Types and formation of partnerships

Sources of partnership law

What is the statutory basis for partnerships, and partnership-like structures in your jurisdiction? To what extent do these laws overlap or share features with company law?

In India, partnerships are governed by the Indian Partnership Act 1932. Further, a limited liability partnership (LLP) is governed by the Limited Liability Partnership Act, 2008 (LLP Act 2008). In an LLP structure, there is limited liability of the partners, whereas in a partnership firm the liability of the partners is unlimited. There is no overlap between the provisions of the Act and the LLP Act, 2008. Further, an LLP has a separate legal entity that is distinct from its partners and all the partners of an LLP have limited liabilities, such as in the case of a company.

A copy of the Partnership Act 1932, can be accessed at the following link: http://www.mca.gov.in/Ministry/actsbills/pdf/Partnership_Act_1932.pdf. For a copy of the LLP Act, 2008, please refer to the following link: www.mca.gov.in/Ministry/actsbills/pdf/LLP_Act_2008_15jan2009.pdf.

The copies of the Partnership Act 1932 and that of the LLP Act 2008 may not be regularly updated at the above-mentioned links.

Types of partnerships

Identify the types of partnerships or other partnership-like structures permitted in your jurisdiction. What are they typically used for?

In terms of the Partnership Act 1932, there are primarily two types of partnerships in India: partnership at will; and a particular partnership. Partnership at will is made by a contract between the partners wherein the duration of their partnership is not determined, whereas when a person may become a partner with another person in a particular undertaking it is categorised as particular partnership.

Further, LLP structures, are typically used when the partners or persons are desirous of having a balance of management control with reduced liability exposure.

Differences between types of partnership

What are the key differences between the various types of partnerships (and similar entities) available in the jurisdiction? Are partnerships treated as bodies of persons or bodies corporate?

In terms of the Partnership Act 1932, partners in a partnership firm have unlimited liability wherein every partner is liable jointly with all the other partners and also severally, for all acts of the firm done while he or she is a partner. However, in terms of the LLP Act, 2008 partners have limited liability, that is, a partner is not personally liable, directly or indirectly, for an obligation of the LLP solely by reason of being a partner of the LLP.

While a partnership firm is a body of persons, an LLP is a body corporate.

Reasons for choosing a partnership structure

What are the typical reasons that businesses choose to operate through a partnership structure in your jurisdiction? Do any factors discourage adopting a partnership structure?

Partnerships are preferred as it is easy to set up a partnership without any formalities or elaborate paperwork. Further, partnerships provide a flexibility to operate as the terms and conditions can be easily amended, from time to time, subject to the consent of all the partners.

Besides the above, with the advent of the LLP Act, 2008 partnerships have become a more popular form of structure owing to the advantages that the limited liability partnership is a separate legal entity with the liability of the partners limited to the extent of capital contributed by them. Additionally, limited liability partnerships have a more regulated framework with all the filings to be made online with the Ministry of Corporate Affairs (MCA), which can be viewed by the public when required.

The biggest disadvantage for the partnership structure is that the liability of the partners is unlimited, however, this drawback was addressed with the advent of the LLP Act, 2008 and is a more preferred structure for the Indian partners. However, from foreign direct investment (FDI) perspective, FDI is only permitted if the LLP is engaged in an activity in which 100 per cent foreign investment is permitted under the automatic route and there are no foreign investment linked performance conditions.

Formation (formalities and bars to formation)

How are partnerships and the similar structures available in your jurisdiction formed?

A partnership firm is formed by way of a partnership deed which details out all the requisites of the partnership such as the rights and obligations of each partner, contribution, place and type of business. Any person can be a partner of a partnership firm. Further, it may be registered at the option of the partners. The benefits of registering a partnership firm are as follows:

  • the firm can file a suit against the third party;
  • a partner can file a suit against other partners of the firm;
  • the firm can file a suit against any partner; and
  • a partner can file a suit to enforce a right arising from the contract or conferred by the Partnership Act 1932 against the firm.

 

However, in an LLP, a minimum of two designated partners are required, out of which at least one designated partner should be a resident in India (ie, a person who has stayed in India for 182 days in the preceding calendar year). In the event, a designated partner is a body corporate or company it can act only through its nominee. An LLP is governed by the LLP agreement. In the absence of an LLP agreement, the mutual rights and duties of the partners is determined in the manner as prescribed under the LLP Act 2008. Every LLP is required to be registered with the Ministry of Corporate Affairs. 

A partnership firm and an LLP can carry out any lawful business activity through a place of business in India.

Law stated date

Correct on:

Give the date on which the above information is correct.

11 June 2020.