Limited Liability Partnerships (LLPs) – An elucidation

Introduction
Internationally, Limited Liability Partnership (LLP) ...
 A partner can decide the way they want to run and manage the LLP, in the form
of LLP Agreement. The LLP Act does not reg...
LLP is similar to the procedure for incorporation of a company under the Companies
Act, 1956. The registering authority is...
Steps
Process
DIN Director identification number
(of at least any two partners)
DSC
1
2
3
4

Digital signature Certificate...
•

Maintenance of books of accounts

LLP would be required to maintain such books of account as prescribed, either on
cash...
•

Company into LLP

A private limited company or an unlisted public limited company can get converted
into LLP. Any priva...


Guidance & Execution in formation of LLP



Attestation/Certification of documents submitted for application for allot...
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Limited Liability Partnerships – An elucidation

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I presented on "Limited Liability Partnerships (LLPs) – An elucidation" in National Convention for CA students at Chennai on 27th November,2013. This is the paper of it.

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Limited Liability Partnerships – An elucidation

  1. 1. Limited Liability Partnerships (LLPs) – An elucidation Introduction Internationally, Limited Liability Partnership (LLP) is a preferred business vehicle particularly for the service industry or activities involving professionals like Company Secretaries, Accountants, Advocates and even their cross sections. LLP combines the advantages of both the Company and Partnership into a single form of organization. This form of business organization has been prevalent in many countries including USA, UK, Japan, and Singapore. The Limited Liability Partnership form of business organization was introduced in India by way of Limited Liability Partnership Act, 2008 (LLP Act, 2008). The act was published in the official Gazette of India on 9 th January, 2009 and has been notified with effect from 31st March, 2009. The LLP legislation emerged in India based upon the recommendations of Abid Hussain Committee (1997), Naresh Chandra Committee on Corporate Governance (2003) and Dr. Jamshed J. Irani Committee on New Company Law (2005). Indian LLP Act, 2008 is broadly based on UK LLP Act, 2000 and Singapore LLP Act, 2005. According to both of these Acts, LLPs allow creation in a body corporate form as a separate legal entity i.e. separate from its partners/members. LLP is preferable form of organization for the people who want to run the business on cooperation, flexibility of organizing their internal structure as a partnership but with limited liability. Lots of entrepreneurs have welcomed government move as structure is having benefits of company with lesser compliance requirement. As of now more than 10,000 LLPs have been registered. Features of LLP  An LLP is a body corporate and legal entity distinct from its partners and has perpetual succession.  Any two or more persons associated for carrying on a lawful business with a view to earn profit may form LLP as per the Act. Each LLP shall have at least two individuals as designated partners, of whom at least one shall be resident in India. There is no cap on number of partners.  LLP agreement is not mandatory. In the absence of LLP agreement, the execution of mutual rights and liabilities of partners shall be determined or governed as provided under Schedule I to the LLP Act. 1
  2. 2.  A partner can decide the way they want to run and manage the LLP, in the form of LLP Agreement. The LLP Act does not regulate the LLP largely; rather it allows partners the liberty to manage it as per their will.  Every Limited Liability Partnership shall use the words “Limited Liability Partnership” or its acronym “LLP” as the last words of its name.  Limited Liability Partnership form has opened the door for Micro, Small and Medium Enterprises (MSME) Sector to enjoy the dual advantage of less compliance with higher access to credits in the market.  LLP is a unique form of business organization that enables professionals like CS, CMA, CA Actuaries, Valuers, Management Consultants and Advocates to form a Multi-disciplinary Professional LLP, which was not allowed earlier. This is now allowed with limited liability.  Foreign Investment is allowed in LLP only with Foreign Investment Promotion Board (FIPB) approval. Under FDI Policy, Foreign Investment in LLP is allowed with specific approval of the Government. However, FDI in LLPs is allowed only under those sectors where 100% FDI is otherwise allowed under automatic route and subject to other specified conditions. Some of the main advantages and disadvantages of LLP at a glance are :Advantages  No major Investment  Limited Liability Commercially efficient vehicle No personal liability Internal flexibility Less statutory compliances Lesser paper work and formalities  Perpetual succession             Disadvantages Mandatory Disclosure of information Cannot raise public money Loss of secrecy of information Untried structure More legal documentation Stringent rules on FDI Practical issues in formation financial  Lack of awareness among general public Incorporation of LLP [Section 11 to 21] It is permitted to incorporate a LLP only for “a lawful business with a view to earn profit”. Therefore, LLP cannot be incorporated for charitable purposes unlike Section 25 companies under the Companies Act, 1956. The procedure for incorporation of 2
  3. 3. LLP is similar to the procedure for incorporation of a company under the Companies Act, 1956. The registering authority is the Registrar of Companies (RoC). The Act has defined “Limited Liability Partnership” to mean a partnership formed and registered under this Act. This stipulates two requirements : A partnership and;  The need for its registration. Thus, the registration of the LLP is compulsory under the Act. The certificate of incorporation is the conclusive evidence of its formation. At least two persons (natural or artificial) are required to form an LLP. In case, any body corporate is a partner, then it should nominate any natural person as its nominee for the purpose of the LLP. The following can become a partner in an LLP : Company incorporated in and outside India  LLP incorporated in & outside India  Individuals resident in & outside India ‘Designated Partner’ means a partner who is designated as such in the incorporation documents or who has become a designated partner by and in accordance with the LLP Agreement. The designated partner shall be responsible for all the acts, matters and things to be done by the LLP in respect of all the compliances, rules and provisions of the Act. ‘Contribution’ of a partner may be in the form of money, tangible or intangible property or by contracts for services performed or to be performed. The obligation of a partner to contribute money or property for an LLP shall be as per the LLP agreement. In the absence of any provision to the contrary in the LLP Agreement, all partners are entitled to share equally in capital, profits and losses of LLP. The LLP Agreement, subject to the provisions of the LLP Act, will govern the relationship of partners interse and with LLP. It is a public document relating to rights and duties as set out in the First Schedule. A person becomes a partner by virtue of this agreement. The Process to form an LLP is :- 3
