Law of Contract II
Subjects / Law of Contract II / Limited Liability Partnership
Unit 5 · Partnership

Limited Liability Partnership

An LLP under the Limited Liability Partnership Act 2008 is a body corporate with separate legal personality and perpetual succession, in which partners have limited liability, combining the flexibility of partnership with the protection of a company.

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.

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.

**Salomon v Salomon and Co Ltd (1897)** House of Lords

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

  1. 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.

  2. 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.

  3. 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.

  4. 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.

  5. 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.

  6. 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.

  7. 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.

  8. 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

  1. Why was separate legal personality necessary in order to limit partners' liability?
  2. What is the significance of S.26 providing that a partner is an agent of the LLP but not of the other partners?
  3. 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.

Three traps in this problem

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