Limited liability partnership gowtam bhat


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seminar paper presented by Gowtam Bhat, a student of II year B.Com of SVS College, Bantwal, Karnataka under the auspices of Commerce Association-focus is on LLP in India

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Limited liability partnership gowtam bhat

  1. 1. Limited Liability Partnership is a body corporate & is a separate legal entity. Special type of partnership wherein liabilities of partners are limited. From March 31, 2009, the Limited Liability Partnership Act, 2008 came into force to basically visualise & give opportunities mainly to service sector including I.T, Accountancy & Law The disadvantages of company & partnership form of organisation led to LLPs
  2. 2. Unlimited Liability: Every partner is jointly & severally liable for firm’s debts. Principal Agency Relationship: A partner can be bound by the acts of his co-partners & at the same time, he can bind other partners by his acts. Limit on maximum number of partners: Maximum number of partners is 10 in the case of banking business & 20 in other businesses. But in case of LLPs there is no maximum limit on number of partners. This allows to acquire more capital needed to run the business efficiently.
  3. 3. Higher Administrative Costs: The Companies Act, 1956 imposes lot of rigidity in every functions & activities of companies. Such rigidity in activities increases administrative costs. More Restrictions Unnecessary Formalities Maintenance of registers & records Disadvantages of Companies
  4. 4. Limited Liability & Perpetual Succession Healthy Blending of Partnership & Company Body corporate having legal entity separate from its partners Minimum number of partners is two & there is no limit on maximum number of partners Written partnership deed & Registration is compulsory with Registrar of Companies [RoC] Any individual or body corporate can be a partner in an LLP
  5. 5. A partner in an LLP can bind the LLP but not the co- partners. There is no Principal – Agency Relationship Every LLP should have at least 2 designated partners, who are individuals & at least one of them should be Resident in India. Features of LLP Interest of minority partners are protected. Accounts are to be maintained but small LLPs are exempt from Audit Provisions. Change in partners is required to reported within 30 days of such change.
  6. 6. Concept of “Holding Out” by partners incorporated. For Income Tax Purposes, LLPs are taxed as General Partnership is taxed i.e. at the rate of 30% on income plus 3% education cess. LLPs are not taxed with Dividend Distribution Tax [DDT] & Minimum Alternate Tax [MAT] But for other purposes like registration, Reconstruction, amalgamation, liquidation etc are similar to those under Companies Act, 1956 Already existing partnership firms, private cos’ & unlisted public companies can convert themselves into LLPs. No Principal - Agency Relationship. Features of LLP
  7. 7. Features Company Partnership Firm LLP Registration Compulsory registration required with ROC. Certificate of incorporation is compulsory evidence. Not compulsory. Unregistered partnership firm will not have the ability to sue. Compulsory registration with ROC required. Name Name of public company to end with “Ltd” & a private company with “Private Ltd” No guidelines. Name to end with “LLP” or “Limited Liability Partnership” Capital Contribution Private Co should have a minimum paid up capital of Rs.1 lakh & Rs. 5 lakh for a public Co. Not specified. Not specified. Legal Entity Status Is a separate legal entity. Not a separate legal entity. Is a separate legal entity.
  8. 8. Features Company Partnership Firm LLP Liability Limited to the extent of unpaid capital. Unlimited, can extend to the personal assets of partners. Limited to the extent of the contribution to the LLP. Number of Shareholders Minimum :2. Maximum: 50 in a private Ltd Co. Minimum :2. Maximum: 20 [10 in Banking firms] Minimum :2. Maximum: No limit. Taxability Income is taxed at 30 % + Surcharge + 3 % education cess Income is taxed at 30 % + Surcharge + 3 % education cess Not notified. Audit Compulsory, irrespective of share capital & turnover. Compulsory. Required, if the capital is above Rs.25 lakhs or turnover is above Rs. 60 lakhs.
  9. 9. ‘Partner’ means any person who has entered into partnership agreement in a LLP. Body corporates / Individuals can become partners in an LLP. However, following persons are disqualified from becoming partners: 1. Person of unsound mind. 2. Person who has applied to be adjudicated as insolvent & his application is pending. 3. Undischarged insolvent.
  10. 10. ‘Designated Partner’ means any partner designated as such in Section 7 of LLPAct, 2008. According to Section 7(1), every LLP must have two designated partners who are individuals. Out of two designated partner, at least one of them should be a Resident in India. If the partners in an LLP are body corporates, then the nominees of such corporates act as Designated Partners.
  11. 11. LLP incorporated in India will be assessed as if it is a partnership firm. According to Section 2 (23) of Income Tax Act, 1961, the term ‘Firm’ shall include LLP & ‘Partner’ shall include partner of LLP & ‘Partnership’ shall include LLP. But, LLPs incorporated outside India [Foreign LLPs] shall be taxed as ‘Company’ Like in the case of general partnership, share of profit of LLP at the hands of its partners is exempt. [Section 10 (2A) of Income Tax Act, 1961.
  12. 12. The provinces of Quebec, Ontario, Manitoba, Alberta, the territory of Nunavut, Nova Scotia have permitted LLPs for lawyers. The Partnership Amendment Act, 2004 [Bill 24] permitted LLPs even for other professionals as well as businesses.
  13. 13.  In China, the LLP is known as Special General Partnership. The organizational form is restricted to knowledge based professionals & technical service Industries. The structure protects co-partners from liabilities due to willful misconduct of one partner or a group of partners.
