New Delhi, Oct. 9: The government will finalise a limited liability partnership act, which will pave the way for a new breed of business where liabilities are capped. However, these will neither be limited companies allowed to access the stock market, nor partnerships with risks of full liability.
The act has been prompted by the recent scam in penny stocks. It is believed that the new class of business will address the needs of small firms which want to get the benefits of corporatisation without actually turning into a limited company.
In limited liability partnerships (LLP), all members will share equal liability. In case of a business failure or a complex case of claims and disputes, the liability will rest on the partner/s responsible. The personal assets of other members will not be attached, if they are not embroiled in the case.
Firms formed under the LLP act will not face the rigours of a partnership firm, where two or more individuals manage and operate the business. The owners are equally and personally liable for business debts in a partnership firm.
Sources in the government said the LLP draft is ready and would be brought before cabinet later this month.
At present, all companies in the country have been set up either under the Indian Partnership Act, 1932 or the Companies Act, 1956.
Sources said the new law would create a class of business that will enjoy “the benefits of both worlds”. It will be a central legislation policed by government agencies. The standards of financial disclosures will be same as, or similar to, those prescribed for private companies.
LLPs will be governed by tax laws applicable to partnership firms and not limited companies. “In a legal perspective, the LLPs will be a hybrid between a company and a partnership, but perhaps closer to a private limited company,” officials said.
An LLP can have unlimited partners, but many of them may not participate in the management. These firms can also give employee stock options in the form of junior partnerships without managerial responsibility.
The Naresh Chandra Committee on corporate governance had suggested an LLP for accountancy and law firms along the lines of an act in the UK.
Jolted by the recent penny stocks scam and the shenanigans of vanishing companies earlier, the government has decided to extend the LLP to all small businesses. Initially, the rules will be framed for professional and service-sector firms. “We woke up to the need for LLPs vis a vis partnership firms when we saw many US companies going bust in the 1990s as a result of malpractice litigation,” said officials.
“We realised that our own professional firms can get caught in such a situation in a globalised world. Also, many SMEs, which went belly up during the 1990s, had one or two directors who were actual promoters. Other directors were shown as promoters for the sake of listing norms. And it was the actual promoters, many of whom were professional chartered accountants or business managers, who bore the brunt of the litigation,” they added.