared among the partners under the terms of the agreement. Profit and loss distribution might be based on the capital contribution percentage or distributed evenly.
- When the partnership suffers losses, it helps to divide the load among the partners. When there were no acts governing partnership provisions in 1860, the most essential criteria in assessing the validity of a partnership were the sharing of profits.
Rights of the Partnership:
- Right to participate in business (Section 12 a): Each partner has a right to take part in the management of the company. When some partners solely participate in the firm’s business affairs, their right to participate in business is limited. This power can only be limited if the partnership agreement expressly specifies so.
- Right to access books and accounts (Section 12 d): The active and dormant partners both have this privilege. Each partner has the opportunity to view and inspect the firm’s accounting records.
- Right to be indemnified: The partners have a legal right to be compensated for decisions made throughout the course of business. However, such a decision should only be made in an emergency and should be of the type that a reasonable person would make.
- Right to express his opinion (Section 12 c): Each partner has the right to express his or her opinion on the company’s affairs.
1.2 Limited Liability Partnership
In today’s world, the concept of a limited liability partnership has become one of the most well-known methods of doing business. India is also one of the countries where limited liability partnerships are used to conduct business.
In 2008, India passed the Limited Liability Partnership Act. A Limited Liability Partnership, or LLP, combines the characteristics of both the Partnership and the Company into a single entity. In other words, an LLP is a corporate structure that offers the benefits of limited liability for a corporation while still providing flexibility to its members, similar to a partnership firm.
What is Limited Liability Partnership (LLP):
In contrast to the partnership governed under the Indian Partnership Act, 1932, a Limited Responsibility Partnership (LLP) is a type of partnership in which the partners’ liability is limited. In an LLP, a partner cannot be held accountable for his or her co-wrongdoing partner’s or negligence.
This is a key distinction between it and an unlimited partnership. As a result, the liability of partners in an LLP is limited, much like that of shareholders in a corporation. As a result, an LLP is a hybrid of a partnership and a corporation, and it is ideal for small and medium-sized businesses because of this aspect.
Origin of LLP:
The concept of a Limited Liability Partnership (LLP) was born in the United States in the early 1990s as a result of the abrupt drop in real estate and early prices in Texas in the 1980s, as well as the impact it had on banks and other financial institutions.
This debacle resulted in a high number of banks, savings, and loan collapses. On August 26, 1991, Texas passed the first LLP statute, which was quickly followed by other countries throughout the world. Canada, Germany, Japan, China, Greece, Singapore, and other nations have recognized the concept of LLPs, with India being one of them.
LLP in India:
The draught bill for introducing LLP in India was based on the recommendations of the J.J. Irani Committee and the Naresh Chandra Committee-II. The Bill was approved by the Cabinet on December 7, 2006, and it was then tabled in the Rajya Sabha on December 15, 2006.
The Department Related Parliamentary Standing Committee on Finance proposed several changes to the draught Bill, 2006. The Limited Liability Partnership (LLP) Bill, 2008 was finally approved by the Cabinet on May 1, 2008. Both Houses of Parliament passed the bill with no alterations. The bill received the President’s assent on January 7, 2009.
The Limited Liability Partnership Act, 2008, was enacted on March 31, 2009, after being published in India’s official gazette on January 9, 2009.
Pre-Requisites of LLP Agreement:
- Names and Motives: The full name of the company as well as the partners must be included in the LLP agreement. In some Indian states, the number of partners that can be included in an LLC filing is unrestricted. To avoid deviation with the aforementioned goal, the nature and extent of the establishment should be clearly stated.
- Duration: When one of the partners dies, the partnership is usually dissolved. The date the partnership was authorized and accepted, as well as the expected date, must be provided. When there are several partners in an LLP, a clause in the agreement might be made to address how the LLP will act in such instances.
- Capital Contribution: Capital contributions include both financial and non-monetary items such as commodities, services, furnishings, time, office space, or another sort of property. It should be clearly stated in the agreement what each partner’s contribution percentage is.
- Distribution of Profits: The framework of LLP has a significant impact on LLP profits. In the absence of a designation, revenue is dispersed equally or in proportion to each partner’s share or contribution ratio. While drafting the agreement, partners can be as flexible as they like. The earnings that will be paid out, as well as the percentage of profits that will be put back into the business, must be indicated.
1.3 Difference between Partnership and Limited Liability Partnership
|Point of Difference||Limited Liability Partnership Agreement||Partnership Agreement|
|Registration:||Registration is done under LLP Act, 2008.||It is registered under the Partnership Act, 1932.|
|Registered to:||The Ministry of Corporate Affairs is in charge of LLP registration.||The registrar of firms is where you register your partnership.|
|Charter Document:||LLP Agreement||Partnership Deed|
|Name of Firm:||Name containing LLP as suffix||Any name|
|Liability:||The liability of partners is one of the primary differences between an LLP and a partnership. Because the partner and the firm are seen as independent legal entities. As a result, the partners’ liability is limited to the amount invested in the business.||The firm and the partner are not treated as different legal entities. As a result, partners are personally liable for the partnership’s unlimited liabilities.|
|Number of Partners:||In an LLP, there is no minimum number of partners and no maximum number.A minor is not permitted to be a partner.||A partnership firm can have a minimum of two participants and a maximum of twenty.Minor has the potential to be a partner.|
|Agreement:||The operating, managerial, and decision-making procedures, as well as the LLP’s other operations, are all governed by the LLP agreement.||The partnership deed governs the partnership’s operations, management, and decision-making procedures, as well as other activities.|
|Formalities:||Various e-forms are filled out and submitted to the LLP registrar, together with the required payments.||If you want to register your business, you’ll need to submit a partnership deed and a form to the registrar of firms, along with the applicable filing fee.|
|Audit of Accounts:||Only if turnover and capital contribution exceed 40 lakhs and 25 lakhs, respectively, is it required.||Not mandatory.|
|Transferability/Conversion||After receiving the required authorization from all of the LLP’s partners, shares can be simply transferred to another individual.The transferee does not automatically become a partner.Although an LLP cannot be turned back to a partnership, it can simply be transformed to a Limited Liability Partnership or a Private Limited Company.||After receiving the appropriate consent from all of the Partners in a Partnership, shares can be transferred to another individual.The transferability of a partnership is a time-consuming process.Converting a partnership to an LLP (Limited Liability Partnership) or a Private Limited Company is a time-consuming process.|
|Perpetual Succession:||In an LLP, partners may come and go, making perpetual succession feasible.||In a partnership, perpetual succession is not possible.|
The preceding comparison demonstrates why an LLP is better to a partnership firm since it compensates for the benefits of partnerships with greater priority.
The LLP’s transactional ease is unrivalled, and its prominent position in the corporate world puts it in a better position than a partnership. It is not necessary for everyone to choose an LLP, but it is recommended for those who are searching for long-term growth and are prepared to enter the corporate world without the significant barriers that are imposed.
It’s also worth noting that LLPs and partnerships each have their own set of benefits and drawbacks. LLP, on the other hand, provides a name reservation, which boosts the firm’s reputation. Partners’ responsibilities are restricted to their capital contributions to the firm.