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Llp Mantra I 23 Apr 2009


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Llp Mantra I 23 Apr 2009

  1. 1. fields like Charetered Accountant, Company Introduction Secretary, Advocates and so on. After the establishment of WTO and pursuant to rapid development in the corporate world, competition is now not restricted to a specific country and is becoming worldwide and entering into all the fields. Therefore, as an endeavor to enable the Indian Since Limited Liability Partnership is managed as per Corporate Entities to combat with such competition the LLP Agreement which the partners are free to and to have an edge over the others, the Government formulate as per their commercial understanding, of India has now introduced a concept called “Limited therefore, it allows greater flexibility and freedom to Liability Partnership” , which is already very popular partners. However in the absence of such in the international business world. agreement, the LLP would be governed by the framework provided in Schedule 1 of Limited Although the other forms of businesses like Company, Liability Partnership Act, 2008 which describes the Partnership etc. as existed before coming into effect matters relating to mutual rights and duties of the “Limited Liability Partnership Act, 2008”, has partners inter se and those of LLP and its Partners. their own significance. However, still they contain some limitation which restricts an entrepreneur from However, there still exist some Grey Areas in Limited converting its business ideas into reality. The Liability Partnership Act, 2008 which are elaborated Partnership forms of business organization contain below: the restriction as to the maximum number of partners that are allowed to form the Partnership. Similarly, 1. Unnodded Issues the formation of company forms of business organization is itself a cumbersome and complicated The LLP Act was notified on March 31, 2009 which process and involves a huge amount of registration includes a total of 81 sections, 4 schedules and 29 fees. eforms. However, out of 81 sections and 4 schedules, only 71 sections and First schedule have Thus, to help the entrepreneur in pursuing their been notified till now. For example the provision business ideas, a new business model that embraces relating to the conversion of partnership, firm and some key features and benefits of Company and Unlisted Public Company into LLP and that of Partnership has been enacted called “LLP”. winding up and dissolution of the LLP are yet to be notified. 2. Tax Aspects: LLP About LLP Neither the LLP Act, 2008 nor Income Tax Act, 1961 has prescribed any provision relating to the Taxation Aspects of LLP. LLP is nothing but a hybrid of Company and • Whether the Capital Gain Tax arising on the Partnership form of business organization governed transfer of property from the by the provisions as incorporated in the Limited company/partnership to LLP on the Liability Partnership Act, 2008 and rules and conversion would be exempted as per the regulations associated with it. special provision of Section 47 of the As Service sector plays an signifcant and vital role in Income Tax Act, 1961. the development of any economy and there is • At what rate would the income of LLP growing divresity in the range of services being would be taxed. offered, therefore, LLP would also be very useful • What would be the tax treatment in the form of business organisation for this segment. The hands of partners on the receipt of profits, advantage of LLP form would be that it will not remuneration and etc. from the LLP. impose detailed legal and procedural requirements • What would be the rate of stamp duty on as in the case of companies. In this way, it will be an the transfer of Immoveble property on the important vehicle catering to the needs of conversion of company/partnership into professionals, small scale sector, venture capital and LLP. would make it feasible to set up a multidisplinary 3. FDI Policy: partnerships comprising of professionals of different Although the LLP Act, 2008 allows the Non Resident 1
  2. 2. to become a partner in the LLP, however, the FDI independent or unauthorized actions of other guidelines are not yet amended to include the LLP. partner(s), liability of partners being limited to the Whether for the purpose of FDI guidelines, LLP will respective stake of each partner in the LLP, is distinct treated at par with the companies or not are some advantage over the partnership. areas which needs consideration. Such distinct features would be the key drivers for 4. Recognition by Authorities forming LLP, rather than Company for planning different structures. The added advantage towards Although the LLP Act has not prescribed any conversion of a Company into an LLP should be tax restriction with regard to the type of the business neutral, as one understands is the legislative intent. that may be carried on through LLP. However, still This is on the ground that there is no transfer of any the formation of LLP needs the recognition of the assets to a third party on conversion, but an internal other authorities like RBI as NBFCs regulations reorganization taking place through a statute. Similar requires the approval of RBI be obtained before the reorganizations like conversion of a formation of Company as NBFC. Therefore, what proprietary/partnership into a company, or would be requirements with regard to the registration of a firm as a company under Part IX of incorporation of LLP for carrying on the business as the Companies Act, 1956, are treated as tax-free, for NBFC are yet to be prescribe in NBFCs regulations. which there exists legislative/judicial precedence. Another major reason for conversion of a company into an LLP is on the tax front. Currently, the Income- Key Features 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, should not be liable to pay MAT or DDT, considering the legislative intent. Major advantages as compared to Company • No limit on number of partners. • Less Government Intervention • Minimal cost of Formation • Less Compliance level • No requirement of holding any meeting • No requirement of maintenance of large statutory records. Status pro –quo on conversion It is essential to note that on conversion, all the members of the Company 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. On conversion, Regular Section all the tangible (movable and immovable) property and the intangible property, all assets, interest, rights, privileges, iabilities, obligations of the Company shall stand transferred to, and vest in, the LLP and the Rationale behind conversion of Existing Private Company so converted into an LLP shall cease to exist Company into LLP upon conversion. Limited Liability partnership concept combines the organizational flexibility of a partnership firm FAQs coupled with the advantage of limited liability for its Since LLP is a new concept in India, therefore keeping partners. The key features of the LLP such as a in the mind the unawareness about the subject, we separate legal entity with unlimited number of partners, no partner being liable on account of the
  3. 3. Online Solution have prepared a query bank for the users. Some of them are given below: Wizard- Wizard-LLPonline Whether a body corporate can become a, an online Portal developed by partner in LLP? Corporate Professionals, is a comprehensive and Yes. simplified portrayal of Limited Liability Partnership. Is there any residency requirement for It aims to provide one stop solutions for all your becoming partner? needs relating to the LLP whether relating to the No. formation, conversion or otherwise. The unique and Who can be a “Designated Partner”? innovative calculators of this website, makes it an Only Individual. indispensable tool for the users of the LLP who might How the mutual rights and duties of face difficulties in understanding and conceptualizing partners inter-se and those of partners this new concept. and LLPs would be governed? LLP Agreement entered into between the Highlights of partners or between the LLP and partners would govern the mutual rights and duties of partners. Whether LLP Agreement would be mandatory for all LLPs? No. In the absence of the LLP Agreement, the mutual rights and duties of the partners inter se and those of partners and LLPs would be governed by the provision as prescribed under Schedule I of the Act. How can a person become a partner of an LLP? Persons, who subscribed to the incorporation Document at the time of incorporation of LLP, would become the partners of LLP and subsequent to incorporation, new partners can be admitted as per conditions and requirements prescribed in the LLP Agreement Whether Foreigners can incorporate LLP in India? Prepared by: Yes Ankit Singhi – 011-40622208 To know more about the subject and to get an Asst. Manager, Corporate Affairs & Compliances expert view on all the queries relating to the LLP, Visit FAQs section of Shipra Wadhwa-011-40622246 Associate, Corporate Affairs & Compliances D-28, South Extn. Part-I, New Delhi-110049, Ph: 011-40622200; Fax: 011-40622201. 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 latest prevailing Limited Liability Partnership Act, 2008 in India. The author and the company expressly disclaim all and any liability to any person who has read this Newsletter 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 Newsletter.