Llp Mantra Iv 02 Jun 2009


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Llp Mantra Iv 02 Jun 2009

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Llp Mantra Iv 02 Jun 2009

  1. 1. LLP MANTRA A Publication by Corporate Professionals - {Y-01).{V-04) LLP
  2. 2. Insight Regular Section – Convert Your Company to LLP Particulars Page No. 3-4 FAQ’S – Conversion to LLP Regular Section – Conversion Procedure 5-8 9 Conversion Segment on Global Comparison LLP in News 10 11 Recent Queries on LLP Club Grey Areas in LLP 11 12 Our Offerings 12 Public Opinion 12 Page 2 of 13
  3. 3. Regular Section – Conversion to LLP Why Private Companies should convert to LLP? Limited Liability concept combines the organizational flexibility of a partnership firm coupled with the advantage of limited liability for its partners. The key features of the LLP such as a separate legal entity with unlimited number of partners, no partner being liable on account of the independent or unauthorized actions of other partner(s), liability of partners being limited to the respective stake of each partner in the LLP, are a distinct advantage over other form of organization. Such distinct features would be the key drivers for forming LLP, rather than Company for planning different structures. Another major reason for conversion of a company into an LLP is on the tax front. Currently, the Income-tax Act, 1961, provides for payment of minimum alternate tax (MAT) as also for payment of dividend distribution tax (DDT) by companies. An LLP, which is not a company, is not be liable to pay MAT, DDT and even surcharge on income tax. Major advantages as compared to Company • No need of converting into Public Company to have members more than 50 ,as there is no limit on maximum number of partners • Minimal Government Intervention • Minimal cost of conversion • Less Compliance level • No requirement of holding any meeting • No requirement of maintenance of Large statutory records • Limited Liability as in case of Companies. • No restriction on related party transactions • No Minimum alternate tax & dividend distribution tax. • No mandatory audit in some cases. • Less financial disclosure norms. Status upon conversion. It is essential to note that on conversion, all the partners of the partnership firm shall become the partners of the LLP. It is provided that no other person would become partner on conversion into an LLP for the simple reason that on conversion, it should be a mirror image. Page 3 of 13
  4. 4. On conversion, all the tangible (movable and immovable) property and the intangible property, all assets, interest, rights, privileges, liabilities, obligations of the firm/Company shall stand transferred to, and vest in, the LLP. Also, the firm so converted into an LLP shall cease to exist upon conversion Capital Gain on Conversion Under the provisions of LLP Act, 2008 on conversion of company into LLP, all tangible (movable or immovable) and intangible property vested in the company, all assets, interests, rights, privileges, liabilities, obligations relating to the company, and the whole of the undertaking of the company, shall be transferred to and shall vest in the limited liability partnership without further assurance, act or deed; Section 45 of the Income Tax Act provides that any profit or gains arising on transfer of capital asset shall be chargeable to capital gain. Though Section 47(xiii) of the Income Tax Act exempts the conversion of Firm/LLP (as per Union Budget 2009-10) into Company from the provisions of Capital Gains subject to certain conditions that the all the Partners before the succession become the shareholders of the Company in the same proportion of the capital account on the date of succession but no exemption is granted to conversion of company into LLP. Therefore till any such amendment in Income Tax Act, the transfer of all assets (movable assets) and liabilities of the Company will be made at their Book Value at the time of conversion to avoid any Capital Gain Tax. In respect of immovable property, as per section 50C of the Income Tax Act, in case of transfer of land , building or both, the value of asset calculated for the purpose of making the payment of stamp duty ,shall be taken to be value of asset and therefore any difference in the book value and valuation as per stamp duty, shall be liable for capital gain Page 4 of 13
  5. 5. Regular Section – Conversion Procedure Page 5 of 13
  6. 6. Step I Deciding the Partners and Designated Partners A Private Company desires to convert its status to LLP Form shall foremost decide the designated Partners of the proposed LLP, as only the members can be the Partners of the converted LLP and of these members of the company at least two Partners would be the Designated Partners.. In case of Body Corporate who is a member of the Company, desires to appoint a designated partner, in that case their nominee can be appointed as the designated Partner. Parameters for deciding Designated Partners: 1. Minimum of Two Individuals as Designated Partners, of total no. of Partners. 