2. Table of Contents
Partnership
1. Indian Partnership Act 1932
2. Nature Of Partnership
3. Types of Partnerships
4. Types of Partners
5. Reconstitution Of A Firm
6. Dissolution Of a Firm
7. Registration Of A Firm
8. Case Study Analysis
Limited Liability Partnership
1. Overview-Limited Liability Partnership Act, 2008
2. Salient Features
3. Taxation Of LLP
4. Comparison between company partnership and LLP
5. Case Study Analysis
3. Indian Partnership Act 1932
The term 'partnership' is defined under section 4 of Indian partnership act 1932 as
under "Partnership is an agreement between two or more persons who have agreed to
share profits of the business carried on by all or any one of them acting upon all.“
Came into existence on 1st Oct, 1932.
Partnership refers to an agreement between persons to share their profits or losses
arising on account of actions carried by all or one of them acting on behalf of all.
The persons who have entered such an agreement are called partners and give their
collective business a name, which is necessarily their firm-name.
This relation between partners arises out of a contract or an agreement, which means
a husband and wife carrying on a business or members of a Hindu undivided family
are not into partnership.
The share of profits received by any individual from the firm, money received by a
lender of money, salary received by a worker or a servant, annuity received by a
widow or a child of a deceased partner, does not make them a partner of the firm
4. Nature Of Partnership
Association of two or more than two persons
Result of an agreement between two or more persons
Agreement must be to share profit of the business
Business must be carried on by all or any of them acting for all or by any of them
acting for all
Share Of Profits of the business
Restriction on transfer of interest
Unanimity of consent
Agreement must be to carry on some business
5. Types Of Partnership
Partnership For A Fixed Term:
1. free to fix the duration; rights and duties of the partners continue to be the same
unless they have been changed by an agreement
2. May continue to be at business after the expiry of stated period, called as
‘partnership-at-will’
Particular Partnership:
1. Where two or more persons agree to do business in particular adventures or
undertakings
Partnership At Will
1. No provision in the contract between the partners for duration of the partnership
2. Has no fixed or definite date pf termination, so death or retirement of any partner
does not affect the existence of partnership
6. Types of Partners
Active Partner
Partner who takes an active part in the management of the business is called active
partner. He may also be called 'actual' or 'ostensible' partner.
Sleeping or Dormant Partner
A sleeping or dormant partner is one who does not take any active part in the management
of the business. He contributes capital and shares the profits which is usually less than that of
the active partners.
Nominal Partner
A partner who simply lends his name to the firm is called nominal partner. He neither
contributes any capital nor shares in the profits or take part the management of the business.
But he is liable to third parties like other partners.
Partner in Profits
A partner who shares in the profits only without being liable of the losses is known as
partner in profits. He does not take part in the management of the business but he is
liable to third parties for all the debts of the firm.
Partner in Holding Out
Strangers who hold themselves out or represent themselves to be partners in a firm, whereby
they induce others to give credit to the partnership are called ‘partners by holding out’ or
‘partners by estoppel’
7. Reconstitution of a Firm
When there is any change in the composition of the partnership it is called
reconstruction of the partnership firm. The reconstitution takes place when
A new partner is admitted
A partner expires
A partner is expelled
A partner is declared insolvent
A partner dies
A partner transfers his interest to another person
8. Dissolution of a Firm
Dissolution means a firm ceases to exist ; the relationship existing between the
partners discontinues
a.) Dissolution by mutual Agreement : The very first and easy way to dissolve the
firm is dissolution by agreement. A firm may be dissolved with the consent of all
the partners. Or partners may enter into an agreement to dissolve the firm.
b) Compulsory dissolution : A firm may be dissolved :(1) by the adjudication of
all the partners or not of all the partners but one as insolvent,
(2) by the happening of any event which makes it unlawful for the business of
the firm to be carried on or for the partners to carry it on in partnership:
Provided that, when more than one separate adventure or undertaking is carried
on by the firm, the illegality of one or more shall not of itself cause the
dissolution of the firm in respect of its lawful adventures and undertakings.
