The Hindu Business Line : Limited liability concept may be extended to manufacturing

THE Ministry of Company Affairs, which is working on a draft law to allow Limited Liability Partnership (LLP) firms in the professional and services sector, is likely to extend the concept to the manufacturing sector.

This, in effect, would mean that a budding small or medium entrepreneur would be able to foray into a business venture without any fear of being held liable for the partners' misconduct.

Speaking to Business Line, a senior Company Affairs Ministry official said the Ministry had worked in close coordination with the small and medium enterprises (SMEs) to see how the concept could be extended to the manufacturing sector.

Requests were made to the Ministry by the SMEs to expand the ambit of the LLP concept to other businesses and not restrict it to the professionals and the services sector, the official said.

During the course of deliberations with experts, it was felt that to encourage SMEs, this concept could be a good option, as the crux of the LLP form is the flexibility of the partnership, the official said.

What is LLP? An LLP is a form of business entity, which permits individual partners to be shielded from joint liability created by another partner's business decision or misconduct. An LLP enters into contracts in its own name in the same way as a limited company, but its members have the advantage of limited liability similar to the shareholders of a company. Thus, in the event of a business failure or a case of disputes and claims, the liability would be limited to the partner responsible for it.

There would be no recourse to attach the personal assets of the other members, except the member who was personally responsible or negligent. Similarly, a partner's liability is not limited when the misconduct takes place under his supervision or control.

In other words, an LLP only protects a partner from liability arising from the incorrect decision or misconduct of other partners or any of the employees not under his control. The partnership is not relieved of the liability of its other obligations. SMEs, according to the official, would benefit most from this concept, as it would allow an entrepreneur to get into the business without exposing his full assets to it.

In an increasingly litigious market environment, the prospect of being a member of a partnership firm with unlimited personal liability is considered risky and unattractive, the official explained.

Based on the recommendations of Second Naresh Chandra Committee Report, the Ministry is set to come out with a concept paper on LLP law shortly, the official said.

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