The Limited Liability Partnership Act, 2008 in operation

Section 11(1) is the incorporation route. Two or more persons associated for carrying on a lawful business with a view to profit subscribe their names to an incorporation document, the document is filed in the prescribed manner with the fees with the Registrar of the State in which the registered office is to be situated, and there is filed along with it a statement in the prescribed form made by an advocate, or a company secretary or a chartered accountant or a cost accountant who is engaged in the formation of the partnership, and by any one who subscribed his name, that all the requirements of the Act and the rules made under it have been complied with. Section 11(2) prescribes what the document must state, including the name of the partnership, the proposed business, the address of the registered office, the name and address of each person who is to be a partner on incorporation, and the name and address of the designated partners.

Section 12 governs the registration. When the requirements imposed by clauses (b) and (c) of section 11(1) have been complied with, the Registrar shall retain the incorporation document and, unless the requirement imposed by clause (a) of that sub-section has not been complied with, he shall within a period of fourteen days register the incorporation document and give a certificate that the limited liability partnership is incorporated by the name specified in it. The certificate is conclusive evidence that the partnership is incorporated by that name. Section 14 then sets out the effect of registration: on registration the partnership is, by its name, capable of suing and being sued, of acquiring, owning, holding and developing or disposing of property whether movable or immovable, tangible or intangible, of having a common seal if it decides to have one, and of doing and suffering such other acts and things as bodies corporate may lawfully do and suffer.

The registered office is fixed by section 13(1), and the consequences of a lapse are small but real. Every limited liability partnership shall have a registered office to which all communications and notices may be addressed and where they shall be received, and a document may be served on the partnership or on a partner or designated partner by sending it by post under a certificate of posting or by registered post or by any other prescribed manner at the registered office and at any other address specifically declared for the purpose. Section 13(3) allows the place of the registered office to be changed by filing a notice with the Registrar, and the change takes effect only upon that filing. Section 13(4) attaches a penalty of five hundred rupees for each day during which a default continues, subject to a maximum of fifty thousand rupees for the partnership and for each partner.

The name has its own three rules. Section 15(1) requires the words limited liability partnership or the acronym LLP as the last words of the name. Section 15(2) bars registration of a name which in the opinion of the Central Government is undesirable, or is identical or too nearly resembles that of any other limited liability partnership or a company or a registered trade mark of any other person under the Trade Marks Act, 1999. Section 16 lets a person apply to the Registrar to reserve a name, either the proposed name or the name to which the partnership proposes to change its name, and the Registrar may reserve it for a period of three months from the date of intimation if he is satisfied, subject to the prescribed rules, that the name is not one which may be rejected on any ground in section 15(2). Section 17 provides for rectification where a partnership has been registered by a name that is identical with or too nearly resembles that of another partnership or a company or a registered trade mark, as is likely to be mistaken for it: the Central Government may direct the partnership to change its name within a period of three months from the date of the direction, and an application by the proprietor of the registered trade mark is maintainable within a period of three years from the date of incorporation or registration or change of name. Section 19 lets the partnership change its registered name by filing a notice with the Registrar in the prescribed form and on payment of the prescribed fees.

Section 23(1) is the governing rule and it is short. Save as otherwise provided by the Act, the mutual rights and duties of the partners of a limited liability partnership, and the mutual rights and duties of the partnership and its partners, are governed by the limited liability partnership agreement between the partners, or between the partnership and its partners. Section 23(4) supplies the default: in the absence of agreement as to any matter, the mutual rights and duties of the partners and of the partnership are determined by the provisions relating to that matter as set out in the First Schedule. So the agreement does not have to cover everything, but what it leaves out is settled by the Schedule rather than by negotiation, and the parties who draft it need to read the Schedule to know what the gaps mean.

Section 23(2) requires the agreement and any changes made in it to be filed with the Registrar in the prescribed form and manner and on payment of the prescribed fees. Section 23(3) allows an agreement in writing made before the incorporation of the partnership between the persons who subscribe their names to the incorporation document to impose obligations on the partnership, provided the agreement is ratified by all the partners after incorporation. That ratification step is the one that is missed, and it is the one that decides whether the pre-incorporation agreement binds the partnership at all.