- See more at: http://taxguru.in/corporate-law/dissolution-partnership-
firm.html#sthash.WembvUcM.dpuf
9. c.) Dissolution on the happening of certain contingencies. A firm is dissolved—
(1) if constituted for a fixed term, by the expiry of that term;
(2) if constituted to carry out one or more adventures or undertakings, by the
completion thereof;
(3) by the death of a partner; and
(4) by the adjudication of a partner as an insolvent
- See more at: http://taxguru.in/corporate-law/dissolution-partnership-
firm.html#sthash.WembvUcM.dpuf
10. Registration of a Firm
The law relating to a partnership firm is contained in the Indian Partnership Act,
1932.
Under Section 58 of the Act, a firm may be registered at any time (not merely at
the time of its formation but subsequently also) by filing an application with the
Registrar of Firms (the District Registrar, Registration and Stamps Department in
the State of Andhra Pradesh) of the area in which any place of business of the
firm is situated or proposed to be situated.
Application shall contain:- Name of the firm Place or principal place of
business Names of any other places where the firm carries on business Date
on which each partner joined the firm Name in full and permanent address of
partners. Duration of the firm
Under Section 59 of the Act, when the Registrar of Firms is satisfied that the
provisions of section 58 have been duly complied with, he shall record an entry
of the statement in the Register of Firms and issue a Certificate of Registration
11. Registration of a Firm
Penalty for furnishing false particulars (Section 70) : Any person who signs any
statement, amending statement, notice or intimation under this Chapter
containing any particular which he knows to be false or does not believe to be
true or containing particulars which he knows to be incomplete or does not
believe to be complete, shall be punishable with imprisonment which may
extend to three months, or with a fine or with both
Partnership Act, 1932 does not provide for compulsory registration of firms. It is
optional for partners to set the firm registered and there are no penalties for
nonregistration
12. Limited Liability Partnership
A limited liability partnership (LLP) is a partnership in which some or all partners (depending on the
jurisdiction) have limited liabilities. In an LLP, one partner is not responsible or liable for another
partner's misconduct or negligence.
Limited Liability Partnership act, 2008:
• The Act came into force w.e.f. 31st March 2009
• It combines the advantages of both the Company and Partnership into a single form of organization
• The liability of the partners would be limited to their agreed contribution in the LLP.
• No partner would be liable on account of the independent or un-authorized actions of other partners.
• Limited Liability Partnership is managed as per the LLP Agreement.
• In the absence of such agreement the LLP would be governed by the framework provided in Schedule
1 of Limited Liability Partnership Act, 2008
13. Advantages of LLP:
Body Corporate: LLP is a body corporate , which means it has its own existence as
compared to partnership. LLP is a distinct entity in the eyes of law. LLP will know by
its own name and not the name of its partners.
Liability: A LLP exists as a separate legal entity. Liability for repayment of debts and
lawsuits incurred by the LLP lies on it and not the owner.
Perpetual Succession: The LLP will be a same entity with the same privileges,
immunities, estates and possessions. The LLP shall continue to exist till its wound up
in accordance with the provisions of the relevant law.
Flexible to Manage: LLP Act 2008 gives LLP the at most freedom to manage its own
affairs. Partner can decide the way they want to run and manage the LLP, in form of
LLP Agreement.
Easy Transferable Ownership: It is easy to become a Partner or leave the LLP or to
transfer the ownership in accordance with the terms of the LLP Agreement.
Separate Property: A LLP as legal entity is capable of owning its funds and other
properties. The property of LLP is not the property of its partners.
14. Taxation: LLP are taxed at a lower rate as compared to Company. Moreover, LLP are
also not subject to Dividend Distribution Tax as compared to company.
Capacity to sue: As a juristic legal person, a LLP can sue in its name and be sued by
others. The partners are not liable to be sued for dues against the LLP.
No Mandatory Audit Requirement: Under LLP, only in case of business, where the
annual turnover/contribution exceeds Rs 40 Lacs/Rs 25 Lacs are required to get
their account audited annually by a chartered accountant. This provides great relief
to small businessmen.
Renowned form of business: Though it is recently introduced in India, but it is very
known concept in other countries of the world.
Disadvantages of LLP:
It cannot raise money from Public.
Under some cases, liability may extend to personal assets of partners.
16. Key Requirements to form a LLP:
Partner
Atleast 2 persons (natural or artificial) are required to form a LLP. In case any Body
Corporate is a partner, than he will be required to nominate any person (natural) as its
nominee for the purpose of the LLP.
Contribution
In case of LLP, there is no concept of any share capital but every partner is required to
contribute towards the LLP in some manner. The said contribution can be tangible,
movable or Immovable or intangible property or other benefit to the limited liability
partnership.
