Introduction

Limited Liability Partnership (LLP) is an alternative form of business organisation. It not only provides the benefits of limited liability but also allows its members the flexibility of organising their internal affairs as a partnership based on a mutually arrived agreement. Liability of the partners is not as limited as that of shareholder in a company. Further there could be unlimited liability on partners, in case that of certain other laws. In an increasingly litigious market environment, a need for a new corporate form providing 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, was felt, in order to enable professional expertise and entrepreneurial initiative to combine, organise and operate in flexible, innovative and efficient manner. The Limited Liability Partnership Act, 2008 (the LLP Act), except for certain sections, became operative from 31st March, 2009. The Rules made under the LLP Act have been notified on 1st April, 2009. First LLP was registered on 2-4-2009. Sections 55 to 58 pertaining to conversion of a firm or a company to LLP and Rules pertaining to such conversion became operative from 31st May, 2009. Section 51 and sections 63 to 65 pertaining to winding up of an LLP have become operative from 10th July, 2012.

Salient Features

• An LLP is a hybrid form of organisation having features of a partnership firm under the Partnership Act, 1932 and a company under the Companies Act, 1956/2013.

• The LLP’s are administered by the Registrar of Companies.

• Liability of partners is limited except where an Act is carried out by the LLP with intent to defraud creditors or any other person or for any fraudulent purpose.

• LLP is a body corporate and a legal entity separate from its partners. It has perpetual succession. Thus, an LLP is capable, in its own name, of acquiring, owning, holding, disposing of property, whether movable, immovable, tangible or intangible. It can sue and can be sued, and is capable of doing and suffering other acts as a body corporate may do or suffer.

• There is no limit on maximum number of partners.

• Rights and duties of partners of an LLP and mutual rights and duties between an LLP and its partners are governed by the LLP Agreement between the partners or between the LLP and its partners.

• Partners are agents of LLP but not the agents of other partners.

• An individual or body corporate may become a partner in LLP.

• LLP must have at least two individuals as Designated Partners. At least one of the Designated Partners must be resident in India. A body corporate partner of the LLP may nominate an individual as a Designated Partner.

• LLP must maintain proper books of account. The accounts may be on cash basis or accrual basis.

• Accounts of LLP are required to be audited. However, an LLP whose turnover in any financial year does not exceed ₹40 lakhs or the contribution (capital) does not exceed ₹25 lakhs is exempt from the provisions of audit.

• LLP is required to file Statement of Account and Solvency and Annual Return in the prescribed form every year.

• LLP is required to file information about the LLP Agreement, changes in the LLP Agreement and changes in particulars of designated partners and partners.

• Right of a partner to share profits and losses is transferable.

• A person representing himself (holding out) to be a partner or permitting himself to be represented as a partner of an LLP is liable to person giving credit the LLP relying on such representation.

• Concept of ‘Whistle Blower’ is incorporated in the LLP Act.

• A partnership under the Partnership Act, 1932 may be converted into an LLP. A private company or an unlisted public company may also be converted into an LLP provided there is no ‘security interest’ subsisting on the date of application for conversion.

• Provisions made in the LLP Act for investigation into the affairs of an LLP by inspector to be appointed by the Central Government.

• Provisions made in the LLP Act for Compromise, Arrangement or Reconstruction of an LLP and amalgamation of LLPs. For this purpose, application to be made to National Company Law Tribunal to be constituted under section 10FB of the Companies Act, 1956/ 408 of the Companies Act, 2013. Pending the constitution of such Tribunal under both Acts, application to be made to the High Court.

• All filings under the LLP Act to be done electronically. Similarly, the Registrar may furnish information or provide copies and extracts certifying the same by affixing digital signature.

• Heavy penalties have been provided in case of non-compliance of provisions of the LLP Act.

• For the purposes of taxation, an Indian LLP is treated on par with a partnership firm under the Partnership Act, 1932.