2. Atleast One Designated Partner to be Resident Indian. In case of conversion of Private Limited Company into LLP, all the shareholders of the Company to be partners in the LLP and no one else and also there will be no security interest subsisting or in force at the time of application in the assets of the Company. Step II Obtaining DPIN No. & Digital Signature Designated Partner Identification Number (DPIN): Every Designated Partner have to obtain a DPIN from the Registrar of LLP. Digital Signature Certificate: Any one Designated Partner shall obtain a Digital Signature. Step III Checking the Name Availability The next step is to make an application in eForm 1 of Rule 18(5) of the Limited Liability Partnership Act 2008, for reservation of the desired name of the LLP on payment of the prescribed fees. A Board resolution passed by the Company approving the conversion into LLP shall be attached with the aforesaid form. Step IV Drafting of LLP Agreement The next pertinent step is drafting of Limited Liability Partnership Agreement governing the mutual rights and duties among the partners and among the LLP and its partners. It is not necessary to have the LLP Agreement signed at the time of incorporation, as the details of the same needs to field in eform 3 within 30 days of incorporation but in order to avoid any dispute between the partners as to the terms & conditions of the agreement after the conversion Page 6 of 13
  7. 7. into LLP, it is always beneficial to have the LLP Agreement drafted and executed before the incorporation of the LLP Step V Filing of Incorporation Documents Next is the filing of prescribed e-forms with the Registrar of LLP for incorporation of the LLP on payment of prescribed fees based on the total monetary value of contribution of partners in the proposed LLP. eForm 2: Incorporation Document This is an informative document setting down the details of LLP, its Partners including designated partners, amount of contribution along with Subscription Sheet to be filed with eForm 3: Details of LLP Agreement This form provides for the necessary information in respect to the LLP Agreement entered into between the partners. eForm 4: Consent of Partners and Designated Partners to be filed with the Registrar of LLP within 30 days of Incorporation. Step VI Filing of Conversion Application Application for conversion in eForm 18 to be submitted by the Shareholder of the Company covering name, registration number and date of Incorporation of the Company, consent of all shareholders of the Company along with following details:  Whether any security interest in the assets of the company is subsisting or in force  Whether up to date Income-tax return is filed under the Income-tax Act, 1961.  Whether any prosecution initiated against or show cause notice received by the company for alleged offences under the Companies Act, 1956.  Whether any proceeding by or against the company is pending in any Court or Tribunal or any other Authority.  Whether any conviction, ruling, order, judgment of any Court, Tribunal or other authority in favour of or against the company is subsisting.  Whether any clearance, approval or permission for conversion of the company into limited liability partnership is required from anybody/ authority. etc Step VII Certificate of Registration After the all formalities and filings been complied with by the applicants , the Registrar of LLP to issue a Certificate of Registration as to conversion of the LLP. The Certificate of Registration issued shall be the conclusive evidence of conversion of the LLP. Page 7 of 13
  8. 8. Step VII Information to Registrar of Companies Converted Limited liability partnership to file within fifteen days of the date of registration, information to the concerned Registrar of Companies with which it was registered under the provisions of the Companies Act, 1956 about the conversion and of the particulars of the limited liability partnership in eForm 14. Page 8 of 13
  9. 9. FAQ – Conversion to LLP Whether it is necessary that all the shareholders shall become the partners of LLP post conversion? Yes, as per Schedule III & IV of the LLP Act, all shareholders shall become the partners of the LLP post conversion. What are the Prescribed Forms for conversion? Form 17 is required to be filed for conversion of Firm to LLP and Form 18 is required to be filed for conversion of Private/ Unlisted Company to LLP. What is the treatment for stamp duty issues, both in terms of original incorporation and conversion from other business structures? Would there be any stamp duty exemption in case of conversion? The Act does not contain any provision for treatment of stamp duty issues either on incorporation of an LLP or on conversion of other entities into LLP since this is a subject reserved for the States. This, however, is an important issue from the point of view of making the LLP structure more attractive. Currently there is no clarity, whether there would be any stamp duty exemption on conversion into LLP or not. Whether LLP would be able to convert itself into company under the Companies Act, 1956? Yes, LLP can convert themselves into Companies under the provisions of Part IX of the Companies Act 1956 What will be the treatment of reserves post conversion of company into LLP? Presently there is no clarity as to what will be the treatment of reserves post conversion, there. It can be treated as reserves post conversion or it can also be credited to the capital account of the partners. What are the requirements and consequence provided in the Act in respect of licenses, permits, approvals etc obtained by a firm, private company or an unlisted public company, prior to its conversion into LLP? It has been provided in the Act that on conversion of a firm/private company/unlisted public company into LLP, any approval, permit or license issued to the firm/private company/unlisted company under any other Act shall, subject to the provisions of such other Act under which such approval, permit or license was issued, be transferred in the name of converted entity viz LLP. Page 9 of 13