Designated Partners
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. In the case where one or
more partners are individuals and bodies corporate, at least two individuals who are
partners of such limited liability partnership or nominees of such bodies corporate shall
act as designated partners. All the Designated Partner of the proposed LLP needs to have a
Digital Signature Certificate (DSC).
17. Designated Partner shall be:
o Responsible for the doing of all acts, matters and things as are required to be done by the limited liability part-
nership in respect of compliance of the provisions of this Act including filing of any document, return, etc; and
o Liable to all penalties imposed on the limited liability partnership for any contravention of those provisions.
Director Identification Number (DIN)
Every Designated Partner is required to obtain a DIN from the Central Government. The Direction
Identification Number would be used as Unique Identification.
LLP Name
Before selecting the name of the LLP, it is necessary to evaluate the proposed name under the
following given criteria:
o LLP with similar name to an existing company should obtain a Non-Objection certificate.
o The Ministry of Corporate Affairs of India has prescribed certain words, which should not form part of the name
of LLP intended to be incorporated in India, such words are prohibited under The Emblems and Names
(Prevention of improper use) Act, 1950.
o Various government regulatory authorities operating in India like SEBI, RBI, has prescribed certain words, which if
forms part of the name of the proposed LLP to be incorporated, requires there first hand approval.
18. LLP Agreement
For the purpose of forming a LLP, there should be agreement between the partners
interested in forming the LLP, which forms the basis of the formation of LLP and lays down
its founding structure.
The basic contents of Agreement are:
o Name of LLP
o Name of Partners & Designated Partners
o Form of contribution
o Profit Sharing ratio
o Rights & Duties of Partners
Registered Office
The Registered office of the LLP is the place where all correspondence related with the
LLP would take place. A registered office is required for maintaining the statutory records
and books of Account of LLP. It is necessary to submit proof of ownership or right to use
the office as its registered office with the Registrar of LLP.
20. Summary
Bhogilal who had started the partnership firm admitted
his minor son to the benefits of the partnership.
The minor attained majority on August 22,1950 and he
was elected to remain the partner of the firm and a fresh
partnership deed was executed on August 28.
The minor died Three days after the execution of the
partner ship deed. The accounts of the firm were closed
at Diwali every year.
The income-tax officer calculated the proportionate
profits coming to the share of the son up to August 22,
when he attained majority and included the sum in the
assessment of the assesse ( The father) for that Samvat
year.
Tribunal: The sum represented profits of the partnership
to which the son was entitled and therefore can be
included in the Income Tax assessment.
21. Issues Raised
1. Whether the father was liable to pay tax on
the income of his minor son?
2. Whether the son could ever have claimed from
the partnership of the sum?
Contention
The sum constituted the income of the son as a minor
and therefore the assesse, who was the father, should
pay the tax on the amount under Section 16(3) of IT
act, 1922 which says- income in the eye of the law is
looked upon as income of the father. Although a
certain amount is not the income of the minor still you
must look upon it as his income and make the father
pay tax on that income - notwithstanding the fact that
had the partnership resulted in a loss, His son as a
22. Judgement- With respect to issue 1.
Income may accrue to the assesse without the
actual receipt of the same.
Unless and until there is created in favour of
the assesse the debt due to somebody it cannot
be said that he has acquired a right to receive
the income or that income has accrued to him.
In the case, No debt was created in favour of
the son, nor the sum was a debt due at any
time by the partnership to the son. Therefore
the son had not acquired any right to receive
income as on 22 and hence the sum cannot be
included in the assessee’s total income.
23. Judgement with respect to issue 2
As soon as the partnership deed was executed (28 Aug)
and the son was elected to continue as a partner, the
only right that he had was to receive his share in the
profits, when the accounts were made up at Diwali and
not before.
He had no right to receive the profits that may have
arisen when he attained majority (22 Aug). A partnership
may come to an end by operation of law; a partner may
die or a partner may retire, in which case the law
provides that accounts would have to be made up on that
particular day, irrespective of the provision in the
partnership deed for making up the accounts in the
ordinary course.
In case of minor, the accounts would have to be made up
on that particular day on which the minor elects not to
be a partner.
24. The son (or his estate) acquired the right to receive
the sum only on 31, when the debts and accounts
were to be ascertained, because of his death.
