1 LLP2 Brief Overview of LLP Act, 20083 Merits and Demerits of LLP4 LLP v/s Other Forms5 Taxation Aspects on LLP6 Taxation Aspect on Conversion to LLP7 FDI in LLP8 Audit & Accounts of LLP9 LLP v/s LLC
LLP•A form of business organization which has been introduced inIndia by way of LLP Act, 2008•Which Combines the advantages of both the Company andPartnership into a single form of organization•LLP also limits the personal liability of a partner for theerrors, omissions, incompetence, or negligence of the LLPsemployees or other agents•A separate legal entity
Brief Overview of LLP Act, 2008•Chapter I – Preliminary•Chapter II – Nature of LLP•Section 3 •(1) - A LLP is a Body Corporate •(2) - Shall have Perpetual Succession•Section 4: The Partnership Act, 1932 is not applicable to LLP•Section 5: Capability of becoming a partner in an LLP(Unsound, insolvent)•Section 6 (1): Every LLP shall have at least two partners
•Section 6(2): If at any time number of partners fall below 2 andLLP carries on business for >6 months, then the partner carrying onbusiness (knowing the fact) is personally liable for the obligations•Section 7 •(1): At least one partner should be resident of India •IF partners are body corporate •(2): Any partner may be admitted to or retired from a LLP in accordance with LLP agreement
•Section 7 •(3): An individual shall not become a designated partner in any LLP unless he has given his prior consent to act as such to the LLP in such form and manner as may be prescribed •(4): Every LLP shall file with the Registrar the particulars of every individual who has given his consent to act as designated partner in such form and manner as may be prescribed within 30 days of his appointment •(5): An individual eligible to be a designated partner shall satisfy such conditions and requirements as may be prescribed •(6): Every designated partner of a LLP shall obtain a DPIN from the CG
•Section 8: Designated partner responsible for doing all theacts, matters and things to be done by LLP and Liable to allpenalties imposed on LLP for any contravention of the provisions•Section 9: A LLP shall appoint Designated partner within 30 Daysof a Vacancy for any reasons•Section 10: •(1): If a LLP contravenes the provisions Section 7(1), LLP and its every partner shall be punishable with fine – 25,000 to 5,00,000 •(2): If a LLP contravenes the provisions Section 7(4) & (5), 8 and 9, LLP and its partnership shall be punishable with fine – 10,000 – 5,00,000
Chapter III - Incorporation of Limited Liability Partnership AndMatters Incidental Thereto ( Section 11 – Section 21)•LLP shall only be formed for carrying any business with profit motive•That the incorporation documents shall contain the prescribedinformation.•Registrar on registration shall issue the necessary certificate ofincorporation•Every LLP shall have a registered office to which all communicationsand notices may be addressed and where they shall be received.•The name of LLP shall end with words “LLP” or “Limited LiabilityPartnership” as suffix.•The LLP can also change its name•LLP can apply to the CG for directing any other LLP registered withsimilar nor identical name, to rectify its name.
Chapter IV - Partners And their Relationships (Section 22 toSection 25):•The mutual rights and duties of the partners of a LLP, shall begoverned by the LLP agreement.•In the absence of agreement as to any matter, the mutual rightsand duties of the partners shall be determined by the provisionsrelating to that matter as are set out in the First Schedule.•LLP Agreement can also be amended.•A partner can also cease to be partner of the firm•Cessations , not by itself discharge the partner from any obligationto the LLP or to the other partners or to any other person which heincurred while being a partner the obligation for acts.•Consent is necessary to become a partner in LLP
•Partner to notify change in address or name to the LLP , which inturn will notify the same to the Registrar•Any person ceasing to be partner of the LLP, can himself file theintimation of his cessation to the Registrar of CompaniesChapter V - Extent & Limitations of Liability of LLP & Partners(Section 26 to Section 31):•The mutual rights and duties of the partners of a LLP, shall begoverned by the LLP agreement.•In the absence of agreement as to any matter, the mutual rightsand duties of the partners shall be determined by the provisionsrelating to that matter as are set out in the First Schedule.
•LLP Agreement can also be amended.•A partner can also cease to be partner of the firm•Cessations , not by itself discharge the partner from any obligationto the LLP or to the other partners or to any other person which heincurred while being a partner the obligation for acts.•Partner to notify change in address or name to the LLP , which inturn will notify the same to the Registrar•Consent is necessary to become a partner in LLP•Any person ceasing to be partner of the LLP, can himself file theintimation of his cessation to the Registrar of Companies
Chapter VI – Contributions (Section 32 to Section 33):•A contribution of a partner may consist of tangible, movable orimmovable or intangible property or other benefit to the limitedliability partnership.•The obligation of a partner to contribute shall be as per the limitedliability partnership agreement•Chapter VII – Financial Disclosures (Section 34 – Section 41)•The LLP shall maintain such proper books of account as may beprescribed.•Prepare & file within 6 months of end of the FY a Statement ofAccount and Solvency with Registrar of Companies
•Statement of Account and Solvency will be signed by theDesignated Partners•Prepare & file within 60 days of end of the financial year anAnnual Return with the Registrar of Companies.•The documents filed with ROC shall be available for publicinspection.•Central Government can compound offence punishable with fineonly.Chapter VIII - Assignment and Transfer of Partnership Rights(Section 42):•The rights of a partner to a share of the profits and losses of thelimited liability partnership are transferable either wholly or in part.•Transfer does not entitle the partner to participate in themanagement or the conduct of the activities of the LLP.