Leaving the partnership is governed by section 24. A person may cease to be a partner in accordance with an agreement with the other partners, or, in the absence of such an agreement, by giving a notice in writing of not less than thirty days to the other partners of his intention to resign. Section 24(2) provides that a person shall cease to be a partner on his death or the dissolution of the partnership, if he is declared to be of unsound mind by a competent court, or if he has applied to be adjudged as an insolvent or declared as an insolvent. Section 24(3) is the provision that catches people out: where a person has ceased to be a partner, the former partner is to be regarded, in relation to any person dealing with the partnership, as still being a partner unless that person has notice that the former partner has ceased to be a partner, or notice of the cessation has been delivered to the Registrar. Section 24(4) provides that the cessation of a partner does not by itself discharge him from any obligation to the partnership or to the other partners.

Section 25 requires the filings to follow the changes. Every partner shall inform the partnership of any change in his name or address within a period of fifteen days, and the partnership shall file a notice with the Registrar within thirty days where a person becomes or ceases to be a partner, and within thirty days of a change in the name or address of a partner. A notice relating to an incoming partner must contain a statement by that partner that he consents to becoming a partner. Section 25(4) and (5) attach a penalty of ten thousand rupees to the partnership and each designated partner, and to a partner, for a contravention. Section 26 then supplies the default agency rule: every partner of a limited liability partnership is, for the purpose of the business of the partnership, the agent of the partnership, but not of the other partners.

Section 7(1) sets the requirement. Every limited liability partnership shall have at least two designated partners who are individuals, and at least one of them shall be a resident in India. The proviso to that sub-section deals with the case of a 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 the partnership, or nominees of those bodies corporate, shall act as designated partners. Section 7(2) provides how the designated partners are fixed, whether the incorporation document specifies them, states that each partner from time to time is to be a designated partner, or a partner becomes one later.

Section 9 deals with a vacancy. A partnership may appoint a designated partner within thirty days of a vacancy arising for any reason, and if no designated partner is appointed, or if at any time there is only one designated partner, each partner shall be deemed to be a designated partner. Section 8 governs the liability of the designated partners for the obligations of the partnership. Section 10 is the penalty provision: it punishes a contravention of section 7(1) and of section 9, and the penalties it sets out for the partnership and each partner, and for the designated partners, are the ones that follow the partnership for a failure to maintain the required number.

The exposure that follows a designated partner is not limited to the penalties. Section 30 is the provision that matters most in practice. Where an act is carried out by a limited liability partnership, or by any of its partners, with intent to defraud the creditors of the partnership or any other person, or for any fraudulent purpose, the liability of the partnership and of the partners who acted with that intent is unlimited for all or any of the debts or other liabilities of the partnership. Where the act is carried out by a partner, the partnership is liable to the same extent as the partner unless it is established by the partnership that the act was without its knowledge or authority. Section 30(2) makes every person who was knowingly a party to the carrying on of the business in that manner punishable with imprisonment for a term which may extend to five years and with a fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees.

So the designation is a role as well as a filing. A designated partner is the person who signs the statement of account and solvency, who signs the notices of change filed with the Registrar, and who is the person the regulator will come to when the filing is wrong. The LLP agreement should allocate the work and say who acts when the designated partners cannot agree, because section 9's deeming provision can put every partner in the role at once.

Section 27 sets out the liability of the partnership and section 28 the liability of the partner, and the two have to be read together. Section 27(1) provides that a partnership is not bound by anything done by a partner in dealing with a person if the partner in fact has no authority to act for the partnership in doing that act and the person knows that he has no authority or does not know or believe him to be a partner. Section 27(2) makes the partnership liable where a partner is liable to any person as a result of a wrongful act or omission in the course of the business of the partnership or with its authority. Section 27(3) provides that an obligation of the partnership, whether arising in contract or otherwise, is solely the obligation of the partnership, and section 27(4) that the liabilities of the partnership are met out of the property of the partnership.

Section 28 then limits what a partner owes. A partner is not personally liable, directly or indirectly, for an obligation referred to in section 27(3) solely by reason of being a partner of the partnership, and the section does not affect the personal liability of a partner for his own wrongful act or omission. A partner is not personally liable for the wrongful act or omission of any other partner. Section 28(2) is the section to point a founder to: the protection is against the obligations of the partnership, not against what the partner does.

