Limited Liability Partnership: An Emerging Concept in India

Picture courtesy: London Logic Praha

This article was written by harshita punjabi a student of Rajiv Gandhi National University of Law.

There is a splurge of unemployment in India for the last few decades and an individual has many options for self employment such as sole proprietorship, partnership,company etc. but each form suffers from disadvantages. So, a new style of corporate entity has been allowed  to conform to the rapid changes taking place in the industry known as Limited Liability Partnership,more popularly known as LLP,with unlimited personal liability on one hand and the statute-based governance structure of limited liability company on the other. LLP came into existence in Limited Liability Partnership Act 2008. The Act came into force on 31st March 2009 after recommendations of several expert committees.The LLP would be most suitable form for small and medium enterprises owing to flexibility in structure and operation.

Features of Limited Liability Partnership

  • The LLP is a body corporate and a legal entity separate from its partners and has a perpetual succession.
  • The mutual rights and liabilities of partners shall be governed by an agreement between partners. In absence of LLP agreement, the mutual rights and duties shall be determined as provided under Schedule 1 of the act.
  • The Indian Partnership Act,1932 shall not be applicable to LLPs as it is a separate legislation and is regulated by an agreement between partners.
  • Every LLP shall have atleast two partners and atleast two individuals as Designated Partners,of whom one shall be resident in India. No partner would be liable for the independent and unauthorised acts of other partners.
  • In accordance with provisions of the act, any firm,private company or an unlisted public company would be allowed to be converted into a LLP
  • LLP shall maintain annual accounts and every LLP shall file a statement of accounts and solvency with the Registrar every year.The accounts of LLPs shall also be audited.

Incorporation of  Limited Liability Partnership

For a LLP to be incorporated, there must be two or more persons,one of them must be resident in India, carrying on lawful business  to earn profit who subscribe their names to an incorporation document.By filing Form-1,  approval to the proposed names of the LLP is obtained. The incorporation document contains name of LLP,its proposed business,address of its registered office,address of registrar,partners name,photographs and address and shall be in Form-2. It shall be filed with the registrar of state in precribed form, made by either an Advocate,or a Company Secretary,or a Chartered Accountant, or a Cost Accountant in whole time practice in India that all requirements under the act and rules are complied with in respect of incorporation along with prescribed fee and registrar has to issue certificate of incorporation within 14 days.The certificate issued  by the registrar is proof that all requirements have been complied with.The LLP Agreement determines mutual rights and duties of LLP and its partners and it should be filed with the registrar  within 30 days of incorporation in Form-3. The agreement generally contains Contributions made by both the designated partners,agreed ratio of sharing the profits and losses, aims and objectives of the LLP,rights and duties of partners and designated partners,provision of withdwal of any existing partner and extent of the liabilities of  LLP.In absence of such agreement,the rights and duties of LLP and its partners shall be determined by provisions as set out in First schedule.

Steps to form an LLP

Deciding the Partners and Designated Partners for forming
Obtaining the Director Identification Number and the Digital Signature.
Filing of Form 1 for Name Availability.
Drafting of LLP Agreement and filing of form 3
Filing of Form 2 for Incorporation and Subscription Document.
Certificate of Incorporation

Advantages of forming an LLP

  • LLP is legal entity separate from its partners and individual partners are protected from joint liability created by other partner’s misconduct.
  • LLP has lesser compliance and more flexibility which allows for participation in management.
  • It has simple registration procedure and it is easy to become a partner or leave the LLP.There is no requirement of minimum capital and no restriction on maximum limit.

Disadvantages of forming an LLP

  • Financial information is to be disclosed under section 34 and it makes it suffer from lack of privacy.
  • Winding up the business in case of exigency is difficult because of lot of legal compliances under Limited Liability Partnership rules.
  • The legal uncertainity is more because of this being a newly introduced concept in the corporate world and yet to prove itself as commercial entity.

Accounting Aspect of Limited Liability Partnership

Every LLP shall maintain books of account which contains all sums of  money received and expended,a record of assets and liabilities  of  LLP,statement of cost of goods purchased,inventories,work-in-progress,finished goods.Every LLP shall file a Statement of Accounts  and Solvency in Form-8,essentially signed by designated partners, within a period of 30 days from the end of six months of financial year.An LLP is required to get its accounts audited if, in any financial year, turnover exceed forty lakh rupees or total contribution  of  its partners exceed twenty five lakh rupees. The account of liability liability partnership should be audited as per LLP Rules,2009.Every LLP shall file an annual return with the Registrar in Form-11, along with prescribed fee,within period of 60 days from the closure of financial year. If  turnover of an LLP is upto five crore rupees or contribution upto fifty lakh rupees,annual return shall be accompanied with certificate from designated partner, to the effect that information provided in annual return is correct.

Electronic filing of documents

Every form or application shall be filed in computer readable electronic form to the Registrar through portal maintained by Ministry of corporate affairs on its website www.mca.gov.in. All LLP forms,except the forms to be filed by foreign LLP is being approved by Registrar of Companies of concerned state with effect from 2012. ROC,Delhi and Haryana process and approve the forms of foreign LLPs.