Integration of LLP system with MCA-21

From June, 2012 LLP system has been integrated into MCA-21. Due to the integration there has been sync between LLP & Company filings.

Designated Partners

Every LLP must have at least two individuals as the designated partners. At least one of the designated partners must be resident in India (i.e., person who has stayed in India for not less than 182 days in the immediately preceding one year). A body corporate may appoint an individual to act as a designated partner. The incorporation document may specify who will be the designated partners. Any partner may become a designated partner or cease to be a designated partner in accordance with the LLP Agreement. Every designated partner must obtain DPIN. MCA has vide its notification dated 5th July, 2011 (w.e.f. 9th July, 2011), amended the Limited Liability Partnership Rules, 2009. Now instead of DPIN, every partner who will be appointed as Designated Partner, will need to apply for DIN and not DPIN. Individuals holding both DPIN and DIN, their DPIN stands cancelled. For obtaining DPIN the individual has to apply in Form DIN-1 under Companies (Director Identification Number) Rules, 2006. Pursuant to this LLP Forms 7 & 10 are cancelled. An individual has to give prior consent to become a designated partner and LLP to file consent in Form 4 has to be filed with the Registrar. Any change in particulars filed in erstwhile Form 7 or DIN-1 for allotment of DPIN, intimate such changes in Form DIN-4 within 30 days of such changes. An LLP may appoint a designated partner within 30 days of vacancy arising for any reason. If there is no designated partner, or if at any time there is only one designated partner, each partner is deemed to be a designated partner. Designated partners are responsible for doing all acts, matters and things that are required to be done for complying with the provisions of the LLP Act. They are liable to all penalties imposed on the LLP.

Formation of LLP

Post incorporation LLP is required to file Forms 8 & 11 for every Financial Year

All LLPs registered up to 30th September of the financial year have to mandatorily close the financial year as on last day of the financial year. E.g.

A. LLPs registered between 1-4-2015 and 30-9-2015

o Have to close financial year on 31st March, 2016

o File Annual Return of LLP in Form 11 by 30th May, 2016 and Statement of Accounts & Solvency in Form 8 by 30th October, 2016.

B. LLPs registered between 1-10-2015 and 31-3-2016

• Have option either to close financial year as on 31-3-2016 or 31-3-2017 and to file Forms 8 & 11 accordingly.

If LLP fails to file Forms 8 & 11 within time, an additional fee of ₹100/- per day is payable, till the date of actual filing. However tax laws may require closure of financial year on 31st March, irrespective of the date of formation of LLP.

Broad essential clauses of the LLP Agreement

LLP is largely governed by the agreement amongst the partners. Hence drafting of LLP agreement is crucial and it is necessary to cover various aspects governing business and relation amongst partners and between LLP and its partners.

• Definition/interpretation clause

• Names of designated partners

• Lawful business clause

• Registered Office clause

• Capital & contribution clause

• In case of conversion of partnership/Company into LLP appropriate clauses for such takeover

• General terms amongst the partners inter se

o Admission of new partner retirement of partner

o Cessation of partner

o Resignation of partner

o Expulsion of partner

o Sharing of profit

o Sharing of loss

o Meetings of partners

o Voting rights and its determination

o Rights & duties of partners

o Restriction on partners authority

o Acts requiring consent of requisite number of percentage of the partners

o Indemnity

o Interest & remuneration

o Appointment of auditors

o Removal of auditors

o Signatory to bank accounts, agreement, etc.

o Share in goodwill

o Assignment monetary interest of partners

o Rights of legal representative

o Duration of the LLP

o Voluntary winding up

o Meeting, recording in meeting, etc.

o Changes/amendment in agreement

o Arbitration clause for settlement of disputes

o Address for service of documents

o Changes that may occur in future and the procedure for the same.

