LIMITED LIABILITY PARTNERSHIP

With the growth of the Indian economy, the role played by its entrepreneurs as well as its technical and professional manpower has been acknowledged internationally. It is felt opportune that entrepreneurship, knowledge and risk capital combine to provide a further impetus to Indias economic growth. In this background, a need has been felt for a new corporate form that would provide an alternative to the traditional partnership, with unlimited personal liability on the one hand, and, the statute-based governance structure of the limited liability company on the other, in order to enable professional expertise and entrepreneurial initiative to combine, organize and operate in flexible, innovative and efficient manner. The Limited Liability Partnership (LLP) is viewed as an alternative corporate business vehicle that provides the benefits of limited liability but allows its members the flexibility of organizing their internal structure as a partnership based on a mutually arrived agreement. The LLP form would enable entrepreneurs, professionals and enterprises providing services of any kind or engaged in scientific and technical disciplines, to form commercially efficient vehicles suited to their requirements. Owing to flexibility in its structure and operation, the LLP would also be a suitable vehicle for small enterprises and for investment by venture capital. Keeping in mind the need of the day, the Parliament enacted the Limited Liability Partnership Act, 2008 which received the assent of the President on 7th January,2009. The salient features of the LLP Act 2008 inter alia are as follows: (i) The LLP shall be a body corporate and a legal entity separate from its partners. Any two or more persons, associated for carrying on a lawful business with a view to profit, may by subscribing their names to an incorporation document and filing the same with the Registrar, form a Limited Liability Partnership. The LLP will have perpetual succession; (ii) 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 partners or between the LLP and the partners subject to the provisions of the LLP Act 2008 . The act provides flexibility to devise the agreement as per their choice. In the absence of any such agreement, the mutual rights and duties shall be governed by the provisions of proposed the LLP Act; (iii) The LLP will be a separate legal entity, liable to the full extent of its assets, with the liability of the partners being limited to their agreed contribution in the LLP which may be of tangible or intangible nature or both tangible and intangible in nature. No partner would be liable on account of the independent or un-authorized actions of other partners or their misconduct. The liabilities of the LLP and partners who are found to have acted with intent to defraud creditors or for any fraudulent purpose shall be unlimited for all or any of the debts or other liabilities of the LLP; (iv) Every LLP shall have at least two partners and shall also have at least two individuals as Designated Partners, of whom at least one shall be resident in India. The duties and obligations of Designated Partners shall be as provided in the law; (v) The LLP shall be under an obligation to maintain annual accounts reflecting true and fair view of its state of affairs. A statement of accounts and solvency shall be filed by every LLP with the Registrar every year. The accounts of LLPs shall also be audited, subject to any class of LLPs being exempted from this requirement by the Central Government.

(vi) The Central Government have powers to investigate the affairs of an LLP, if required, by appointment of competent Inspector for the purpose; (vii) The compromise or arrangement including merger and amalgamation of LLPs shall be in accordance with the provisions of the LLP Act 2008; (viii) A firm, private company or an unlisted public company is allowed to be converted into LLP in accordance with the provisions of the Act. Upon such conversion, on and from the date of certificate of registration issued by the Registrar in this regard, the effects of the conversion shall be such as are specified in the LLP Act. On and from the date of registration specified in the certificate of registration, all tangible (moveable or immoveable) and intangible property vested in the firm or the company, all assets, interests, rights, privileges, liabilities, obligations relating to the firm or the company, and the whole of the undertaking of the firm or the company, shall be transferred to and shall vest in the LLP without further assurance, act or deed and the firm or the company, shall be deemed to be dissolved and removed from the records of the Registrar of Firms or Registrar of Companies, as the case may be; (ix) The winding up of the LLP may be either voluntary or by the Tribunal to be established under the Companies Act, 1956. Till the Tribunal is established, the power in this regard has been given to the High Court; (x) The LLP Act 2008 confers powers on the Central Government to apply provisions of the Companies Act, 1956 as appropriate, by notification with such changes or modifications as deemed necessary. However, such notifications shall be laid in draft before each House of Parliament for a total period of 30 days and shall be subject to any modification as may be approved by both Houses; (xi) The Indian Partnership Act, 1932 shall not be applicable to LLPs. Procedure for Establishment of LLP STEP - I Decide on the Partners and the Designated Partners A LLP can be incorporated with a minimum of at least two partners who can be Individuals or Body Corporate through their nominees. Further for incorporating an LLP, of the total number no. of partners, at least two shall be Designated Partners, of which at least one must be an Indian Resident. Parameters for deciding the Partners and Designated Partners:

Atleast Two Partners; Individuals or Body Corporate through individual nominees. Minimum of Two Individuals as Designated Partners, of total no. of Partners. Atleast One Designated Partner to be Resident Indian.

A person Resident in India means a person who has stayed in India for a period of not less than one hundred and eighty two days during the immediately preceding one year.