•Chapter IX – Investigation (Section 43 – Section 54):•The CG shall appoint one or more competent persons asinspectors to investigate the affairs of a LLP and to report thereonin such manner as it may direct if—(a) the Tribunal(b) on an application received from >1/5th of the total number ofpartners LLP, by order, declares that the affairs of the LLP ought tobe investigated; or(c) any Court, by order, declares that the affairs of a LLP ought to beinvestigated.•The CG may appoint one or more competent persons as inspectorsto investigate the affairs of a LLP.
Chapter X - Conversion to LLP (Section 55 to Section 58)Chapter XI - Foreign Limited Liability Partnerships (Section 59)•The CG may make rules for provisions therein by applying orincorporating, with such modifications, as appear appropriateChapter XII - Compromise or Arrangement of Limited LiabilityPartnerships•LLP can enter into compromise or arrangement with its creditorsor the partners
•Consent of 3/4th in value of the partners or creditors will berequired•An application is required to be filed with the High Court for anycompromise or arrangement.Chapter XIII - Winding Up and Dissolution (Section 63 – Section 65)•A LLP can be wound up either voluntarily or by the order of tribunal•The Act prescribes the circumstances under which the LLP can bewound up compulsorily by the High Court.
Merits of LLP•Renowned form of business•Easy to Form•Body Corporate ( Separate Legal Entity)•Limited Liability•Perpetual Succession•Flexible to Manage•Easy Transferable Ownership•Capacity to sue•Lesser Compliances
Demerits of LLP•Any act of the partner without the other partner, may bindthe LLP•Under some cases, liability may extend to personal assets ofpartners.•Cannot raise money from Public.
LLP v/s Other Forms Category Partnership Company LLPCommon Seal r a Depends Cost of Negligible Minimum Statutory 800 Only Formation Fees Pvt. Co. – 6,000 Public Co. – 9,000Separate Legal Entity and r a a Perpetual Succession Evidence of Partnership Share Certificate LLP Ownership Deed Agreement
Category Partnership Company LLPApplicability of Not Applicable Compulsory The necessary Accounting rules in this regard Standards not yet issued. Annual Filing Not Required With ROC With Registrar of LLP Dissolution Agreement, Voluntary or by Voluntary or by Mutual order of National order of National Consent, or by Company Law Company Law Court Order Tribunal. Tribunal. Creation Created by Created by Law Created by Law ContractPrincipal / Agent Partners are The directors act Partners act as Relationship agents of the as agents of the agents of LLP and firm and other company and not of the other partners. not of the partners. members
Category Partnership Company LLPAnnual Filing Not Required With ROC With Registrar of LLPWhistle Blowing No Such No Such Provision made to Provision Provision protect employees & PartnersPrevailing Law The Indian The Companies The LLP Act, 2008 Partnership Act, Act, 1956 1932Contracts with Partners are free Restrictions on Partners are free Partners / to enter into any Board regarding to enter into any Director contract. some specified contract. contracts, in which directors are interested.
Taxation Aspect on LLP•LLP will be treated as Partnership firms for the purpose ofIncome Tax and will be taxed like a partnership firm.•Section 40(b) : Interest to partners, any payment of salary,bonus, commission or remuneration allowed as deduction inthe hands of Partnership firm•LLP not covered under presumptive taxation
Section 184Section 184: In order for Limited Liability Partnership to be assessed asfirm as Income Tax Act, it has to satisfy the following criteria:•The LLP is evidenced by an instrument.•The individual shares of the partners are very clearly specified in thedeed•A certified copy of LLP Agreement must accompany the return ofincome of the LLP of the previous year in which the partnership wasformed (If LLP Agreement amended, submit return of income with LLPagreement)•No Failure on the part of LLP while attending notices given by ITO
What happens if section 184 is not complied by firms?•Section 185 applies to the LLP•Section 185: When section 184 is not complied with, the consequence is that no deduction towards interest and remuneration is allowed. This is the mandate of the section 185.
Taxation aspect on Conversion to LLP•Capital Gain on conversion of Partnership into LLP •No tax implication •If the rights and obligation of the partners remain the same after conversion •If there is no transfer of any asset or liability after conversion•If there is a violation of these conditions , the provision ofcapital gain will apply.
