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Limited Liability Partnerships in light of Recent Amendments

December 4, 2012

What is an Limited Liability Partnership - Background

Limited Liability Partnership entities, the world wide recognized form of business organization, has been introduced in India by way of Limited Liability Partnership Act, 2008. A Limited Liability Partnership, popularly known as LLP, combines the advantages of both the Company and Partnership into a single form of organization. In LLP, one partner is not responsible [or] liable for another partners'/LLP's employees/other agents errors, omissions, misconduct or negligence. This is an important difference from that of an unlimited partnership. In LLP, all partners have limited liability for each individual's protection within the partnership, similar to that of the shareholders of a corporation. However, unlike corporate shareholders, the partners have the right to manage the business directly.

Concept of LLP has its origin in 1991 in U.S.A. The LLP structure is available in countries like United Kingdom, United States of America, Australia, Singapore, Germany, Canada etc., Our Indian LLP Act is broadly based on UK LLP Act, 2000 and Singapore LLP Act 2005.

The Committee on Regulation of Private Companies and Partnerships headed by Shri. Naresh Chandra (2003) and The Committee on New Company Law (Dr. J.J. Irani Committee (2005)) constituted by Ministry of Corporate Affairs have strongly recommended to have legislation on LLPs in India.

Features of LLP

  • LLP is a body corporate having a legal entity separate from its partners and shall have perpetual succession.
  • An LLP shall have either the words "Limited Liability Partnership" or the acronym "LLP" as the last word of its name.
  • An LLP and any other body corporate can be a partner in LLP.
  • An LLP should have at least two Designated Partners, one of whom should be a resident in India.
  • Any change in the partners of a LLP shall not affect the existence, rights or liabilities of the LLP.
  • LLP can be formed to carry on a lawful business, which has been defined to include any trade, business or profession.
  • LLP can sue, be sued, acquire, own, hold, develop or dispose of property, possess a common seal and do such acts as bodies corporate may lawfully do.
  • The liabilities of a LLP would be met out of the property of the LLP.
  • LLP is an extremely flexible entity and is governed by LLP Agreement in respect of rights, duties of LLP & its partners, remuneration to partners etc.,

Advantages of LLP

  • Renowned and accepted form of business worldwide in comparison to Company.
  • Low cost of Formation.
  • Easy to establish, manage & run.
  • No requirement of any minimum capital contribution.
  • No restrictions as to maximum number of partners.
  • LLP & its partners are distinct from each other.
  • Partners are not liable for acts of other partners.
  • No principal agent relationship between the partners.
  • Lesser compliance requirements.
  • No exposure to personal assets of the partners except in case of fraud.
  • Less Government Intervention.
  • Easy to dissolve or wind-up.
  • Professionals can form Multi-disciplinary Professional LLP, which was not allowed earlier.
  • Audit requirement only in case of contributions exceeding Rs. 25 lakh or turnover exceeding Rs. 40 lakh

Disadvantages of LLP

  • LLP can not be formed for non profit objectives / purposes and NBFC Activities.
  • Cannot raise money from Public.
  • One of the designated partners must be resident in India.
  • Any act of the partner without the consent of the other may bind the LLP.
  • Under some cases like fraud, misrepresentation,etc., liability may extend to personal assets of partners.
  • Very heavy penalty (of Rs 100 per day) for late filing of Annual Returns, LLP Agreement and any changes therein etc.,
  • Where an LLP with FDI wants to have a body corporate as a Designated Partner(DP), only a Company registered in India under the Companies Act, 1956 can be a DP.
  • No separation of Management from owners.

Pre-conditions for conversion of existing firms/companies (Private and unlisted) into LLP

A firm, private or an unlisted company may apply to Registrar of Companies (ROC) in the prescribed form along with the prescribed documents for converting itself into an LLP provided:

  • all the partners of the firm or shareholders of a company shall become partners of the LLP.
  • there is no security interest subsisting on assets of the company at the time of making an application.
  • on registration of the LLP, all assets and liabilities of the firm [or] companies(Private and unlisted) shall be transferred to and vest in the LLP, and the firm/companies shall be dissolved and removed from the records of the respective authorities i.e., registrar of firms/ROC.

Further, the LLP shall ensure that for a period of twelve months commencing not later than fourteen days after the date of registration, every official correspondence of the LLP bears a statement that it was, from the date of registration converted from a firm/company into a LLP and name and registration, if applicable, of the firm from which it was converted.

Advantages of Conversion of Firm, Private Company/Unlisted Public Company into LLP

Advantages of conversion of Firm into LLP
  • There is no limit to maximum number of partners, therefore gives you opportunity to expand your business.
  • The liability of Partners is limited to the amount which is agreed between the partners to be contributed towards the LLP.
  • No exposure to personal assets of the partners.
  • Business will be recognized by the name of LLP and not individual partners, therefore LLP can create goodwill of its own.
  • Recognized as body corporate therefore it will be easy to attract finance from market.
  • Foreign Investment is also allowed , therefore it will be possible to access to foreign expertise.
  • Partner can enter Joint Ventures with other parties in the name of LLP, which is otherwise not feasible in case of partnerships.