  14. 14. In Germany partnerships are for non-commercial professionals. It is not considered as a corporate entity. The partners are jointly & severally liable for all damages, partnership debts, except when some partners’ misconduct has caused damages to other parties. The partnership is not subject to corporate / Business Tax & only its’ partners respective income is taxed.
  15. 15. LLPs were introduced in Japan in 2006. Japanese LLPs may be formed for any purpose [should be stated Partnership Deed]. Japanese LLPs are not to be used by Lawyers or Accountants, as these professionals are required to do business through an Unlimited Liability entity. Japanese LLPs are not corporations.
  16. 16. In United Kingdom, LLPs are governed by the Limited Liability Partnership Act, 2000 [In Britain] & Limited Liability partnership Act, 2002 [Northern Ireland]. In UK, LLP is a corporate body having separate legal existence from its partners. A UK LLPs partners have a collective responsible to the extent of that they may agree in an LLP agreement. But no individual responsibility for each others options.
  17. 17.  In US, LLPs were formed in 1990s. LLPs were formed to overcome the collapse of real estate & energy prices in Texas in 1980s. The collapse led to large wave of banks , savings & loan failures. Because the amount recoverable from the banks was small, efforts were made to recover the assets from the Lawyers & Accountants of United States. To protect these partners, LLP was introduced in United States.
  18. 18. Section Default Who is liable Penalties / Prosecutions Section 8 Liabilities of Designated Partners Designated Partners Liable to all penalties imposed on LLP for any contravention Section 10 Non appointment of Designated Partners LLP & all Partners Fine between Rs.10000/- to Rs.500000/- Section 10 Non filling of Income Tax Returns, Sales Tax/ VAT Returns etc. LLP & all Partners Fine between Rs.10000/- to Rs.100000/- Section 11 Penalty for false declaration in Incorporation Document Defaulting Partner Imprisonment up to 2 years & a fine between Rs.10000/- to Rs.500000/- Section 13 Registered office- Contravention of Provisions LLP & its Partners Fine between Rs.2000/- & Rs.25000/-
  19. 19. Section Default Who is liable Penalties / Prosecutions Section 20 Improper use of words “Limited Liability Partnership” or “LLP” Defaulting Person Fine between Rs.50000/- to Rs.500000/- Section 34 Maintenance of Books of Accounts, other records & audit etc – non compliance of provisions LLP & all its’ Designated Partners LLP :- Fine between Rs.25000/- to Rs.500000/- Designated Partners :- Fine between Rs.10000/- to Rs.100000/- Section 35 Annual Returns: Non compliance LLP & all its’ Designated Partners LLP :- Fine between Rs.25000/- to Rs.500000/- Designated Partners :- Fine between Rs.10000/- to Rs.100000/-
  20. 20. Section Default Who is liable Penalties / Prosecutions Section 38 Power of Registrar to obtain information: Non Compliance Person in default Fine between Rs.2000/- to Rs.25000/- Section 69 Non filing of documents within prescribed time limit LLP Additional fee of Rs.100 per day of default. Therefore, we can see that they are plenty of fines & penalties for any default & delays by any of the partners.
  21. 21. At the time of introducing LLP Act, 2008, it was given that the capital gain will be attracted at the time of conversion of an unlisted company to an LLP. However, Clause (xiiib) has been inserted in Section 47 w.e.f. A.Y 2011-12 to exempt such capital gain. But some conditions are to be satisfied to claim exemption. They are, 1. Assets & liabilities of the company before conversion becomes assets & liabilities of the LLP. 2. All the shareholders of the company become the partners of the LLP & their contribution & profit sharing ratio in the LLP are in same proportion of their shareholding in the company.
  22. 22. 3. No consideration would be paid by the LLP to the company. The shareholders of the company do not receive any consideration / benefit other than by way of share in profit & capital contribution in the LLP. 4. The aggregate of the profit sharing ratio of the predecessor company in LLP shall not be less than 50% immediately after conversion & for a period of five years after conversion. 5. The total sales, turnover of the business of the company in any way of the 3 years preceding the year of conversion, should not be more than Rs.60 lakhs.
  23. 23. 6. No amount is paid, either directly or indirectly, to any partner out of balance of accumulated profit standing in the accounts of the company from the date of conversion to a period of three subsequent years. Capital gain on the conversion of assets & liabilities from company to LLP is exempt only if these aforesaid conditions are satisfied. If condition 4 & 6, which are relating to subsequent to the year of conversion, if they are not satisfied, the same will be taken as capital gain in the hands of the LLP.
  24. 24. The Limited Liability Act [LLP] Act, 2008 is very small containing only 81 sections. LLP has so many advantages over General Partnership & a Joint Stock Company. But from the perspective of penalties, it is quite large, as more than 40% of the sections prescribe penalties.
  25. 25. For false information in Incorporation Document, the defaulting partner may be imprisoned up to two years & with a fine between Rs.10000/- to Rs.500000/- Even for small defaults & delays, huge penalties have been mentioned in LLP Act, 2008. So, on the one hand, LLP is a healthy blend of company as well as partnership but on the other hand, it is nothing but a plethora of penalties. Therefore, this profuseness of penalty has made the LLP Act just like a beautiful & expensive toy kept in an expensive showroom which can only be watched from a distance.
  26. 26. THANK YOU