Capital Gain on conversion of Company into LLP•Any transaction concerning transfer of a capital asset orintangible asset by a Private Company or unlisted PublicCompany to a Limited Liability Partnership•As a result of conversion of the company into a LLP inaccordance with the provisions of section 56 or section 57 ofthe LLP Act, 2008•Would be exempted from the provision of Capital GainTax, , only if the following conditions are satisfied :
•All the assets and liabilities of the Company immediatelybefore the conversion shall become the assets and liabilities ofthe LLP•All the shareholders of the Company immediately before theconversion shall become the partners of the LLP and theircapital contribution & PSR in LLP should remain in the sameproportion as their shareholding in the company on the dateof conversion•The shareholders of the company do not receive anyconsideration or benefit, directly or indirectly, in any form ormanner, other than by way of share in profit and capitalcontribution in the limited liability partnership
•The aggregate of the PSR of the shareholders of the company in theLLP shall >50% at any time during the period of 5 years from the dateof conversion•The turnover in business of the company in any of the 3PPY in whichthe conversion takes place does not exceed 60 Lakhs•No amount is paid, either directly or indirectly, to any partner out ofbalance of accumulated profit standing in the accounts of thecompany on the date of conversion for a period of 3 years from thedate of conversion.•If conditions not satisfied, profits taxed as deemed profits
Carry forward and set off of accumulated loss and unabsorbed depreciation allowance, on conversion into LLP and Amortization of expenditure incurred under Voluntary Retirement Scheme•Conversion of a Private Company or unlisted Public Companyto Limited Liability Partnership; •Compliance of conditions laid down under 47(xiiib) – Benefit of Carry forward and Setoff and amortization allowed •Non-compliance of conditions laid down under 47(xiiib) – No benefit of Carry forward and Set off and amorization
Benefit of tax credit in respect of Minimum Alternate Tax (MAT) paid by the Company•Any benefit of the MAT credit in hands of Private Company orunlisted Public Companies will not be continued in the handsof successor LLP
FDI in LLP•Allowed – •LLPs with FDI will be allowed, through the Government approval route, in those sectors/activities where 100% FDI is allowed, through the automatic route and there are no FDI-linked performance related conditions. By FDI-linked performance related conditions, it is meant that in sectors, where conditions like minimum capitalization etc are prescribed like development of Townships, NBFC, even though 100% FDI is allowed under automatic route, LLP’s will not be allowed to bring FDI with the approval of Government of India.
•Not Allowed – •To operate in agricultural/plantation activity, print media or real estate business •LLP having FDI, cannot make further investment in LLP or companies engaged in any business•Funding of LLP: •Allowed: •Downstream investment by company •Investment by Cash Considerations •Not Allowed: FII’s, Foreign Venture Capitalists and ECB’s
•Ownership and management of LLPs •Determination of Designated Partner: •At least one designated partner shall be person resident in India •Body Corporate as Designated Partner: •Registered under The companies act, 1956
Tax on LLP (Summary)•LLP’s will be treated as Partnership Firms for the purpose ofIncome Tax w.e.f assessment year 2010-11•No surcharge will be levied on income tax.•Profit will be taxed in the hands of the LLP and not in thehands of the partners.•Minimum Alternate Tax a nd Dividend Distribution Tax willnot be applicable for LLP.•Remuneration to partners will be taxed as “Income fromBusiness & Profession”.•No capital gain on conversion of partnership firms into LLP.
•Designated Partners will be liable to sign and file the IncomeTax return.•LLP shall not be eligible for presumptive taxation.•Capital Gain on conversion of Company into LLP will beexempt from tax, if prescribed conditions are complied with.•On conversion, the successor LLP , will be allowed to carryforward and set off of accumulated loss and unabsorbeddepreciation allowance• On conversion, the successor LLP will be allowed to amortizethe expenditure incurred under voluntary retirement schemeOn conversion, the successor LLP will not be allowed to takethe credit of MAT paid by the predecessor company.
Accounts of LLP•LLP has to maintain books of accounts as prescribed in Rule24 of LLP Rules•These books to be retained for 8 years•Either on Cash or on Accrual Basis•The accounting year of each LLP must end on 31st March ( LLPcannot choose accounting year ending on any other date)•It has to prepare statement of accounts and solvencystatement on or before 30th September each year (To besigned by designated partners)
Audit of LLP•To be audited by a CA in accordance with rule 24 of LLP Rules•Audit is compulsory if: •Contribution exceeds 25Lakhs or; •Turnover exceeds 40Lakhs (No specific form of audit report is required to be given)•Appointment of Auditor: •Appoint auditors within 30 Days before the end of each FY •If 1st FY, appointment to be done before the end of first FY
Annual Return Compliance•LLP has to file an annual return with ROC•On or before 30th May each year•In form no. 11 with the prescribed fees
LLP V/s LLCBasis of Difference LLP LLC Formation Easier to from than Most states require LLCs filing of articles of organization and other docs Paperwork Partnership agreement Operating agreement to be drafted along with company bylaws to be drafted Size Minimum of 2 LLCs may be single partners required member operated.
Basis of Difference LLP LLC Reduced Liability Personal creditors can Biz creditors cannot go seize the business after personal assets assets; to recover debts likewise, business creditors can seize personal assetsProfession(Business) LLPs are more likely to LLCs are more likely to consist of consist of Small/mid Professionals(CAs, sized owners. Lawyers etc…)