Unabsorbed depreciation and accumulated losses of the Partnership firm can be carried forward and set off by the LLP.

Advantages of conversion of Private Company/ Unlisted Public Company into LLP:
  • No requirement of holding any meeting and statutory records.
  • LLP will be taxed as Partnership firms and therefore no dividend distribution tax.
  • No need to pay large fees for increasing the contribution, as required in case of capital.
  • Restrictive provisions relating to managerial remuneration and acceptance of deposits are not applicable to LLPs.
  • Less Compliance and less intervention of Government.
  • Transfer of assets on conversion into an LLP is not treated as transfer provided the transfer is done in accordance with provisions of section 56 and Section 57 of the LLP Act, 2008. Thus there is no capital gains tax on conversion of private company/ unlisted public company into an LLP.
  • Transfer of shares by any shareholder of a private company/ unlisted public company in the process of conversion will not be treated as transfer under the Income Tax Act, 1961.
  • Unabsorbed depreciation and amortization of expenses can also be carried forward by the LLP upon fulfillment of conditions mentioned in section 47(xiiib) of the Income Tax Act, 1961.
  • Accumulated losses of the Company can also be carried forward and set off by the LLP.

Foreign LLP

Foreign LLP can establish a place of business in India and its regulatory mechanism is prescribed as per section 59 of the LLP Act, 2008 and rule 34 of the LLP Rules, 2009 prescribed by the Central Government.

Taxation of LLPs

Section 10(23) of Income Tax Act states that 'firm' shall include LLP, 'partner' shall include partner of LLP and ‘partnership’ shall include LLP. So, LLP incorporated in India will be assessed as if it is a partnership firm w.e.f. Assessment year 2010-11

  • LLP will be taxed on the same lines as partnership firms — this would mean taxation of profit in the hands of the entity; the partners will be exempted.
  • As per section 10(2A) of Income Tax Act, the share of profit of LLP will be exempted from tax in the hands of the partners. LLPs are taxed at a rate of 30.90%. There is no surcharge to be levied on the income tax of LLPs.
  • Dividend Distribution Tax will not be applicable for LLP
  • The new Chapter XII-BA introduced to the Income Tax Act, 1961 vide Union Budget 2011-2012 provides for levy of Alternate Minimum Tax @ 18.5% (plus surcharge) on the adjusted total income of LLPs in cases where the regular income tax payable by a LLP for a particular financial year is less than the corresponding AMT. The adjusted total income for the purpose of AMT is calculated as follows:
  • Adjusted total income shall be the total income as increased by the deductions claimed under any section included in chapter VI-A ( C ) (deductions in respect of certain income) and deductions claimed under section 10AA (deduction available to SEZ units).
  • Indian LLPs are not liable to tax under the Wealth Tax Act as Wealth Tax Act deals with taxation of individuals and Companies (company does not include LLP)
  • LLPs cannot avail presumptive taxation scheme under sections 44AC or 44AD of the Income Tax Act.
  • The tax will be imposed only on 40% of the firm's income, since the firm will be allowed to pay the balance 60% to the partners as remuneration. This means, the partners will have to pay tax on the amount paid to them. So, there will be no double taxation of income.

Foreign Investment in LLP

The FDI Policy in India is administered by the Government of India and regulated by the Reserve Bank of India. In May 2011 the Cabinet Committee on Economic Affairs of Government of India approved to allow FDI in LLPs and Pres Note No. 1 was issued in this regard in May, 2011.

The contents of the Press note No. 1 of 2011 are as follows:

  1. In LLPs 100% FDI is allowed with the prior approval of the FIPB in sectors where 100% FDI is allowed under automatic route. However FDI in LLPs is not allowed in the following sectors:
    • Sectors where FDI – linked performance related conditions are attached. By FDI-linked performance related conditions, it is meant that in sectors, where conditions like minimum capitalization etc., are prescribed like sectors such as power, roads, information technology, manufacturing, development of Townships, NBFC etc.,
    • Agriculture or plantation activities
    • Print media
    • Real Estate
  2. LLPs cannot avail External Commercial Borrowings.
  3. Foreign institutional Investors /Foreign Venture Capital Investors are not permitted to invest in LLPs.
  4. Conversion of Company with FDI into LLP is permitted. But, prior approval of the FIPB is to be obtained.
  5. LLPs with FDI are not allowed to make downstream investments which mean LLP having FDI, cannot make further investment in LLP or companies engaged in any business, even though 100% FDI is allowed under those sectors. However Indian companies with FDI are permitted to make downstream investment in LLPs only if both the Indian company and the LLP operate in sectors where 100% FDI is permitted under automatic route and no FDI-linked conditions are attached.
  6. Contribution through foreign investment should be in cash only. If the investment is to be bought otherwise than in cash, then Government approval is required.
  7. Designated Partners (DPs) in LLPs with FDI
    • For the purposes of appointing a DP, "resident in India" would have the meaning, as defined for "person resident in India", under Foreign Exchange Management Act
    • Where an LLP wants to have a body corporate as a DP, only a company registered in India under the Companies Act, 1956 can be a DP
    • DP are responsible for compliance with the FDI conditions and liable for all penalties imposed on the LLP for any contravention.