Designated Partner means a partner who is designated as such in the incorporation documents or who become a designated partner by and in accordance with the Limited Liability Partnership Agreement STEP II Obtain Designated Partner Identification Number (DPIN) and a digital signature certificate DPIN is an eight digit numeric number allotted by the Central Government in order to identify a particular partner and can be obtained by making an online application in e Form 7 to Central Government and submitting the physical application along with necessary identity and Address proof of the person applying with prescribed fees. STEP III Decide on the name of the LLP and check whether it is available. The next step is to decide the name for the proposed LLP to be incorporated, anyone intending to incorporate an LLP has to evaluate his proposed name under the prescribed parameters and make an application in Form 1of Rule 18(5) of the Limited Liability Partnership Act 2008, for reservation of the desired name. The name of the limited liability partnership shall not be similar or identical with Company or LLP already registered in India and it should not contain words prohibited under the law. STEP IV Draft the LLP agreement The next step is drafting of Limited Liability Partnership Agreement governing the mutual rights and obligation of the partners and among the LLP and its partners. The basic contents of Agreement are: The basic contents of Agreement are:

Name of LLP Name of Partners & Designated Partners Form of contribution Profit Sharing ratio Rights & Duties of Partners Proposed Business Rules for governing the LLP

The Agreement can be drafted before or after Incorporation of the LLP STEP V File the LLP Agreement, incorporation documents

Next is the filing of Incorporation documents, consent of Partners and declaration electronically through the medium of e-forms prescribed with the Registrar of LLP for incorporation of the LLP on payment of prescribed fees based on the total monetary value of contribution of partners in the proposed LLP.

eForm 2: Incorporation Document This is an informative document setting down the details of LLP, its Partners including designated partners along with their amount of contribution and consent for forming a Limited Liability Partnership to carry on a lawful business with profit motive along with declaration stating that all the requirements of Limited Liability Partnership Act, 2008 regarding incorporation of LLP in India have been complied with. eForm 3: Details of LLP Agreement This form provides for the necessary information in respect to the LLP Agreement entered into between the partners. eForm 4: Consent of Partners Consent of each partner to become a partner of Limited Liability Partnership along with their address and identity proof to be filed with the Registrar of Companies. Subscription Sheet: Just like in case of Company formation, the partners are required to subscribe their names along with signatures to the subscription sheet, which shall be witnessed by any chartered Accountant/Company Secretary/Advocate in practice. eForm 3 & 4 are required to filed within 30 days of the incorporation STEP VI Obtain the certificate of Incorporation After the Registrar is satisfied that all the formalities with respect to the incorporation has been complied, he will issue a Certificate of Incorporation as to formation of the LLP within maximum of 14 days from date of filing of documents . The Certificate of Incorporation issued shall be the conclusive evidence of formation of the LLP. Conversion of company into a LLP (i) Consequent to the Limited Liability Partnership Act, 2008 coming into effect in 2009 and notification of the Limited Liability Partnership Rules w.e.f. 1st April, 2009, the Finance (No.2) Act, 2009 had incorporated the taxation scheme of LLPs in the Income-tax Act on the same lines as applicable for general partnerships, i.e. tax liability would be attracted in the hands of the LLP and tax exemption would be available to the partners. Therefore, the same tax treatment would be applicable for both general partnerships and LLPs. (ii) Under section 56 and section 57 of the Limited Liability Partnership Act, 2008,

conversion of a private company or an unlisted public company into an LLP is permitted. However, under the Income-tax Act, no exemption is available on conversion of a company into an LLP. As a result, transfer of assets on conversion would attract capital gains tax. Further, there is no specific provision enabling the LLP to carry forward the unabsorbed losses and unabsorbed depreciation of the predecessor company.

(iii) Therefore, clause (xiiib) has been inserted in section 47 to provide that (1) any transfer of a capital asset or intangible asset by a private company or unlisted public company to a LLP; or (2) any transfer of a share or shares held in a company by a shareholder

On conversion of a company into a LLP in accordance with section 56 and section 57 of the Limited Liability Partnership Act, 2008, shall not be regarded as a transfer for the purposes of levy of capital gains tax under section 45, subject to fulfillment of certain conditions. This clause has been introduced to facilitate conversion of small private and unlisted public companies into LLPs. These conditions are as follows: (1) the total sales, turnover or gross receipts in business of the company should not exceed Rs.60 lakh in any of the three preceding previous years (2) the shareholders of the company become partners of the LLP in the same proportion as their shareholding in the company; (3) no consideration other than share in profit and capital contribution in the LLP arises to the shareholders; (4) the erstwhile shareholders of the company continue to be entitled to receive at least 50% of the profits of the LLP for a period of 5 years from the date of conversion; (5) all assets and liabilities of the company become the assets and liabilities of the LLP; and (6) no amount is paid, either directly or indirectly, to any partner out of the accumulated profit of the company for a period of 3 years from the date of conversion. (iv) However, if subsequent to the transfer, any of the above conditions are not complied with, the capital gains not charged under section 45 would be deemed to be chargeable to tax in the previous year in which the conditions are not complied with, in the hands of the LLP or the shareholder of the predecessor company, as the case may be [Section 47A(4)]. (v) Further, the successor LLP would be allowed to carry forward and set-off the business loss and unabsorbed depreciation of the predecessor company [Subsection (6A) of section 72A]. (vi) However, if the entity fails to fulfill any of the conditions mentioned in (iii) above,

