Basics of Limited Liability Partnership (LLP)
Posted on: 2017-06-03 01:44:01
In India, businesses mainly operated as companies, sole proprietorships and partnerships. Each of these is subject to different regulatory and tax regimes reflecting their organization and ownership. With the growing Indian economy, the role played by its entrepreneurs as well as its technical and professional manpower has been acknowledged worldwide. Since then, a need was 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 way, which would provide a further impetus to India's economic growth. The limited liability partnership (abbreviated as 'LLP') is an answer to that.
After several deliberations and amendments by various committees, the revised Limited Liability Partnership Bill, 2008 was introduced in the Rajya Sabha on 21st October, 2008. After being passed by both Houses, the Honorable President of India gave assent to the Bill on 7th January 2009 and Limited Liability Partnership Act, 2008 ('The Act') became a law. The LLP in India is based on UK LLP Act, 2000 and Singapore LLP Act, 2005.
The LLP 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.
The salient features of the LLP under the Act are as follows:
• The LLP is an alternative corporate business vehicle that gives the benefits of limited liability but would allow its members the flexibility of organizing their internal structure as a partnership based on an agreement amongst its partners.
• Since LLP contains elements of both 'corporate structure' as well as 'partnership firm structure' LLP is called a hybrid between a company and a partnership.
• The Act does not restrict the benefit of LLP structure to certain classes of professionals only and is available for use by any enterprise which fulfils the requirements of the Act.
• The LLP is 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 LLP. It is capable of entering into contracts and holding property in its own name.
• The LLP has perpetual succession. The LLP can continue its existence irrespective of changes in partners.
• The mutual rights and duties of partners of an LLP inter se and those of the LLP and its partners are governed by an agreement between partners or between the LLP and the partners subject to the provisions of the proposed legislation. LLP 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 Schedule I to the Act.
• The LLP is 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 unauthorized 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.
• 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 Act read with the LLP agreement.
• 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 exemption to certain class of LLPs.
• The Central Government shall have powers to investigate the affairs of an LLP, if required, by appointment of competent inspector for the purpose.
• The compromise or arrangement including merger and amalgamation of LLPs shall be in accordance with the provisions of the Act.
• A firm, private company or an unlisted public company would be 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 Act. On and from the date of registration specified in the certificate of registration, all tangible (movable or immovable) 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.
• The winding up of the LLP may be either voluntary or by the National Company Law Tribunal.
• The Act confers powers on the Central Government to apply provisions of the Companies Act, 2013 as appropriate, by notification with such change s 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.
• The Indian Partnership Act, 1932 is not applicable to LLPs.
• Taxation of LLP is akin to taxation of a partnership firm under the Income-tax Act, 1961.
Benefits to LLP under Income Tax Act, 1961 and Companies Act, 2013: There are several benefits to a LLP under the Income-tax Act, 1961 and the Companies Act 2013 over a company, the same is summarized below:
|
S. No. |
Features |
Company |
LLP |
|
1 |
Legal entity |
Separate |
Separate |
|
2 |
Perpetual succession |
Yes |
Yes |
|
3 |
Liability |
Limited |
Limited |
|
4 |
No. of members / partners |
Private company- Minimum: 2; Maximum:200 Minimum 2 Public company –Minimum: 7; Maximum: No limit One person company - 1 |
Minimum – 2 Maximum – No Limit |
|
5 |
Instrument requirements - Incorporation |
Memorandum and articles to be filed with RoC, Fees for filing all doc. Memorandum to be in respective forms specified in Tables A, B, C, D and E in Schedule I Articles to be in respective forms specified in Tables F,G,H,I and J in Schedule I Various other documents required to be filed at the time of incorporation. Filing Fee high as compared to LLP |