Partners and their Relations

Persons who subscribe their names to the ‘Incorporation Document’ are the first partners of the LLP. Any other person may become partner in accordance with the LLP Agreement. It is clarified that as per section 5 of LLP Act, 2008 only an individual or body corporate may be a partner in a Limited Liability Partnership. An HUF cannot be treated as a body corporate for the purposes of LLP Act, 2008. Therefore, a HUF or its Karta cannot become designated partner in LLP. Said clarification leaves scope for interpretation whether HUF through its Karta can become partner in the LLP or not. Mutual rights and duties of partners and mutual rights and duties of LLP and its partners are governed by the LLP Agreement between the partners, or between the LLP and its partners. Information relating with regard to the LLP Agreement and any changes therein is required to be filed with the Registrar in Form 3. In case the LLP Agreement is silent on any matter, provisions in the First Schedule to the LLP Act relating to that matter will apply. It may be noted that First Schedule is not very comprehensive to cover various situations and hence it is necessary to cover various aspects in the LLP agreement. A person may cease to be a partner of the LLP in accordance with the agreement with the other partners or by giving a notice in writing of not less than 30 days. A person also ceases to be a partner on his death, dissolution of LLP, if he is declared to be of unsound mind or applies to be adjudged as an insolvent or is declared as an insolvent. Right of a partner to share profits and losses is transferable. However, the transferee, on account of transfer, does not get right to participate in the management of the LLP or right to access information. The transfer by itself does not result in dissociation of the partner from the LLP or dissolution of the LLP.

Extent of Liability of LLP and its Partners

Every partner of an LLP for the purpose of its business is an agent of the LLP but is not an agent of other partners. Obligations of LLP are solely its obligations and liabilities of LLP are to be met out of properties of LLP. LLP is not bound by anything done by a partner in dealing with another person if the partner had no authority to do the act on behalf of the LLP and the person either knows that the partner had no authority; or did not know or did not believe him to be a partner of the LLP. LLP is liable for wrongful act or omission of a partner done in the course of business or with the authority of the LLP. A partner is not personally liable for obligations of the LLP. However, he is liable for his own wrongful act or omission. A person who represents (holds out) himself to be a partner or knowingly permits himself to be represented as a partner is liable to any person who, based on such representation, has given credit to the LLP. The LLP receiving the credit is liable to the extent of the credit received or any financial benefit derived thereon. If an LLP or any of its partners act with the intent to defraud creditors of the LLP or any other person or for any fraudulent purpose, then the liability of the LLP and the concerned partners is unlimited. However, where the fraudulent act is carried out by a partner, the LLP is not liable if it is established by the LLP that the act was without the knowledge or authority of the LLP.Where the business is carried out with fraudulent intent or for fraudulent purpose, every person who was knowingly a party is punishable with imprisonment and fine. Also the LLP, its partners and designated partners or employees conducting its affairs in a fraudulent manner are liable to pay compensation.

Contributions

The obligation of a partner to contribute shall be as per the LLP Agreement. Contribution may consist of tangible or intangible, movable or immovable property or other benefit to the LLP including contract of services performed or to be performed. The contribution of each partner along with the nature of contribution has to be disclosed in the accounts of the LLP. The monetary value of the non-monetary contribution is to be valued by a Chartered Accountant or a Cost Accountant or an Approved Valuer. A creditor of an LLP, who extends credit relying on the obligation of the partner to make contribution as recorded in the LLP Agreement, may enforce such obligation against the partner.

