Is Liability of Designated Partners in LLP Unlimited?

In this article, the idea of designated partners in LLPs is explained, along with their obligations, limitations on their responsibility, management tasks, and legal requirements in India.

In India, limited liability partnerships (LLP) have gained popularity, particularly among small and medium-sized businesses. The limited liability protection that an LLP offers its partners is one of its main advantages. However, it’s a popular misperception that authorized partners in an LLP have limitless liability. In this post, we’ll talk about whether or not designated partners in an LLP have unlimited liability.

Definition of Designated Partners

Let’s first define designated partners before we discuss the liabilities of these partners in an LLP. A designated partner is a partner who is specifically identified as such in the LLP agreement and is in charge of overseeing the LLP’s operations. In other words, they are in charge of managing the LLP’s daily activities. A designated partner must be an individual with a Ministry of Corporate Affairs-issued Designated Partner Identification Number (DPIN). (MCA).

Liability of Designated Partners

The limited liability protection that an LLP offers its partners is one of its main advantages. In the event of any obligations resulting from the business operations of the LLP, the partners’ personal assets are thereby safeguarded. It is crucial to remember that authorised partners in an LLP do not have unlimited liability. Like a partner in a conventional partnership, they are liable for the LLP’s actions.

Exceptions to Limited Liability

While designated partners in LLP enjoy limited liability protection, there are certain exceptions to this rule. Designated partners can be held personally liable for the debts and obligations of the LLP in the following scenarios:

1. Fraudulent actions – If a designated partner commits fraud or misrepresentation, they can be held personally liable for any losses incurred by the LLP as a result of their actions.
2. Negligent actions – A designated partner may be personally liable for any injury they carelessly create to a third party and that third party suffers as a result.
3. Breach of duty -A designated partner who violates their obligation to the LLP may be held personally responsible for any losses the LLP suffers as a result of the violation.

Liability of Designated Partners in Management

As was already said, appointed partners are in charge of running the LLP’s affairs. As a result, they are held to a higher standard of accountability than the other LLP partners.

A designated partner may be held personally responsible for any damages suffered by the LLP as a result of their activities if they take a course of action that is not in the best interests of the LLP. For instance, a designated partner may be held personally accountable for losses the LLP incurs as a result of a choice they made.

Minimum Requirement for a Designated Partner in LLP

LLPs are required to have at least two designated partners at all times. Additionally, all designated partners must have a DPIN allotted by the MCA. To be eligible for a DPIN, a person must be at least 18 years of age and must not have been declared bankrupt or convicted of any economic offences.

Responsibilities of the Partner and the Designated Partner

While designated partners have a higher level of responsibility in LLP, all partners have certain responsibilities towards the LLP. Some of the key responsibilities of partners in LLP include:

1. Contributing capital – All partners are required to contribute capital towards the LLP as per the terms of the LLP agreement.
2. Maintaining proper records – All partners are responsible for maintaining proper records of the LLP’s financial transactions.
3. Complying with regulations – All partners are required to comply with the regulations applicable to the LLP.
4. Participating in decision-making – All partners are expected to participate in the decision-making process of the LLP and provide their inputs for the betterment of the LLP

In addition to the above responsibilities, designated partners have the following additional responsibilities:

1. Filing of annual return-: The LLP’s chosen partners are responsible for making sure the yearly returns are presented to the Registrar of Companies on time. (ROC).
2. Compliance with the LLP agreement – Designated partners are in charge of making sure that the LLP agreement is upheld and that other partners abide by its rules.
3. Appointment of auditors -Designated partners are in responsible of choosing the LLP’s auditors and ensuring that the audit is done accurately and on schedule.
4. Maintaining proper records – Designated partners are responsible for ensuring that the LLP’s financial records are maintained in a proper and accurate manner.

Conclusion

In LLPs, designated partners’ liability is limited, just like it is for partners in conventional partnerships, but it is not infinite. However, in some circumstances, including those involving fraud, negligence, and duty violations, authorised partners may be held personally accountable. 

The chosen partners must be aware of their obligations and constantly act in the LLP’s best interests. All LLP partners, including designated partners, have obligations to the LLP and are required to follow all laws that apply to the LLP.

Vakilsearch can help you with the question of whether the liability of designated partners in LLP is unlimited or not by providing legal expertise on this matter. We can also assist in registering an LLP with limited liability to protect the designated partners from personal liability for the LLP’s debts and obligations.