A limited liability partnership is important because it has features of both, a partnership and a company. An LLP registration is overlooked by the Ministry of Corporate Affairs (MCA) and the Limited Liability Partnership Act of 2008. Limited liability is the most important characteristic of an LLP. It means that the ability of an LLP allows partners to be free from any obligation to use their personal assets for paying off the debts of the company, unlike in the partnership Act of 1932.
LLP is a separate legal entity distinct from its owners. This allows it to enter into a contract and have a property in its own name. It is not a new concept in the 22nd century. The formation of an LLP includes features of a partnership and a corporation. Also, it gives a person a freer and a positive approach towards the formation of an enterprise.
The J.J. Irani Committee in 2005 recommended the use of such a new vehicle for the growth of a business enterprise. It can be said that an LLP is a mixed breed structure which is increasingly being chosen. It paves the way for the growth of a developing country like India.
The Ability of LLP to Enter Into a Contract
Section 3 of the Limited Liability Partnership Act of 2008 states an LLP to be a body corporate. In addition, the requirements of the Indian contract act of 1872 includes the capacity to enter into a contract. Hence, it is important to note that the same runs co-extensive as in the case of an LLP also.
Considering the power to contract, the separate legal entity concept is important. As an LLP, it is also a form of a company. It means that the ability of an LLP covers everything that a natural person can do including the capacity to enter into a contract, “to sue and to be sued.” Change in the partner of an LLP does not affect its existence. It is a feature of an LLP.
An LLP is an artificial person. It has a character that is distinct from its partners. It means that an LLP is able to exist is separate from its partners. Also, the law states that an LLP has a separate legal existence.
A famous case of Salomon v. Salomon and Co. LTD. defines this principle very well.
Here, the House of Lords rejected the saying. It was conveyed that the company, on registration, has its own existence. It has an identity separate and distinct from its members. As a result, the shareholders are separate from the company even if they hold the entire share capital of the company. It concludes that an LLP is also a form of company and has a separate legal existence, implying the ability of LLP to enter into contracts, and to sue and to be sued in its own name.
In another prominent case of Abdul Haq v Das Mal, an employee was not paid a salary for several months. He filed suit against directors for the recovery of the amount of salary. It was stated that he would not succeed. The reason is, the remedy lies against the company and not against the directors.
An LLP is a separate legal entity while the partnership is not. Here’s a read to burst myths regarding LLP in India.
Capacity to Sue and to be sued
Capacity means the legal competence of a person. It implies that an LLP has such competence that it can bring upon a case against someone. And that someone may also sue the LLP for any wrong done to him.
The fact is that an LLP is also the classification of a form of company. And, it can now be said that a company has the capacity to sue and to be sued. An LLP must also come into the same domain. An LLP is also a subset of the term company. One can sue both the partnership and its partners, for damages and liability. LLP is liable for wrongful act or omission of a partner done in the course of his employment or with the authority of the LLP. Hence, we may conclude that to make a person liable for something, he must have such a capacity that he may be made liable. And that the person should also have the capacity to make liable someone who does any wrong to him. Thus, an LLP has such an ability.
Benefit of Having a Limited Liability
The members of an LLP are only the agents of such an enterprise. It means that the liability of the members is only limited up to the amount of their respective contribution. It also includes any undrawn profits, out of such a formation. Then, there are exceptions, which include negligence, wrongful trading, personal guarantees, etc. Thus, the most important and useful aspect of an LLP is the limited liability of its members. It is not so, under the Partnership Act of 1932. Moreover, there would be no resort to the attachment of the personal assets of the other partners. Except for the one who is personally liable for the negligence, others are free.
Ability of Perpetual Succession
The LLP continues to exist until it is wound up or struck off. Under the provisions of the Limited Liability Partnership Act, an LLP has perpetual succession. A general partnership firm does not observe perpetual succession. It means an ability of LLP allows it to continue with its business regardless of possible partner change. Also, it can hold properties on its own name. The reason is that it is an independent entity separate from its individual partners. While a standard partnership refers to its partners, an LLP is independent of its partners.
It is the origination of law, and the winding up can only take place by operation of law, which may be voluntarily, or by an action of the tribunal.
Now, it’s important to state that all the above aspects must be fulfilled completely. We may now not be very hesitant to say that the capacity of an LLP works in conformity with the basic function. LLP is an effective instrument based upon company law with a flavour of partnership.