Accounts and Audit

LLP is required to maintain proper books of account which may be on cash basis or on accrual basis and according to the double entry system of accounting. The books of account should disclose the financial position, particulars of money received and expended, record of assets and liabilities, cost of goods purchased, inventories, work-in-progress, finished goods and cost of goods sold. Books of account should enable the designated partner to ensure that Statement of Account and Solvency complies with the LLP Act. Every LLP is required to file Statement of Account and Solvency in Form 8 within 30 days from the end of six months of the financial year i.e., on or before 30th October. Accounts of LLP are required to be audited. However, an LLP whose turnover in any financial year does not exceed ₹40 lakhs or the contribution (capital) does not exceed ₹25 lakhs is exempt from the provisions of audit. For the first year, the auditor may be appointed any time before the end of the financial year. Thereafter, the auditor is to be appointed at least 30 days prior to the end of the financial year. The designated partners shall appoint the auditors. If they fail to do so, the partners may appoint the auditors. Provisions have been made regarding filling up of casual vacancy in the office of the auditors, reappointment of the auditors, deemed reappointment of the auditors and removal of the auditors. Unlike company there are no provisions under the LLP Act to intimate Registrar about the appointment of the auditor. An auditor may resign or may express his unwillingness to be reappointed by a notice in writing. In either case, he is required to enclose with the notice a statement of circumstances connected with his ceasing to hold office.Within 60 days from the end of the financial year, the LLP is required to file Annual Return in Form 11. Where the annual turnover of the LLP is up to ₹5 crore or the contribution is up to ₹50 lakhs, the Annual Return is to be accompanied by a certificate from a designated partner other than the signatory to the Annual Return, to the effect that the Annual Return contains true and correct information. In other cases, the Annual Return is to be accompanied by a certificate from a Company Secretary.

Conversion to Limited Liability Partnership

The LLP Act provides for the conversion of general partnership firm, private limited & unlisted public company. Act does not prescribe any procedure for conversion of sole proprietary concerns, trusts into LLP. Provisions of section 58(4) are very significant. It being a notwithstanding clause has overriding effect on various laws for the time being in force. As per the said clause all the property assets and liabilities of the firm/company converted into LLP gets vested in the LLP without any further act/deed and erstwhile firm company stands dissolved.

+ Limited Liability Partnership Rules, 2009

Steps in conversion of Firm or private company or unlisted public company into LLP is broadly similar to that of formation of LLP. However it may be noted that the LLP Act does not provide for any procedure for conversion of LLP into partnership firm or company. However using restricting models business along with assets & liabilities can be transferred to partnership firm or company and thereafter LLP can be wound off. It has been clarified provisions of Ss. 55 & 58 of the LLP Act, does not provided for the conversion of the multiple firms into single LLP. In case any Chartered Accountancy partnership firm is converted into LLP in terms of the provisions of the LLP Act then such LLP in accordance with the provisions of S. 58(4)(b) would be deemed to be the auditor of the company. Relevant company may take note in change of status of the auditor through resolution of the Board.

Restructuring of LLPs

Provisions are been laid for

• Compromise or arrangement of LLP between

1. LLP and its creditors

2. LLP and its partners

• Restructuring of LLP

• Amalgamation of LLP

Provisions are similar to that of sections 391 to 394 of the Companies Act, 1956 or 230 to 232 of the Companies Act, 2013. However currently no income-tax exemptions are been provided in case of restructuring etc. of LLP. In absence of income-tax incentives, restructuring of LLPs may not take off.

Foreign LLP

Provision has been made regarding establishment of a place of business by a foreign LLP. A foreign LLP within 30 days of establishing a place of business in India has to file with the Registrar Form 27 along with a copy of certificate of incorporation or registration or other document evidencing the constitution of the LLP, full address of the registered/principal office of the LLP in the country of incorporation, address of the principal place of business in India, list of partners and designated partners, if any, and names and addresses of two or more persons resident in India authorised to accept service of notices, documents, etc. Any change in the above particulars has to be intimated in the prescribed forms. If the documents are not in English language, the certified translation is also required to be filed. A foreign LLP is also required to file Statement of Account and Solvency every year. Foreign LLPs may be regarded as company for the purposes of income-tax.