  4. 4. Steps Process DIN Director identification number (of at least any two partners) DSC 1 2 3 4 Digital signature Certificate (of at least any two partners) Name reservation Certificate of Incorporation LLP Agreement Designated partners details Total Stamp duty on LLP Agreement Form DIN 1 DSC Form 1 Form 2 Form 3 Form 4 Compliances for LLP [Section 34 & 35] 4 Filling Fees (in ₹) 100 to 300 500 to 2,500 200 500 to 5,000 50to 200 50 to 200 2,000 to 11,200 0.1% of Capital & maximum ₹ 10,000 Time 1 Day 1 Day 3 Days 7 Days 7 Days 2 Days 21 Days
  5. 5. • Maintenance of books of accounts LLP would be required to maintain such books of account as prescribed, either on cash basis or accrual basis of accounting. The accounts are to be maintained on financial year basis, which has been defined to mean the year starting from 1 st of April of any year and ending on 31 st of March of the following year. The books of account shall be preserved for 8 years from the date on which they are made. The LLP is obligated to file Statement of Account and Solvency within 30 days from the end of 6 months of the financial year to which the Statement of Account and Solvency relates. The Act also postulates the filing of Annual Return by LLP within 60 days from the close of the financial year. • Audit The audit of LLP is mandatory unless the turnover of LLP does not exceed ₹ 40,00,000 or contribution does not exceed ₹ 25,00,000. The power to appoint auditors lies with designated partners. The auditor is to be appointed within 30 days prior to the end of each financial year. In case of new LLP, the auditor is to be appointed before the close of the first financial year. Conversion into LLP [Section 55 to 58] For conversion of firm/private limited company/unlisted public company into LLP, the partners of the firm/shareholders of company are required to file a statement and incorporation documents in the prescribed form with the RoC. • Partnership firm into LLP Any existing partnership firm that is willing to get converted into an LLP will need to apply through Form 17 (Application and statement for the conversion of a firm into LLP). Form 17 needs to be filed along with Form 2 (Incorporation document and Subscriber’s statement). On registration of the LLP, all assets and liabilities of the firm shall be transferred to and vest in the LLP, and the firm shall be dissolved. As an LLP and a general partnership is being treated as equivalent (except for recovery purposes) in the Act, the conversion from a general partnership firm to an LLP will have no tax implications if the rights and obligations of the partners remain the same after conversion and if there is no transfer of any asset or liability after conversion. 5
  6. 6. • Company into LLP A private limited company or an unlisted public limited company can get converted into LLP. Any private company/unlisted public company that is willing to get converted into an LLP needs to apply through Form 18 (Application and Statement for conversion of a private company/unlisted public company into LLP).Form 18 needs to be filed along with Form 2 (Incorporation document and Subscriber’s statement). Private limited company/unlisted public company can be converted if and only if –  There is no security interest in its assets subsisting or in force at the time of application for conversion; and  All the shareholders of the company become partners of LLP and no one else. Taxation of LLP LLP formed and registered in India under the LLP Act, 2008 shall be taxed as a ‘Firm’ under the Income-tax Act, 1961. Accordingly, the income of the LLP will be taxed in the hands of the LLP and the amount disbursed to the partner as profit (i.e. partner‘s share of total income) shall be exempt from tax in his hands, as in the case of partnership firm under section 10(2A) of the Act. For LLP tax rate is 30% of total income (plus EC & SHEC). An LLP also has a distinct advantage of claiming interest up to 12% on capital and borrowings from partners irrespective of profit or loss during the given year. Further, to encourage small companies (private & unlisted) to convert themselves into LLPs, provisions are made under the Act to give immunity from capital gains tax by not treating ‘Conversion’ as ‘Transfer’ u/s. 47(xiiib) of the Act. No Dividend Distribution Tax (DDT) on distribution of profits to partners is applicable. LLP is not an ‘Eligible assessee’ for the purpose of presumptive taxation u/s 44AD. LLP shall be subject to Alternate Minimum Tax (AMT) @ 18.5% on the ‘Adjusted total income’ as per the income tax provisions. However, LLP will be able to enjoy credit of AMT to be carried forward for a period of 10 years, though in the first stance, there will be an outgo of 18.5% tax. Professional Opportunities LLP is a comparatively new form of business organization in India and various opportunities for Chartered Accountants (CAs) exist with this regard :6
  7. 7.  Guidance & Execution in formation of LLP  Attestation/Certification of documents submitted for application for allotment of Designated Partner Identification Number (DPIN)  Drafting of LLP agreement  Advice on conversion from other forms to LLP and vice-versa  Maintenance of books of accounts  Audit of accounts  Advisory on Compromise, Arrangement and Reconstruction  Arbitration matters Conclusion The LLP has brought immense benefits to the professionals in terms of limited liability and flexibility of operations. It would encourage Micro, Small and Medium Enterprises (MSME) to use this as a business tool. It has become our responsibility to learn the act and properly guide the clients. 7

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