  10. 10. LLP in News Notification of Conversion Provisions Ministry has notified the conversion provisions of LLP Act and Rules provided under Section 55, 56 and 57 and Schedule II, III and IV w.e.f. 31st May 2009, making it possible for the existing firms, Private and Unlisted Public Companies to get converted to Limited Liability Partnership and to avail the benefits of this new form of business. Amendment of LLP Act and Rules 2009 The First amendment in the Schedules of the LLP Act concerning conversion provisions notified by the Ministry on 04th of June 2009, providing for appeals to be made to Company Law Board till the constitution of Tribunal. To check out the notifications, click here Tax regime for LLP introduced The Union Budget 2009-10 has introduced the Tax regime for Limited Liability Partnerships. As per the Budget, LLP will be treated as Partnership Firms and will be taxed accordingly. In order to check out the entire coverage, please click here Page 10 of 13
  11. 11. Conversion Segment on Global Comparison Facts LLP UK Singapore LLP US LLP Indian LLP Conversion of Conversion is not Section 20 and Second Permits conversion Section 55 and Firm permitted Schedule of the Act but does not require Second Schedule provides for conversion consent of all of the Act deals of existing Firm to LLP partners with conversion of existing Firm to LLP. Conversion of Permits conversion Section 21 and Third Permits conversion Section 56 & 57 Company but require consent Schedule of the Act but does not require and Third of all members provides for conversion consent of all Schedule of the of existing Private members Act deals with Companies to LLP. Conversion of Companies to LLP. Gray Issues on LLP Liability of Designated Partner: Section 8 provide that the Designated Partners of the Limited Liability Partnership shall be responsible for all the compliances of LLP provided under the LLP Act and LLP Agreement and in case of contravention of any of the provision, the designated partner shall be liable for all penalties imposed on limited liability partnership, which means in case of contravention of any provision e.g. in section 25 where every Designated Partners and LLP would be liable in case of non filing of notice of cessation of any partner with the registrar, the liability of the designated partner would be double including the liability of LLP for which also the designated partner is liable as per Section 8(b) Page 11 of 13
  12. 12. Recent Queries on LLP Club Whether foreign LLPs will be governed by Indian laws? Also, whether dispute between the partners can be adjudicated by arbitration? What will be the treatment of reserves in case of conversion of company to LLP? Whether I can form a LLP with a German national? What is difference between Partner & Designated partner? How do changes in shareholding happen in an LLP? Can Trusts be a shareholder in the LLP? What are the constitutional documents evidencing an LLP? Can a foreign shareholder be introduced in an LLP are there any FEMA / other guidelines? Is it advantageous for a foreign shareholder to be holding the shares in the LLP Are there any succession provisions under the tax laws for creating an LLP/ What about implications under other laws such as stamp duty, VAT etc.? How will winding up of existing companies operate , are there any changes in Company Law for enabling succession? To check out their solutions, click here Public Opinion Our Poll of the week “Whether procedure of winding-up LLP should be easy from that of a Company” was favored by 56% audience while 31% audience was favoring for more strict provisions for winding up of LLP and in between these 13% audience remain constant for any favor. To count your vote on “Whether LLP should be allowed to merge with Company” log in to Our Offerings Page 12 of 13
  13. 13. Our Team: Anki t Si ng hi – 011- 40622208 Shi pr a Wadh wa- 011- 40622246 As st . Ma na ger , Cor po r a t e Af fai r s & Compli an ce s Ass oci ate, C or por at e Affairs & C ompl i ances e mai l: an ki t @i ndi acp . c om e mail : s hi pr a@i ndi ac p. c om Visit us at From the house of Corporate Professionals (India) Private Limited D-28, South Extn. Part-I, New Delhi-110049, Ph: 011-40622200; Fax: 011-40622201. Email: & Our G amut o f Ser vi c es INV E ST M ENT B ANK IN G • INDI A EN TR Y S ER V IC E S • M &A , C OR POR A TE CO MP LI ANC E S & DU E DIL I GE NC E • C OR POR A T E TA XAT ION • SE C UR IT Y LAW ADV I SOR Y • AUD I T & AC COUN TIN G Disclaimer: This paper is a copyright of Corporate Professionals (India) Pvt. Ltd. The entire contents of this paper have been developed on the basis of Limited Liability Partnership Act 2008 and the corresponding Laws in India. The author and the company expressly disclaim all and any liability to any person who has read this paper, or otherwise, in respect of anything, and of consequences of anything done, or omitted to be done by any such person in reliance upon the contents of this paper. Page 13 of 13