Recent Changes in Limited Liability Partnership(LLP)

  1. Integration of DIN and DPIN:
    • After the commencement of Limited Liability Partnership Act, 2008 (LLP Act, 2008) one of the major change was integration of DIN (Director Identification Number) & DPIN (Designated Partner Identification Number). Previously MCA used to issue DIN to Directors and DPIN to Designated Partner. However, to avoid duplication it has vide Circular For DIN DPIN dated 08.07.2011 has integrated DIN & DPIN and w.e.f 09.07.2011 no fresh DPIN are issued. If an indivual has both DIN & DPIN, his DPIN will be cancelled and DIN will be used for all purposes under Companies Act, 1956 and LLP Act, 2008.
  2. Integration of LLP & MCA Site:
    • Another major change is the integration of LLP site with MCA site w.e.f 11th June 2012. The erstwhile LLP website (www.llp.gov.in) has been merged with the MCA website (www.mca.gov.in) and all filings pertaining to LLP's has to be done through the MCA portal only.
    • The Procedure for formation of LLP is almost same. One practical difference is that Residential status of each designated partner needs to be updated by filing Form DIN 4.
    • Registration of Limited Liability Partnership was previously centralized at New Delhi. But, now the powers have been delegated to the respective Registrar of Companies(ROC) where the Register office of LLP is situated.
  • Changes after Integration Process:
    • Previously stakeholders did not have the facility to view the Master Data of LLP as we use to do for companies. But, after this integration process now we can View Master data, Signatory details and Index of Charges of all the LLP's.
    • Facility of Inspection is now available even for LLP's after a payment of a fee of Rs. 50/-.
    • There is no requirement that Both the Designated Partners must have DSC. We require the DSC of both the partners only while we file Form # 8 (Statement of Account and Declaration of Solvency).
  1. Recent major notifications in LLP:

 

Reference No Date of Issue Description Main Synopsis of Notification
G.S.R. (E) 05/06/12 The Limited Liability Partnership (Amendment) Rules, 2012 ·       Above rules came into effect from 11th June, 2012

·       the person who intends to become designated partner/partner of LLP shall file its consent in Form # 2( Incorporation Documents)

·       No requirement to file Form # 4 at the time of incorporation, it has to be filed only when there is a appointment, cessation or change in designation, or name, address of the Designated partner/Partner with filing fee of Rs. 50/-.

·       Filing fee has been increased to Rs.500/- for Form # 24 for strike off name of defunct LLP instead of Rs.50/-

G.S.R. (E) 10/07/12 Sections 51, 63-65 of LLP Act,2008 notified. Section 51 (Application for winding up of LLP) and
Section 63-65 Chapter XIII) (Winding up and dissolution.) have been notified
G.S.R. (E) 10/07/12 Limited Liability Partnership (Winding up and Dissolution) Rules, 2012 ·       Ministry has notified the new Limited Liability Partnership (Winding up and Dissolution) Rules, 2012 which will be effective from 10th July 2012.

·       Winding up may be voluntary or by the order of the Tribunal.

·       In case of voluntary winding up resolution must be passed with approval of 3/4th of majority of partners and approval of all secured/unsecured creditors if any.

·       Winding up by Tribunal comes when LLP is unable to pay debts, i.e. to a creditor exceeding one lakh rupees / Execution in favour of Creditor returned unsatisfied / Tribunal is satisfied that LLP is unable to pay debts.

G.S.R.692(E) 14-09-2012 Limited Liability Partnership(Second Amendment) Rules,2012 ·  The amendment has come into effect w.e.f. 16th September, 2012. Following point vii in item no.12 of Form 11 has been substitued:
Companies Incorporated Outside India [or] Companies incorporated in Sikkim.

 

Conclusion

Limited Liability Partnership(LLP) though came very late to India, has finally found its space. LLP is best suited to small and medium business enterprises by offering a good mix of company and partnership form of organization. The Ministry of Corporate Affairs(MCA) is continuously striving to bring about improvements in the field of regulations governing LLP and their formation. Integration of LLP and MCA site has further simplified the procedure for formation of a LLP and other filings related thereto.

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