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Limited Liability Partnership (LLP)

Background of LLP in India - In the Indian context, businesses are typically structured or organized as sole proprietor concerns, partnership firms or companies (either public or private limited). These types of business organizations have their individual advantages and disadvantages. For example, a partnership firm provides flexibility in internal organization, right to participate in the management, with no public disclosures, whereas in the case of a company, the advantages include liability of shareholders being limited, perpetual succession and unlimited members. ‘Limited Liability Partnership’ (LLP), is a legal form available world-wide has now been introduced in India and is governed by the Limited Liability Partnership Act 2008 with effect from April 1, 2009. Seen as a major capacity-enhancing tool for Chartered Accountants and other professionals, the LLP is a corporate business vehicle that enables professional expertise and entrepreneurial initiative to combine and operate in flexible, innovative and efficient manner, providing benefits of limited liability while allowing its members the flexibility or organizing their internal structure as a partnership Definition: A limited liability partnership (LLP) is a partnership in which some or all partners (depending on the jurisdiction) have limited liability. It therefore exhibits elements of partnerships and corporations. In an LLP one partner is not responsible or liable for another partner's misconduct or negligence. This is an important difference from that of an unlimited partnership or partnership firms, formed under Indian Partnership Act, 1932. In an LLP, some partners have a form of limited liability similar to that of the shareholders of a corporation. Unlike corporate shareholders, the partners have the right to manage the business directly. An LLP also contains a different level of tax liability from that of a corporation. Limited liability partnerships are distinct from limited partnerships in some countries, which may allow all LLP partners to have limited liability, while a limited partnership may require at least one unlimited partner and allow others to assume the role of a passive and limited liability investor. As a result, in these countries the LLP is more suited for businesses where all investors wish to take an active role in management. Certain key provisions of the LLP Act are as follows: * The LLP shall be a body corporate and a legal entity separate from its partners. * Any two or more individual or body corporates can form an LLP; however, the LLP can have unlimited number of partners. * The LLP would have a perpetual succession. * The mutual rights and duties of partners of an LLP inter se and those of the LLP and its partners shall be governed by an agreement between the partners, or between the LLP and the partners, subject to the provisions of the proposed legislation. * The capital contribution of the partners can be in the form of tangible or intangible proper or of any other nature. * The LLP will be liable to the full extent of its assets, with the liability of the partners being limited to their agreed contribution in the LLP. No partner would be liable on account of the     independent or unauthorized actions of other partners or their misconduct. * The provisions of the Indian Partnership Act, 1932, shall not apply to LLPs. * The LLP Act contains provisions for converting other entities, such as partnership firms, unlisted companies and private companies, into an LLP. (LLP-  Limited Liability Partnership) Advantage of LLP over Companies: ( from the view of taxation point- Savings in Tax)
  • The LLP is a kind of a hybrid entity which combines the advantages of a partnership firm and a limited company. Such distinct features would be the key drivers for forming LLPs, rather than companies, for planning different structures (for example, undertaking large infrastructure and real estate development projects).
  • Another major reason for conversion of a firm/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, should not be liable to pay MAT or DDT, considering the legislative intent.
Need for LLP
  • For a long time, a need has been felt to provide for a business format that would combine the flexibility of a partnership and the advantages of limited liability of a company at a low compliance cost.
  • The Limited Liability Partnership format is an alternative corporate business vehicle that provides the benefits of limited liability of a company but allows its members the flexibility of organizing their internal management on the basis of a mutually arrived agreement, as is the case in a partnership firm. This format would be quite useful for small and medium enterprises in general and for the enterprises in services sector in particular. Internationally, LLPs are the preferred vehicle of business particularly for service industry or for activities involving professionals. An LLP is similar in some ways to a standard Partnership, except that the individual members have lower liabilities to any debts which may arise from running the business. There are more administrative duties involved compared to the Partnership business structure.
Suitability of LLP:
  • The Limited Liability Partnership is itself liable for debts run up in running the business, rather that the individual members of the LLP. As a result, LLP's are only recommended for profit running businesses. Individuals or existing businesses can be members of a Limited Liability Partnership.
Foreign Direct Investment in LLP: The Government of India has reviewed the extant policy on FDI and decided to permit FDI in LLP firms, subject to specified conditions to their agreed contribution in the LLP. No partner would be liable on account of the independent or unauthorized actions of other partners or their misconduct. * The provisions of the Indian Partnership Act, 1932, shall not apply to LLPs. * The LLP Act contains provisions for converting other entities, such as partnership firms,     unlisted companies and private companies, into an LLP. (LLP-  Limited Liability Partnership) Advantage of LLP over Companies: ( from the view of taxation point- Savings in Tax)
  • The LLP is a kind of a hybrid entity which combines the advantages of a partnership firm and a limited company. Such distinct features would be the key drivers for forming LLPs, rather than companies, for planning different structures (for example, undertaking large infrastructure and real estate development projects).
  • Another major reason for conversion of a firm/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, should not be liable to pay MAT or DDT, considering the legislative intent.
Need for LLP
  • For a long time, a need has been felt to provide for a business format that would combine the flexibility of a partnership and the advantages of limited liability of a company at a low compliance cost.
  • The Limited Liability Partnership format is an alternative corporate business vehicle that provides the benefits of limited liability of a company but allows its members the flexibility of organizing their internal management on the basis of a mutually arrived agreement, as is the case in a partnership firm. This format would be quite useful for small and medium enterprises in general and for the enterprises in services sector in particular. Internationally, LLPs are the preferred vehicle of business particularly for service industry or for activities involving professionals. An LLP is similar in some ways to a standard Partnership, except that the individual members have lower liabilities to any debts which may arise from running the business. There are more administrative duties involved compared to the Partnership business structure.
Suitability of LLP:
  • The Limited Liability Partnership is itself liable for debts run up in running the business, rather that the individual members of the LLP. As a result, LLP's are only recommended for profit running businesses. Individuals or existing businesses can be members of a Limited Liability Partnership.
Foreign Direct Investment in LLP: The Government of India has reviewed the extant policy on FDI and decided to permit FDI in LLP firms, subject to specified conditions. On conversion, all the partners/shareholders of the partnership firm/unlisted company/private company shall become the partners of the LLP. It is provided that no other person would become partner/shareholder on conversion into an LLP (i.e. at conversion, it should be a mirror image). 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/company so converted into an LLP shall cease to exist upon conversion. Every partner of the partnership firm that is converted into an LLP shall continue to be personally liable (jointly and severally) for the liabilities and obligations of the partnership which were incurred prior to the conversion or which arose before the conversion. Such provisions are not applicable in the case of conversion of a company into an LLP, presumably since liability of shareholders in a company is anyway limited. Conclusion: Generally limited liability partnership is not applicable for all activities such as non-profit-making activities. Professionals like Company Secretaries, Chartered Accountants, Cost Accountants, Advocates and other professionals may also form multi-disciplinary LLPs to meet the changing economic environment. The introduction of LLPs in India is a good beginning towards a long journey. The hybrid structure of LLP will facilitate entrepreneurs, service providers and professionals to organize and operate in an innovative and efficient manner for effectively competing in the global market. The approval for FDI will lead to creation of employment and shall also bring in international best practices and latest technologies in the country.    
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