The Flexibility and Benefits of a

Limited Liability Partnership over a

Company and Partnership.
 Introduction & History
The LLP is an alternative corporate business form that gives the benefits of limited liability of a company and
the flexibility of a partnership. This new type of business i.e. Limited Liability Partnership (LLP) came into
picture with the enactment of Limited Liability Partnership Act, 2008 (the Act), which was notified on 31st
March,2009.

Partnership is one of the oldest business models but there is a certain disadvantage of it i.e. Unlimited Liability
of Partners. This includes the risk of losing private assets of the partners in case of the liability of the
Partnership Firm.

LLP is a hybrid form of business activity combining the benefits of both the Private company and the
Partnership firm. LLP as an alternate body corporate provides the benefit of Limited Liability of the private
companies while retaining the flexibility and structure of the partnership based on the mutual agreement. It is
a body corporate having a separate legal entity and have perpetual succession.

These features make LLP a lucrative business structure for Medium, Small and Micro Enterprises (MSMEs). The
MSME sector largely works through the regular partnership or proprietorship structures in which the partners
and sole proprietor respectively are personally liable for all liabilities of the business vehicle. "This (LLP form of
business) is a fantastic new opportunity and will inevitably give a whole new profile to the MSME sector. It will
be possible for the sector to reach out to venture capital. This can be the steppingstone for partners becoming
much larger industrialists and logging bigger growth," according to a statement in 2010 by the then Minister
for Corporate Affairs Salman Khurshid on the advantages SMEs can derive from the LLP model.

The importance of LLP has been growing day by day with the increasing registrations and conversion from
other business models such as Private company and partnership. A total of 2,979 LLPs were registered in June
2019 as compared to the total of 677 LLPs in Financial year 2009-10.

The government wants the small and medium enterprises to adopt the LLP structure, which has several
advantages such as limited liability for partners apart from lower compliance costs. The idea of getting SME
sector to adopt the LLP model is to make them more competitive by extending them the benefits of this
model. The Ministry of Corporate Affairs (MCA) has proposed to decriminalise certain compoundable offences
under the Limited Liability Partnership (LLP) Act, involving minor, procedural or technical violations. The
Ministry felt the need to introduce the LLP structure in India in order for entrepreneurship, knowledge and risk
capital to combine and provide a further impetus to India’s economic growth.

This paper deals with the importance of LLP in contrast to the other traditional forms such as partnership and
Private company. It aims to project that how LLP is an alternate which is beneficial for the growth of MSME
sector in India.
 Benefits of LLP over its Counterparts
Over Partnership:
1. Unlimited Liability of the Partners: There is no distinction, in the eyes of the law, between a
partnership firm and its members. In an increasingly litigious environment, it is risky and unfeasible to
go for the conventional Partnership Model and putting up the Personal assets of members in a risky
position. LLP provides a form of business without worrying over the personal assets and lawsuits.

2. Limited membership: Under Section 11 of the Companies Act, a partnership firm cannot have more
than 20 partners (10 in Banking Sector) and after reaching the limit, they have to convert into a Public
Company. This limit prohibits the growth of the Partnerships of lawyers, CA, etc as they are not
allowed to form a public company. LLPs are allowed to have unlimited number of partners to carry on
the business or profession.

Over Companies:
1. Structure of the Company: The Governance of a company is regulated by the Companies Act whereas
for the LLP, it would be on the basis of mutual agreement between the partners. This provides a range
of flexibility in LLP to adopt any form of internal organization.

2. Management-Ownership Separation: In a Company, there exists a separation between the

management and the ownership of the company. However, in LLP, there is no such separation and the
partners are owners as well as the managers.

Advantages of LLP
1. Separate Legal Entity: The LLP would be a separate legal entity independent from its members. This
would enable the LLP to acquire property in its own name, have a seal and can sue or be sued in its
own name.

2. Perpetual Existence: The general partnership is dissolved by the admission, retirement or death of any
of the partners. However, the LLP provides an existence to the Firm independent of the admission,
retirement or death of its members. It goes on till it is ended by the lawful process.

3. Flexibility: It is not required by the LLP to maintain statutory records, require minimum capital
contribution and it is also free from the complicated procedures of the Company. Its setting up or
incorporation and winding up/dissolution process is simple and easy to follow. The members have the
right to directly manage the business of LLP unlike a company.
 Reforms needed & Case Law related
1. Unlimited Liability only in case of Fraud: Section 30 of LLP Act,2008 states about the unlimited liability of
the LLP or its partners only when they do an act with intent to defraud creditors or any other fraudulent
practices. This section is important because it does prevent partners of the LLP to be negligible or fraudulent
with creditors/outsiders. But there is no proper law or Section to fine or punish the Partner in case of breaking
the fiduciary trust with the LLP and other partners. The relationship between the LLP and its partners is of
Principal and Agent. There is no proper law that prevents the partner from breaking this fiduciary relationship.

 Hosking v Marathon Asset Management LLP [2016]-EWHC 2418(Ch)-UK:

Jeremy Hosking was one of the partners in Marathon, a large asset management company.
Marathon's LLP Deed provided that a retiring partner would be entitled to receive half the profits to
which he would have been entitled as a working partner. Following an arbitration between Marathon
and Mr. Hosking during retirement, the arbitrator found that Mr. Hosking committed breaches of
fiduciary duty in the period before he left Marathon.
He went on to apply the partnership rule, traditionally applied to agents and other fiduciaries, to forfeit
the half share of profits which he found Mr. Hosking had been paid, as a working partner, in exchange
for the performance of his duties.
Mr. Hosking appealed against this part of the arbitration award, on the basis that LLP profits did not fall
within the scope of the partnership rule.
The LLP in this case claimed that the member had discussed starting a new business and drafting a
business plan with some of his colleagues before he left. The LLP said this seriously breached his
fiduciary duties, and he should therefore repay £10m he had received as his share of the LLP’s profits.
The High Court ruled in the LLP’s favour, and ordered the member to repay £10m received as his share
of the LLP’s profits.

2. Compulsory Strike Off of LLP: Section 75 of the LLP Act 2008 gives Registrar the power to strike a defunct
LLP off the register where the LLP has not carried out business for the period of two years or more. There are
such acts for the defunct companies as well but what notable is that there exists a Company Revival Procedure
for the revival of struck off companies. But there exists no such corresponding section for the revival of LLPs in
the LLP Act 2008, because of which the LLP cannot move the court for its revival.
 Conclusion
The Flexibility and benefits of LLP over partnerships and Limited Companies makes it a boon to the MSMEs
and entrepreneurs as it gives them the organizational efficiency of a company while retaining the flexibility of
a partnership. This system combines the advantage of partnership structure and the corporate structure.

The LLP structure also helps in easily tapping funds from investors and banks because it provides greater level
of comfort to Banks to lend small traders.

However, no law is perfect. LLP Act too need some amendments. LLP Act need some laws to ensure that the
LLP members do not breach their fiduciary duties to the LLP, otherwise they would forfeit the rights to
remuneration received during the period covered by the breach. There is also a need to insert a Revival
Procedure for defunct LLPs, so that they can be on a parallel line with a Company.

For this purpose, the Central and State Govt. needs to pass appropriate legislation regarding these issues and
making LLP more desirable and regulated.
 Bibliography
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