The Hindu Business Line : Demystifying limited liability partnership

If she weren't a shade confused, she wouldn't be Wafers! Her uncle, a star CFO, was her inspiration and she wished to be like him — jet setting, globe trotting and knowledgeable. At the campus interview her senior had picked a job for Rs 9 lakh and gosh he wasn't even a rank holder. Wafers knew that the industry offered fat pay packs but her heart actually lay in consulting. She wanted to join one of the Big Four firms with the long-term goal of becoming the next C. K. Prahalad. Her professor had once told the class, "In life, you should do what the heart tells you." He was talking about careers!

China said, "For chartered accountants there are a plethora of opportunities in the new international trading regime." Wafers agreed. She recalled reading in the ICAI website that "Opportunities would emerge at three fundamental levels in the WTO regime. At the government level, at the revenue authorities level and at the business unit level." China was surprised. "Wow! These CA students are so analytical," he told himself. "You mean to say, accounting firms will have opportunities at the international level," queried Muskan, Wafer's niece. She was in Class X.

"Yeah," said Wafers. And added, "Actually, the opportunities are not just in the industry. They are in practice as well." China remarked, "But that comes with a huge price. If the pink papers are to be believed, accounting firms in the US have millions of dollars worth of legal suits pending against them." Muskan asked, "So?" "So," replied China, "the liberalised trade scenario which offers potential to provide services across international borders will augment greater liability to firms in case of default." Muskan looked definitely confused.

Wafers explained. "Legally, accounting firms in India are allowed to function as sole proprietary concerns or as partnership firms. A partnership is the relationship between persons who have agreed to share the profits of a business carried on by all or anyone of them acting for all." This set Muskan thinking. "So will I be liable for my partners' shortcomings even if I have been honest in conducting my duties," she asked. "That's the general idea," said China impressed by the kid asking the right questions.

"This traditional model is not equipped to meet the multi-competency, multi-disciplinary and multi-locational requirements of today's global and domestic clients," said China.

Wafers added, "Moreover, the major chunk of all benefits is drawn by the creamy layer of large firms." She had read a research report on "Who are India's top auditors and how much do they charge," which had, among others, documented the great divide in the accounting profession. "This is why the accounting fraternity is in favour of limited liability partnership," (LLP) she added. "But what is LLP?" asked China. Ha, that's why she loved China. The walking encyclopaedia had no inhibitions about seeking a clarification on a doubt, if he had one.

"A limited liability partnership is a form of organisation which shields a partner's assets from limitless liabilities that may accrue from the omissions and commissions of other partners," answered Wafers. Not for nothing was Wafers considered strong in law. "In LLP, every partner will be an agent of the partnership and not of the other partners," she added. "Isn't this a merger of the partnership form of organisation and the company form?" remarked China.

"Exactly," said Wafers. "It promises perpetual succession and a distinct legal identity were it to become law. Further, it requires only a minimum of two partners, having no cap on the maximum number of partners a firm can have," she added. "Section 11," said China hurriedly, "of the Companies Act bars the formation of a partnership consisting of more than 20 persons. Won't the firm have to register itself as a company?" "Yes and No." said Wafers "If LLP becomes law, Section 11 will have to be amended. The idea is to make LLP a vehicle for business expansion.

"How?" asked Muskan. Replied Wafers, "Because of the legal stipulation of unlimited liability among partners, Indian partnerships are mostly restricted to family members and persons who know each other thoroughly." She added, "LLP being a form of partnership having characteristics of a company will limit liability in the case of business failure or professional negligence litigation to the partner responsible." "You mean, only the negligent partner will be penalised and not the whole firm," asked China. "Yes," said Wafers.

China played the devil's advocate. "Is it possible to prove that only a particular partner was negligent and not the others?" Wafers replied, "They will have to divide work amongst themselves appropriately. This could create disputes between partners, but crystal clear division of duties between partners will go a long way in reducing the same."

"Excellent," said Muskan. "The LLP form of organisation would help the small and medium practitioners by encouraging networking and specialisation of functions."

Wafers had a word of caution, "The decision to go for LLP will be based on the interplay of costs and benefits." China continued his black hat thinking, "Other forms of organisation are tried and tested. Why then should one go for something new?" Wafers answered this question philosophically quoting John Rockefeller, "If you want to succeed, you should strike out new paths rather than travel the worn out paths of accepted success." China smiled.

Racy@TheHindu.co.in

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