3. Limited Liability Partnership
The Indian Partnership Act of 1932 provides for a general form of partnership which is the most
prevalent form in India, but, over time the general form of partnership has lost its charm because
of the inherent disadvantages in it, the most important shortcoming is the unlimited liability of
all partners for business debts and legal consequences, regardless of their holding, as the firm
is not a legal entity. General partners are also jointly and severally liable for tortuous acts of copartners. Each partner has the exposure of their personal assets being appropriated and liquidated
to meet partnership dues.
With the growth of the Indian economy, the role played by its entrepreneurs as well as its
technical and professional manpower has been acknowledged internationally. Entrepreneurship,
knowledge, risk and capital may be combined to provide a further impetus to India’s economic
growth. In this background, a need has been felt for a new corporate form that would provide an
alternative to the traditional partnership, with unlimited personal liability on the one hand, and,
the statute-based governance structure of the limited liability company on the other. This would
enable professional expertise and entrepreneurial initiative to combine, organize and operate in
flexible, innovative and efficient manner.
The Government felt that with Indian professionals increasingly transacting with or representing
multi-nationals in international transactions, the extent of the liability they could potentially be
exposed to, is extremely high. Hence, in order to encourage Indian professionals to participate in
the international business community without apprehension of being subject to excessive liability,
the need for having a legal structure like the LLP is encouraged.
The Limited Liability Partnership (LLP) is viewed as an alternative corporate business proposal
that provides the benefits of limited liability but allows its members, the flexibility of organizing
their internal structure as a partnership, which is based on a mutually arrived agreement.
The LLP will be a separate legal entity, liable to the full extent of its assets, with the liability of
the partners being limited to their agreed contribution in the LLP which may be of tangible or
intangible nature or both tangible and intangible in nature. No partner would be liable on account
of the independent or un-authorized actions of other partners or their misconduct. The liabilities
of the LLP and partners who are found to have acted with intent to defraud Trade payables or for
any fraudulent purpose shall be unlimited for all or any of the debts or other liabilities of the LLP.
The main benefit in an LLP is that it is taxed as a partnership, but has the benefits of being a
corporate, or more significantly, a juristic entity with limited liability. An LLP has the special
characteristic of being a separate legal personality distinct from its partners. The LLP is a body
corporate in nature.
However, in the chapter the scope of discussion has been restricted to Partnership accounts as
per the Indian Partnership Act, 1932 only.
4. Main clauses in a partnership deed
From the accounting point of view, the main thing is that relations among the partners will be
governed by mutual agreement. The agreement is known as Partnership Deed which is to be
Fundamentals of accounting
© The Institute of Chartered Accountants of India