Three consequences follow for ordinary advice. A partner who signs a contract for the partnership is not liable on it merely because he signed it, so the contract should make the partner signing it clear that he is signing as a partner and for the partnership. A partner's own fraud is not covered by the form at all, and section 30 goes further and makes the liability unlimited where the fraud is in the carrying on of the business. And a liability that does not arise from the partnership is not touched by section 28(1), which matters for the statutory liabilities that attach to a person in a capacity that is not the partnership, such as a personal liability for an offence or for a tax default.

Section 66 also has to be read alongside. A partner may lend money to and transact other business with the partnership, and has the same rights and obligations with respect to the loan or other transactions as a person who is not a partner. That is the rule that makes a partner's loan to the partnership enforceable against the partnership on the terms of the loan, and it is the mirror of section 33, which allows a creditor who extended credit in reliance on an obligation described in the LLP agreement, without notice of any compromise between partners, to enforce the original obligation against the partner.

Section 32 sets the form of a contribution. A contribution of a partner may consist of tangible, movable or immovable or intangible property or other benefit to the partnership, including money, promissory notes, other agreements to contribute cash or property, and contracts for services performed or to be performed. Section 32(2) requires the monetary value of the contribution of each partner to be accounted for and disclosed in the accounts of the partnership in the prescribed manner. Section 33(1) provides that the obligation of a partner to contribute money or other property or other benefit, or to perform services, is as per the LLP agreement, so the agreement is the document that fixes the capital commitment and section 33(2) preserves the position of a creditor who relied on it.

Section 34 governs the records and the audit. The partnership shall maintain such proper books of account as may be prescribed relating to its affairs for each year of its existence, on a cash basis or an accrual basis and according to the double entry system of accounting, and shall maintain them at its registered office for the prescribed period. Section 34(2) requires every partnership, within a period of six months from the end of each financial year, to prepare a statement of account and solvency for that financial year as at the last day of it, in the prescribed form, signed by the designated partners. Section 34(3) requires the statement to be filed with the Registrar every year in the prescribed form and manner and on payment of the prescribed fees. Section 34(4) provides that the accounts of limited liability partnerships shall be audited in accordance with such rules as may be prescribed, with a proviso allowing the Central Government by notification in the Official Gazette to exempt any class of partnerships.

The audit trigger is therefore a rule-side figure, and the corpus this practice runs on does not carry the notification with the current thresholds, so the guide describes the shape of the obligation rather than a number. What the section does supply is the machinery: the accounts are audited in accordance with the prescribed rules, the statement of account and solvency is prepared and signed by the designated partners within six months of the close of the financial year, and the statement is filed with the Registrar. A partnership that is below the audit threshold still prepares and files the statement, so the filing calendar does not change with the audit threshold. That is the practical point to check against the current rule before the year is planned.

Section 35(1) is the short provision and it is the one most often missed. Every limited liability partnership shall file an annual return, duly authenticated, with the Registrar within sixty days of the closure of its financial year, in the prescribed form and manner and on payment of the prescribed fee. Section 35(2) attaches the penalty: if the partnership fails to file its annual return before the expiry of that period, the partnership and its designated partners are liable to a penalty of one hundred rupees for each day during which the failure continues, subject to a maximum of one lakh rupees for the partnership and fifty thousand rupees for the designated partners.

There are three filings in the annual cycle and they run at different speeds. The statement of account and solvency under section 34(2) is prepared within six months from the end of the financial year and filed under section 34(3) in the prescribed time. The annual return under section 35(1) is due within sixty days of the close of the financial year, which is the fastest of the three. The notices of changes in partners under section 25 are event-driven and are due within thirty days of the change. A new partner who joins in the middle of the year therefore has two filing obligations running at once, and the incoming partner's consent statement required by section 25(3)(c) has to be filed with the notice.

Section 68 was added by the 2022 amendment and it is the one that saves the most time. Any document required to be filed, recorded or registered under the Act may be filed, recorded or registered in such manner and subject to such conditions as may be prescribed. Section 68(2) provides that a copy of or an extract from any document electronically filed with or submitted to the Registrar, which is supplied or issued by the Registrar and certified through affixing a digital signature as per the Information Technology Act, 2000, is admissible in any proceedings as of equal validity with the original document. A partnership that keeps its filing calendar in the electronic mode and holds the certified extracts has a record that survives a challenge to the filing without a further trip to the Registrar's office.