Taxation of Limited Liability Partnership

LLP will be treated as partnership firm for the purpose of Income tax and new provisions have been introduced by Budget of 2009-10 regarding taxation of LLPs;effective from assessment year ,April 2010-31st march 2011.

                               Tax Rate-30% flat tax rate+3% education cess.

The income of LLP will not be charged in the hands of individual partners but in hands of the LLP only. The remuneration to the partners will be taxed under the head income from business and profession. The LLP can get deduction in tax of remuneration,salary,bonus or commission paid to working partners subject to limit prescribed under section 184 and section 40(b) of Income Tax Act. According to section  28(v), remuneration and interest received by partner from his LLP shall be chargeable to tax as profits and gains of business if it is in excess of ceiling fixed under section 40 (b). Any expense incurred by LLP partner for business purpose like payment of interest  and business loss,if any, can be set off against receipt of remuneration and interest.No  TDS deduction is necessary while making LLP payment  of remuneration and interest to LLP partners.                                                                                                                                              Service Tax(Amendment) Rules,2012 consider LLP as Partnership for the purpose of service tax.The word “body corporate” will not include LLPs despite of its legal status and so partial reverse charge is not applicable to LLPs.                                                                                                                      LLP is treated as body corporate under Sales Tax. Under Central Sales Tax,1956 the definition of  dealer includes body corporate as well and there is no dissimilarity in partnership firm, company, body corporate with regard to payment, returns and audit etc. under sales tax.

Investigation of affairs of LLP

According to Section 43 of LLP Act,2008 the Central Government may appoint competent persons to look into the affairs of a LLP.  The act provides for circumstances under which investigation  may be ordered by Central Government. The act also empowers  the Cental Government, if necessary in public interest, to initiate proceedings against LLP to recover property and damages.

Conversion of existing firms into a LLP

As per section 55 and second schedule of the act, a partnership firm may convert itself into LLP. As per section 56 and third schedule,  a private company may convert itself  into an LLP and unlisted public company can be converted into an LLP as per section 57  and fourth schedule of the act. Upon such conversion  the effects of conversion  shall be such as are specified in the act. All tangible and intangible property vested in the company or firm,assets, rights and liabilities relating to the company or firm shall be transferred to and shall vest in LLP, on and from the date of registration specified in certificate of registration. The company or the firm shall be deemed to be dissolved and removed from records of Registrar of Companies or Registrar of Firms, as the case may be.

Foreign Limited Liability Partnership

Rule 34(1) of LLP Rules states  that a foreign limited liability partnership  shall file with registrar in Form-27, a copy of certificate of incorporation, full address of registered office of LLP in the country of incorporation, full address of office of the LLP in India,list  of partners and designated partners and names and addresses of two or more persons resident in India.

Winding up of Limited Liability Partnership

The winding up of a LLP may be either voluntary or by the tribunal under certain circumstances. The grounds  on which NCLT can order for winding up  of the LLP includes inability of LLP to pay its debts, or default in filing the statement of account and solvency or annual return with the Registrar of Companies for five consecutive financial years or any other ground which is equitable in opinion of NCLT. The Limited Liability Partnership ( Winding up & Dissolution) Rules, 2012 describes provisions relating to winding up and dissolution  of LLP. According to LLP Rules,2012  any LLP may be wound up voluntarily if resolution to wind up is passed  by LLP with approval of atleast three-fourths of total number of its partners and also of creditors, if any. Within 30 days of passing such resolution in Form-1, a copy of resolution shall be filed with Registrar.

Conclusion

The passing of LLP Act,2008 is a recognition of changing businesses’ needs in today’s times. With the liberalisaion and globalisation of  indian economy, the LLP will encourage joint ventures and would further contribute to the growth of Indian service industry and make them globally competitive. This form of corporate entity is a good option for self employment and also eliminate the risk suffered due to partnership. The hybrid structure of  LLP will enable Small and Medium enterprises  and family partnerships to expand and will facilitate  service providers and entrepreneurs to organize and operate in efficient manner so as to compete in global market.

References

http://www.indiafilings.com/learn/llp-advantages/

http://articles.economictimes.indiatimes.com/2009-07-31/news/27645189_1_llp-model-limited-liability-partnership-stamp-duty

http://taxguru.in/corporate-law/taxability-of-limited-liability-partnership-llp-and-income-tax-provisions-governing-them.html

http://www.llponline.in/tax_llp.php

http://indialawjournal.com/volume2/issue_2/article_by_bhavesh_sukhada.html

http://blog.ipleaders.in/tax-liability-income-partners-llps/

http://iaccindia.wordpress.com/2010/11/11/limited-liability-partnership-an-emerging-concept-in-india/

http://www.marketexpress.in/013/04/flexibility-benefits-of-llp.html

http://www.caclubindia.com/articles/step-wise-registration-process-for-llp-20295.asp

http://www.llponline.in/llp_section_winding_up_dissolution.php

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