the benefit of set-off of business loss/unabsorbed depreciation availed by the LLP would be deemed to be the profits and gains of the LLP chargeable to tax in the previous year in which the LLP fails to fulfill any of the conditions listed above. (vii) The tax credit under section 115JAA for MAT paid by the company under section 115JB would not be allowed to the successor LLP [Sub-section (7) of section 115JAA]. (viii) The actual cost of the block of assets in the case of the successor LLP shall be the written down value of the block of assets as in the case of the predecessor company on the date of conversion [Explanation 2C to section 43(6)]. (ix) The aggregate depreciation allowable to the predecessor company and successor LLP shall not exceed, in any previous year, the depreciation calculated at the prescribed rates as if the conversion had not taken place. Such depreciation shall be apportioned between the predecessor company and the successor LLP in the ratio of the number of days for which the assets were used by them [Section 32(1)]. (x) The cost of acquisition of the capital asset for the successor LLP shall be deemed to be the cost for which the predecessor company acquired it. It would be further increased by the cost of improvement of the asset incurred by the predecessor company or the successor LLP [Section 49(1)]. (xi) If the capital asset became the property of the LLP as a result of conversion of a company into an LLP, and deduction has been allowed or is allowable in respect of such asset under section 35AD, the actual cost would be taken as Nil [Explanation 13 to section 43(1)]. (xii) If a company eligible for deduction under section 35DDA in respect of expenditure incurred under Voluntary Retirement Scheme (one-fifth of such expenditure allowable over a period of five years) is converted into a LLP and such conversion satisfies the conditions laid down in section 47(xiiib), then, the LLP would be eligible for such deduction from the year in which the transfer took place. (xiii) If a shareholder of a company receives rights in a partnership firm as consideration for transfer of shares on conversion of a company into a LLP, then the cost of acquisition of the capital asset being rights of a partner referred to in section 42 of the LLP Act, 2008 shall be deemed to be the cost of acquisition to him of the shares in the predecessor company, immediately before its conversion [Section 49(2AAA)].

Section 167C: This section provides for the liability of partners of LLP in liquidation. In case of liquidation of an LLP, where tax due from the LLP cannot be recovered, every person who was a partner of the LLP at any time during the relevant previous year will be jointly and severally liable for payment of tax unless he proves that non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the LLP. This provision would also apply where tax is due from any other person in respect of any income of any previous year during which such other person

was a LLP. Distinguish features of LLP / Corporate Body / Partnership Firm are as under: Sno. Features Corporate Body Compulsory registration required with the ROC. Certificate of Incorporation is conclusive evidence. Partnership firm Not compulsory. Unregistered Partnership Firm will not have the ability to sue. LLP Compulsory registration required with the ROC

01.

Registration

02.

Name

Name of a public company to end with the word limited and No guidelines. a private company with the words private limited Private company should have a minimum paid up capital of Rs. 1 lakh and Rs.5 lakhs for a public company Is a separate legal entity

Name to end with LLP Limited Liability Partnership

03.

Capital contribution

Not specified

Not specified

04.

Legal entity status

Not a separate legal Is a separate entity legal entity Limited to the extent of the contribution to the LLP. Minimum of 2. No maximum number

05.

Liability

Unlimited, can Limited to the extent of extend to the unpaid capital. personal assets of the partners

06.

Minimum of 2. In a No. of private company, shareholders / maximum of 50 Partners shareholders Foreign Nationals as shareholder / Partner Taxability Foreign nationals can be shareholders.

2- 20 partners

07.

Foreign nationals cannot form partnership firm.

Foreign nationals can be partners.

08.

The income is taxed at The income is taxed The income is 30% + surcharge at 30% + surcharge taxed at 30% + +cess +cess surcharge + cess Quarterly Board of Directors meeting, annual shareholding meeting is mandatory

09.

Meetings

Not required

Not required.

10.

Annual Accounts and Annual Return Annual Return to be filed with ROC

Annual statement of accounts and No returns to be filed solvency & with the Registrar of Annual Return Firms has to be filed with ROC Required, if the contribution is above Rs.25 lakhs or if annual turnover is above Rs. 40 lakhs. Perception is higher compared to that of a partnership but lesser than a company.

11.

Audit

Compulsory, irrespective of share capital and turnover

Compulsory

12.

How do the bankers view

High creditworthiness, due to stringent compliances and disclosures required

Creditworthiness depends on goodwill and credit worthiness of the partners

13.

Dissolution

Very procedural. Voluntary or by Order of National Company Law Tribunal

Less procedural compared to By agreement of the company. partners, insolvency Voluntary or by or by Court Order Order of National Company Law Tribunal

Questions: 1) What are the provisions of sec 167C? 2) List 2 features of LLP? 3) What are the basic contents of LLP Agreement?

Acknowledgment to www.llp.gov.in www.pkpconsult.com ICAI Study Material on Direct Taxes Compiled By : Jayachandran

Email Id & Mob : pjayancbe@yahoo.co.in, 9746858277.