Section 63 provides that the winding up of a limited liability partnership may be either voluntary or by the Tribunal, and that a partnership so wound up may be dissolved. Section 64 lists the circumstances in which the Tribunal may wind one up: the partnership decides that it is to be wound up by the Tribunal; for a period of more than six months the number of partners is reduced below two; the partnership has acted against the interests of the sovereignty and integrity of India, the security of the State or public order; the partnership has made a default in filing with the Registrar the statement of account and solvency or the annual return for any five consecutive financial years; or the Tribunal is of the opinion that it is just and equitable that the partnership be wound up. Section 51 adds a route for the Central Government, which may cause a petition to be presented to the Tribunal on the ground that it is just and equitable that the partnership be wound up, where it appears to it from a report that it is expedient to do so.

The compromise route runs through the Tribunal as well. Section 60(1) provides that where a compromise or arrangement is proposed between a limited liability partnership and its creditors, or between the partnership and its partners, the Tribunal may, on the application of the partnership, of any creditor or partner, or of the liquidator where the partnership is being wound up, order a meeting of the creditors or of the partners to be called, held and conducted in the prescribed manner or as the Tribunal directs. Section 60(2) provides that if a majority representing three-fourths in value of the creditors or of the partners agree, the compromise or arrangement is, if sanctioned by the Tribunal, binding on all the creditors or all the partners and on the partnership, or on the liquidator and contributories where the partnership is being wound up. Section 61 gives the Tribunal power to supervise the implementation of a sanctioned compromise and to modify it, and to act on its own motion where it cannot be worked satisfactorily.

Section 72 fixes the appellate route and it has a feature that catches people out. Any person aggrieved by an order of the Tribunal may prefer an appeal to the Appellate Tribunal, but no appeal lies from an order made by the Tribunal with the consent of the parties. Every appeal must be filed within a period of sixty days from the date on which a copy of the order is made available to the person aggrieved, and the Appellate Tribunal may entertain an appeal after that period but within a further period of not exceeding sixty days, if it is satisfied that the appellant was prevented by sufficient cause from filing in time. A consent order is therefore final in a way that an order made on contested grounds is not.

A firm, a private company or an unlisted public company can become an LLP, and the route is in the Schedules rather than in the sections. Section 55 provides that a firm may convert into a limited liability partnership in accordance with the provisions of the chapter and the Second Schedule. Section 56 provides that a private company may convert in accordance with the chapter and the Third Schedule, and section 57 does the same for an unlisted public company under the Fourth Schedule. Section 58 governs the registration of the conversion: the Registrar, on satisfying that the firm, private company or unlisted public company has complied with the provisions of the Second, Third or Fourth Schedule as the case may be, shall register the documents submitted under that Schedule and issue a certificate of registration stating that the limited liability partnership is, on and from the date specified in the certificate, registered under the Act, and the partnership must within fifteen days of the date of registration inform the Registrar of Firms or the Registrar of Companies with which it was registered.

The comparison with the partnership is the reason the form is chosen. Section 4 of the Indian Partnership Act, 1932 defines partnership as 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, and the persons so agreeing are partners and collectively a firm. Section 25 makes every partner liable, jointly with all the other partners and also severally, for all acts of the firm done while he is a partner, and section 26 makes the firm liable for a wrongful act or omission of a partner acting in the ordinary course of the business or with the authority of his partners. Section 32 deals with retirement, and section 42 with dissolution on the happening of certain contingencies. Section 4 of the Limited Liability Partnership Act is the provision that disapplies the Indian Partnership Act, so those rules do not run alongside the LLP.

What a partnership gets in exchange is the entity and the limited liability, and what it gives up is the simplicity. Section 67 makes the bridge explicit: the Central Government may by notification in the Official Gazette direct that any of the provisions of the Companies Act, 2013 specified in the notification shall apply to any limited liability partnership, or shall apply with such exception, modification and adaptation as may be specified, and the draft of each notification must be laid before each House of Parliament for a total period of thirty days. So a partnership that takes the benefit of a notification takes the corresponding compliance duty with it, and the draft must have cleared both Houses before it can be issued.

The choice between the forms also turns on what the business needs rather than on the label. An LLP cannot issue shares and cannot pay a dividend, and it cannot raise equity in the way a company can, so the capital for a growth business is raised differently. The counterweight is that the form carries the machinery of the company in the areas where the Act has chosen to apply it, and the decision has to be made against the funding plan rather than against the elegance of the structure.