Incorporation documents to be filed with Registrar. LLP Agreement is to be filed with Registrar in Form 3. In absence of certain clauses in LLP Agreement, mutual rights and duties will be as specified in First Schedule to LLP Act. Filing Fee very less as compared to company |
|
6 |
One person formations |
One person can form a company under Companies Act, 2013 – One person company |
One person cannot form a LLP. |
|
7 |
Types of entities |
Companies Act, 2013 provides for various types of companies such as small company, dormant company, producer company, holding company, subsidiary company, associate company, etc. |
No different types, only one type LLP |
|
8 |
Change of registered office |
In case of change from one Registrar to another – prior approval from Regional Director required |
Registered office can be changed to any place in India by informing RoC subject to prescribed conditions. Less formalities as compared to company |
|
9 |
Suffix to the name |
Name to contain 'Limited' or 'Private Limited' as suffix |
Name to contain 'Limited Liability Partnership' or 'LLP' as suffix |
|
10 |
Bringing in capital |
Cumbersome process of Public Issue, Private Placement, Preferential Issue or Rights Issue |
Very easy to bring in capital |
|
11 |
Directors identity |
All directors to obtain director identification number (DIN) |
Only designated partners to obtain designated partners identification Number (DIN). |
|
12 |
Operations of business |
Regulated by memorandum and articles of association |
Regulated by LLP agreement |
|
13 |
Listing on stock exchanges |
Possible |
Not possible |
|
14 |
Meetings |
Regulated by Companies Act, 2013 – Board Meetings, general meetings are required. |
Not mandatory - No provision for regular Meeting of Board of partners. Partners can decide when and how to meet, delegation of powers etc. as per the LLP agreement. |
|
15 |
Statutory audit |
Compulsory even if no transaction during the year. |
Compulsory only if turnover exceeds Rs. 40 lakh or contribution exceeds Rs. 25 lakh |
|
16 |
Other audits |
Specified companies to have internal auditors, cost auditors, secretarial auditors. |
No such requirement under LLP Regulations |
|
17 |
Formats for Financial Statements |
It provides for specific format for financial statements. Non compliance results in heavy penalties |
No specific format under LLP Regulations |
|
18 |
Other Disclosures |
Detailed disclosures for annual reports, directors report, etc. |
No such provisions under LLP Regulations |
|
19 |
Method of accounting |
Accrual only |
Cash or accrual, any one allowed |
|
20 |
Day-to-day business operations |
Managing director, whole-time director and KMP to look after day-to-day administration |
Designated partner to look after statutory compliances. All partners can look into day-to-day affairs of the LLP as per LLP agreement. |
|
21 |
Authority in conduct of business |
Individual director or member does not have authority in conduct of business of company |
Every partner has authority to conduct business of LLP, unless the LLP agreement provides to contrary. |
|
22 |
Related party transactions |
Regulated under section 188 of Companies Act, 2013 |
Not regulated by the Act |
|
23 |
Accepting deposits |
Regulated by sections 73-76 of Companies Act, 2013 |
Not regulated by the Act |
|
24 |
Making loans and investments |
Regulated by section 186 of Companies Act, 2013 |
Not regulated by the Act |
|
25 |
Loans to directors / partners |
Restrictions under section 185 of Companies Act, 2013 |
No restrictions |
|
26 |
Remuneration |
Restrictions on remuneration to director as per Companies Act, 2013 |
No restriction on remuneration to partner. Remuneration should be as per the provisions of LLP agreement which may be subject to limits under Income-tax Act. |
|
27 |
Requirement of specific management |
Specified companies to have independent directors, women directors, key managerial personnel, audit committee, nomination and remuneration committee, etc. |
No such requirement |
|
28 |
Corporate social responsibility (CSR) |
Mandatory CSR provisions for specified companies |
No CSR provisions |
|
29 |
Change in name and address of members / partners |
No legal requirement to intimate change of name and / or address by a member |
Every partner has to intimate change of name or address to LLP within 15 days in Form No. 6. LLP also has to file the details with Registrar within 30 days of change in Form No. 4. |
|
30 |
Notice of resignation of director |
