Partnership including

LLPArindom Chakraborty

Anirudh Jodha

Aseem Anand

Anil Kumar Shah

Rahul Roy

Tasneem Boxwala

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

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

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

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

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’

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

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

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

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

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

Limited Liability PartnershipA 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

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.

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.

How to form a LLP:

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).

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.

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.

Bhogilal Laherchand v/s

Commissioner of Income

Tax, BombayCompanies Act 1956

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 Samvatyear.

Tribunal: The sum represented profits of the partnership to which the son was entitled and therefore can be included in the Income Tax assessment.

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?

ContentionThe 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

partner would have debited him his share of the loss.

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.

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, theonly right that he had was to receive his share in theprofits, when the accounts were made up at Diwali andnot before.

He had no right to receive the profits that may havearisen when he attained majority (22 Aug). A partnershipmay come to an end by operation of law; a partner maydie or a partner may retire, in which case the lawprovides that accounts would have to be made up on thatparticular day, irrespective of the provision in thepartnership deed for making up the accounts in theordinary course.

In case of minor, the accounts would have to be made upon that particular day on which the minor elects not tobe a partner.

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.

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.

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

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

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

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

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

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

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

Thank You