Business Management · Separate legal personality, directors' duties, shareholders and partnerships

Partnerships and LLPs: Liability, Authority and Dissolution

Updated 11 October 2026 · Fact-checked

A general partnership, governed in India by the Indian Partnership Act 1932, is a relationship between persons who share profits of a business carried on by all or any of them acting for all. Partners have unlimited, joint and several liability. An LLP is a separate legal entity with limited liability for its partners.

Understand Partnerships and LLPs

A partnership is not a company. Under the Indian Partnership Act 1932, it is the relation between persons who agree to share the profits of a business carried on by all of them, or by any of them acting for all. The people are called partners and together they are the firm. The firm is not a separate legal person from its partners. This is the key contrast with a company.

Because the firm has no separate personality, the partners own the business assets together and are personally responsible for its debts. Each partner is an agent of the firm and of the other partners for the firm's business. So an act done by one partner in the ordinary course of the firm's business binds all the partners. The firm's partners are also in a position of mutual trust and must act in good faith toward each other.

Liability is the main risk. In a general partnership, every partner is liable for the firm's acts, jointly and also severally. Jointly means all are bound together. Severally means a creditor can pursue any one partner for the whole debt. That partner may then claim a share back from the others. Liability is unlimited, so personal assets are exposed once firm assets run out.

A limited liability partnership (LLP) is a hybrid. In India it is set up under the Limited Liability Partnership Act 2008. It is a body corporate with a legal personality separate from its partners, and it can own property and sue or be sued in its own name. A partner is generally not personally liable for the LLP's debts. The partner's liability is usually limited to the agreed contribution. An LLP partner is still personally liable for their own wrongful acts and for fraud.

Dissolution ends the firm. A firm can be dissolved by agreement, by the end of a fixed term or of the venture, by notice where the firm is at will, or compulsorily where all partners but one are adjudged insolvent (s.41). Subject to contract, the death of a partner or the adjudication of any partner as insolvent dissolves the firm (s.42). Where the firm continues under the contract, the insolvent partner ceases to be a partner (s.34). A court can also dissolve a firm on grounds such as a partner's unsoundness of mind or persistent breach. An LLP, being a separate entity, carries on despite a change of partners and is wound up under its own rules.

Key rules to remember

Definition of partnership: Partnership = agreement + business + profit sharing + carried on by all or any of them acting for all; All four elements must be present. Sharing profits alone does not always prove a partnership; look at the whole relationship.
Partner as agent: Act in ordinary course of firm's business → binds the firm and all partners; Applies only to acts within the usual scope of the business. Acts outside it may not bind the others.
Liability in a general partnership: Liability = unlimited + joint and several; A creditor can claim the whole debt from any partner. That partner can seek contribution from the others.
LLP liability: Partner liability = limited to agreed contribution (own wrongful acts and fraud excepted); The LLP is a separate legal entity. Partners are not liable for the independent acts of other partners.
Legal personality: Partnership firm: no separate personality. LLP: separate legal personality.; This single difference drives most differences in liability, property and continuity.
Registration: Partnership: registration optional, but if the firm is unregistered, s.69 bars the firm or its partners from suing third parties to enforce contractual rights. LLP: incorporation under the 2008 Act is required.; The s.69 bar applies to suits by the firm or its partners against third parties, so registration matters in practice.

How to solve Partnerships and LLPs questions

Use this method for any question on partnerships and LLPs, whether it is a short MCQ or a written case study.

1Identify the type of business. Is it a general partnership, an LLP or a company? Look for words such as 'LLP', 'limited', 'firm' or 'partners'.
2Check whether the legal entity is separate. A firm is not separate from its partners. An LLP is.
3Apply the authority rule. Ask whether the act was in the ordinary course of the firm's business and whether the partner was acting for the firm.
4Decide who is liable. In a general partnership, name the partners as jointly and severally liable without limit. In an LLP, limit liability to the contribution unless the partner personally acted wrongly or fraudulently.
5If dissolution is asked, find the trigger: agreement, expiry, adjudication of a partner as insolvent, death of a partner, notice or court order. Check for any contrary term in the partnership deed. Remember that, subject to contract, the adjudication of any partner as insolvent dissolves the firm (s.42). Dissolution is compulsory where all partners but one are adjudged insolvent (s.41). Where the contract keeps the firm going, the insolvent partner ceases to be a partner (s.34).
6Note the consequences: winding up affairs, paying creditors first, then partners' loans and capital, then any balance by profit share.
7State your conclusion clearly, link it to the facts in the question, and mention any assumption you made.

Quickest way: Entity first, then liability

When to use it: Use this when time is short, especially in multiple-choice questions comparing a firm, an LLP and a company.

Ask one question: is there a separate legal person? If no, it is a general partnership and liability is unlimited, joint and several.
If yes and it is an LLP, partners have limited liability, but not for their own wrongs or fraud.
For authority, ask: was it ordinary course of business? If yes, the firm is bound.
For dissolution, match the trigger word in the question to the rule: agreement, death, insolvency, notice or court.
Eliminate options that give an LLP unlimited liability or give a general partnership separate personality.