Notice of change of director is to be given by company in DIR-12. A director who has resigned has also to file Form DIR-11 to RoC |
A partner who has resigned from LLP can himself file notice of his resignation to RoC in Form No. 4 |
|
31 |
Shares, allotment, etc. |
Share, share certificate, register of members, transfer and transmission of shares, etc., is required |
No requirement of share and share certificate. Hence, no question of its issue, allotment, transfer, etc. |
|
32 |
Return on capital |
Paid as dividend to shareholders. No interest is payable on capital to shareholders |
Profits can be withdrawn by partners as per LLP agreement. Also interest can be paid on contribution if LLP agreement allows so. |
|
33 |
Charges |
Charges are required to be registered |
Not mandatory for registration of charges. Only statement of accounts and solvency requires the information if any charge is registered. |
|
34 |
Records and registers |
Elaborate records and registers are required to be maintained |
No records and registers have been prescribed. |
|
35 |
Fraud, penalties and Prosecution |
Fraud defined in the Act. Heavy penalties and prosecutions. More than 80 provisions for imprisonment. Class action provided. |
Lesser penalties and prosecution. No class action. Fraud not defined. |
|
36 |
Oppression and mismanagement |
Elaborate provision relating to redressal in case of oppression and mismanagement |
No provision relating to redressal in case of oppression and mismanagement |
|
37 |
Nidhis / NBFCs |
Specific provisions relating to Nidhis / NBFC |
No specific provisions relating to Nidhis / NBFC |
|
38 |
Financials |
Annual financial statements to be filed. |
Statement of accounts and solvency is to be filed annually. |
|
39 |
Not for Profit Organizations |
Can incorporate section 8 company for NPO activities |
Not allowed to incorporate LLP for NPO activities |
|
40 |
Conversion |
A private limited company and a unlisted public company can be converted into LLP under LLP Regulations |
A LLP can be converted into a company under Companies Act, 2013 |
|
41 |
Rate of Income tax |
Domestic companies - For AY 2016-17 - 30% plus 3% cesses. Surcharge 7% if total income exceeds Rs. 1 Crore but is below Rs. 10 Crore. Surcharge is 12% if income exceeds Rs. 10 Crore. |
For AY 2016-17 - 30% plus 3% cesses. Surcharge 12% if total income exceeds Rs. 1 Crore. |
|
42 |
Residential status |
If it is Indian company or the control and management of company is situated wholly in India then it would be resident in India |
If control and management of a LLP is situated wholly outside India then it would be non-resident. |
|
43 |
Applicability of accounting Standards |
Company (Accounting Standards) Rules, 2006 or to specified companies w.e.f. 1st April 2017 Indian Accounting Standards (Ind AS). Secretarial Standards for minutes. |
Accounting Standards issued by ICAI. |
|
44 |
MAT / AMT under Income-Tax Act, 1961 |
Minimum alternative tax under section 115JB applicable |
Alternative minimum tax under section 115JC applicable |
|
45 |
Remuneration to directors / partners |
Remuneration allowable would be as per appropriate resolutions passed, there is no specific restriction under Income- tax Act |
Remuneration allowable would be as per LLP agreement subject to compliance and limits mentioned in section 40(b) of Income- tax Act, 1961 |
|
46 |
Interest to directors/ partners |
Interest allowable would be as per appropriate contracts/agreements for taking of loans, there is no specific restriction under Income- tax Act,1961 |
Interest allowable would be as per LLP Agreement subject to compliance and limits mentioned in section 40(b) of the Income- tax Act,1961 |
|
47 |
Dividend Distribution Tax |
Applicable @ 15% plus surcharge @ 12% and cesses under section115-O of Income-tax Act, 1961 |
Not applicable |
|
48 |
Liability of directors / partners for tax dues in case of liquidation |
Every director is jointly and severally liable unless he proves non-recovery cannot be attributed to his gross neglect, misfeasance or breach of duty – Section 179 of Income -tax Act, 1961 |
Every partner is jointly and severally liable unless he proves non-recovery cannot be attributed to his gross neglect, misfeasance or breach of duty – Section 167C of Income -tax Act, 1961 |
From the above comparison a person may easily come to a conclusion that for a small and medium enterprise doing business in form of LLP is much easier than doing as a company. Due to this, the law related to LLP, its formation, conversion, operation and taxation has gained immense importance.