Law Point
If a minor son attaining majority elects to continue as
a partner, the partnership does not come to an end,
the partner-ship continues, and the minor having
become a partner he is entitled to his profits as
computed at the end of the year regulated by the
partnership deed. On the other hand, if the minor
elects not to be a partner, he severs all his
connection with the partnership and he becomes
entitled to whatever amount is due to him at the
date when he makes the election not to become a
partner.
25. Comparison LLP Vs Partnership
Particular
Governing Law
Registration
Creation
Separate Legal Entity
LLP
The Limited Liability Partnership
Act, 2008 and various Rules made
thereunder
Compulsory and needs to have LLP
as suffix
Created by law
It is separate legal entity,
separate from its partners
designated partners
Partnership
The Indian Partnership Act, 1932
and various Rules made
thereunder
Optional
Created by contract
It is not separate legal entity
from partners. Partners are
collectively referred as firm.
26. Contd..
Particular
Purchase of Property
Partners
Common Seal
LLP
LLP can also purchase movable /
immovable property in its name
Minimum partners – 2 Maximum
partners – unlimited, Foreign
Nationals & Minor
It denotes the signature of the
Company and LLP may have its
own common seal, if it besides to
have one.
Partnership
Partnership firm cannot purchase
movable / immoveable property
in its name. the same must be
purchased in the name of
partners.
Minimum partners – 2 Maximum
partners – 20, Indian Nationals,
No Minor
Not required
27. Contd..
Particular
Expenses for formation
Ownership of Assets
LLP
Minimum Statutory fee for
incorporation of LLP is Rs. 1500/-
and Maximum fee for
incorporation of LLP is Rs. 7000/-
(approx.)
The LLP has ownership of assets
and Partners only have capital
contribution in the LLP
Partnership
Minimum Statutory Fee does not
exceed to Rs. 500/- and Maximum
Statutory Fee is Rs. 5000/-
Partners have joint ownership of
all the assets
28. Comparison LLP Vs Company
LLP
LLP Act, 2008
Ownership and management can be
with same person or can be
divorced
Operational structure has more
flexibility Eg. change in terms of
partnership, change in profit
sharing ratio, remunerating the
partners, introduction and
withdrawal of capital, dissolution
of LLP etc.
Company
Companies Act, 1956
Ownership and management is
divorced
Operational structure has less
flexibility
29. Continued ..(LLP Vs Company)
Statutory compliance easy
approval by Partners only
Accounts can be maintained either
on cash or mercantile system
Statutory compliance complex
approval by BOD’s/ Shareholders
Accounts have to maintained on
mercantile system
30. Case Study: LLP of Henry v. Masson, __ S.W.3d __, 2010 WL 5395640 (Tex. App.
2010)
Appeal/Argument by Mason Response of the Court
Appeal: Court erred in ordering Henry and Masson to
make capital contributions to the partnership to
allow the firm to pay out funds it had taken in that
actually belonged to two new entities formed by the
parties
Basis: Partnership was LLP and provision providing
that partners in an LLP are protected from individual
liability for the debts and obligations of the
partnership incurred while the partnership is an LLP.
Response: The court stated that neither the
partnership agreement nor the statute prevented the
trial court from ordering contributions to the
partnership during winding up.
Basis: Partnership agreement stated that if no partner
agreed to lend funds, each partner was required to
timely contribute the partner’s proportionate share of
funds needed.
Argument: Masson argued that this provision was
not intended to apply in the winding up process
Basis: Reference in the partnership agreement to
payment of the partnership’s debts upon dissolution
“to the extent funds are available”.
Response: Phrase appeared in a section referring to
steps to be taken after the ‘sale of partnership
property’.
Basis: The court did not interpret the agreement to
mean that sale of partnership property was the only
source of funds to pay debts.
COURT RULING DID NOT CHANGE
31. Did you know?
Handoo & Handoo Legal Consultant is the India’s FIRST Limited Liability
Partnership firm incorporated on 02 April 2009
LLP Identification Number AAA-0001
Most of all the professional firms including ________ are LLPs
In 2013, 6783 cases were registered under LLP entity
FDI investment in Limited Liability Partnerships (LLP) started in 2011 with
several restrictions
32. Did you know?
Dilemma faced by a startup regarding what form of business they should go
with:
Sense of Ownership
Acceptance of Foreign Payments/Investments in a Private. Ltd. Company
Going Public in Future