Common mistakes in Partnerships and LLPs

Saying a general partnership is a separate legal entity.
Students confuse a firm with a company because both have a name and trade as a unit.
Fix: Remember that a partnership firm is only a collective name for the partners. Only a company or an LLP has separate personality.
Saying LLP partners can never be personally liable.
Students overstate the idea of limited liability.
Fix: State that liability is limited for the LLP's debts, but a partner remains liable for their own wrongful acts and for fraud.
Treating every act of a partner as binding the firm.
Students forget the 'ordinary course of business' condition.
Fix: Always test whether the act fell within the firm's usual business. Acts clearly outside it may not bind the other partners.
Confusing joint liability with several liability.
The two terms sound alike and are often given together.
Fix: Write both: jointly means bound together, severally means any one can be sued for the whole. Add that the partner can claim contribution from the others.
Assuming the death or insolvency of a partner always dissolves the firm.
Students memorise the default rule and ignore the deed, and they mix up the sections on dissolution.
Fix: Say that, subject to contract, the death of a partner or the adjudication of a partner as insolvent dissolves the firm (s.42), but the partnership contract can provide that the firm continues. Where it continues, the insolvent partner ceases to be a partner (s.34). Compulsory dissolution (s.41) applies where all partners but one are adjudged insolvent.
Mixing up the governing Acts.
Both laws deal with 'partners' and look similar.
Fix: Link the Indian Partnership Act 1932 to general partnerships and the Limited Liability Partnership Act 2008 to LLPs.

Worked examples

Example 1

Asha, Binod and Chitra run a trading firm as a general partnership. Binod, in the ordinary course of the firm's business, buys goods worth ₹6,00,000 on credit. The firm cannot pay. Its assets are worth only ₹2,00,000. Explain who is liable and for how much.

Show the solution

The firm is a general partnership, so it has no separate legal personality from its partners.
Binod acted in the ordinary course of business, so he acted as agent of the firm and the debt binds all three partners.
Liability of partners is unlimited, joint and several.
Firm assets of ₹2,00,000 are applied first. The shortfall is ₹6,00,000 − ₹2,00,000 = ₹4,00,000.
The creditor can claim the shortfall of ₹4,00,000 from any one partner, including from personal assets.
If one partner pays, that partner can claim a contribution from the others according to the profit-sharing ratio or agreement.

Answer: All three partners are liable without limit. The creditor can recover the ₹4,00,000 shortfall from any one of them, and that partner can then claim contribution from the others.

Example 2

The same business is run instead as an LLP with Asha, Binod and Chitra as partners. Binod, acting honestly within the business, incurs the same ₹6,00,000 debt. LLP assets are ₹2,00,000. Explain the position and compare it with the general partnership.

Show the solution

An LLP is a body corporate with its own legal personality, separate from its partners.
The debt is the LLP's debt, not the partners' personal debt.
The LLP's assets of ₹2,00,000 are available to the creditor. The shortfall of ₹4,00,000 is not automatically recoverable from the partners' personal assets.
Each partner's liability is limited to their agreed contribution to the LLP.
Binod acted honestly, so there is no personal liability for fraud or his own wrongful act.
Contrast: in the general partnership, personal assets were exposed. In the LLP they are not, apart from the contribution.

Answer: The creditor can recover only from the LLP's assets and the partners' agreed contributions. The shortfall of ₹4,00,000 does not fall on the partners' personal assets, unless a partner acted fraudulently or wrongfully.

Exam tips

Write the entity type in your first line. It makes the rest of the answer follow naturally.
In compare-and-contrast questions, use the same headings for both forms: legal personality, liability, authority, continuity and dissolution.
Always add the condition 'ordinary course of business' when you discuss a partner's authority.
For LLP liability, include the exception for personal wrongful acts and fraud to secure the full marks.
In case studies, apply the rule to the named people and use the figures given in the question.

Practice questions from Separate legal personality, directors' duties, shareholders and partnerships

Partnerships and LLPs in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Partnerships and LLPs: frequently asked questions

What is the main difference between a partnership and an LLP?

A general partnership has no separate legal personality, so partners have unlimited, joint and several liability. An LLP is a separate legal entity and its partners usually have limited liability. An LLP also continues despite changes in its partners.

Which Act governs a general partnership in India?

The Indian Partnership Act 1932 governs general partnerships. It covers the nature of partnership, partners' rights and duties, authority to bind the firm, and dissolution.

How does a partnership dissolve in India?

A firm can dissolve by agreement, by expiry of its term or venture, or by notice if it is a partnership at will. Dissolution is compulsory where all partners but one are adjudged insolvent (s.41). Subject to contract, the death of a partner or the adjudication of any partner as insolvent also dissolves it (s.42). Where the contract keeps the firm going, an insolvent partner ceases to be a partner (s.34). A court can order dissolution on specified grounds.

Are LLP partners ever personally liable?

Yes, in limited cases. A partner is personally liable for their own wrongful acts and for fraud. They are not liable for the independent acts of other partners.

Can one partner bind the whole firm?

Yes, if the act is in the ordinary course of the firm's business and done for the firm. The firm and all partners are then bound. Acts outside the usual scope may not bind the others.