Winding up and Dissolution of LLP

The winding up of an LLP may be either voluntary or by the Tribunal (till the Tribunal is set reference to Tribunal be read as High Court). Section 64 of the LLP Act provides for circumstances in which an LLP may be wound up by the Tribunal. It is governed by the Limited Liability Partnership (Winding Up and Dissolution), Rules 2012 which were notified on 10th July, 2012. It consists of 301 rules and 125 forms. Section 75 of the LLP Act provides for power to the Registrar to strike off the name of a defunct LLP the register of Limited Liability Partnership. Before striking off the name of an LLP, the Registrar is required to give reasonable opportunity to the LLP of being heard. The Registrar may exercise the power suo motu if the LLP is not carrying on any business for two years or more; or on application by the LLP made with the consent of all partners if the LLP is not carrying on business for one year or more.

Miscellaneous

The Government may by notification direct that provisions of the Company Act, 1956/2013 specified in the notification shall apply to any LLP with or without such exception, modification or adoption as specified in notification. Under the LLP Act and LLP Rules every form, application, document or declaration shall be filed in ‘Portable Document Format’ (PDF) through the portal maintained by the Ministry of Corporate Affairs on its website or through any other website approved by the Central Government. Documents so filed are to be authenticated by valid digital signature. In cases where document is required to be filed on non-judicial stamp paper, the LLP has to submit such document in physical form in addition to submission in the electronic form. The Central Government is to set up and maintain secure electronic registry. It will allow access to the public to inspect documents which are required to be in public domain under the LLP Act on payment of fees.

Taxation of LLP

Section 2(23) of the Income-tax Act, 1961 has been amended. The amended definition of ‘firm’ includes an LLP and definition of‘partner’ includes a partner of an LLP. Thus, for the purposes of taxation, an LLP is treated as a firm and all the provisions applicable to a firm will apply to an LLP. Accordingly, provisions contained in section 40(b) relating to remuneration to the working partners and payment of interest to the partners will apply to an LLP. Provisions relating to Minimum Alternate Tax in section 115JB, Dividend Distribution Tax in section 115-O, Deemed Dividend in section 2(22) will not apply to an LLP. Under section 44AD as substituted by the Finance (No. 2) Act, 2009, an LLP is not eligible for the scheme of presumptive taxation. However foreign LLP would be treated as corporate assessee. Accordingly all the provisions as applicable to company would apply to foreign LLP. There is no specific provision in the Income-tax Act, 1961 for exemption from taxation on conversion or a partnership firm under the Partnership Act, 1932 (general partnership) into an LLP. However, in case of conversion of a General Partnership into an LLP, the Explanatory Memorandum to the Finance (No. 2) Bill, 2009 clarifies that since a general partnership and an LLP are considered equivalent, conversion of a general partnership into an LLP will be tax neutral if the rights and obligations of the partners remain the same and there is no transfer of assets or liabilities. The Finance Act, 2010, has introduced section 47(xiiib) w. e. f. 1-4-2011. The newly introduced section exempts from Capital Gains, any transfer of a capital assets by private company or unlisted public company to a Limited Liability transfer or any transfer of shares held in the company by a share holder as a result of conversion of the company into a Limited Liability Partnership. The conversion must satisfy conditions laid down in sections 56 & 57 of the Limited Liability Partnership Act and satisfaction of various conditions prescribed under this section itself. Under section 140 of the Income-tax Act, 1961, return of income of an LLP is to be signed by a designated partner. However, if for any unavoidable reason the designated partner is unable to sign or where there is no designated partner, any partner may sign the return. Under the new section 167C, each partner of an LLP is jointly and severally liable for tax due from an LLP if it cannot be recovered from the LLP unless he proves that the 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 section is similar to section 179 applicable to directors of a private company. It is materially different from section 188A already existing and applicable to partners of a partnership firm.

Alternate Minimum Tax (AMT)

Effective F. Y. 2011-12, i.e. Assessment Year 2012-13, the Finance Act, 2011 has introduced new Chapter XII-BA titled as ‘Special Provisions Relating to Certain Limited Liability Partnership’. It consists of sections 115JC to 115JF. For details p. 9.54.

RULES GOVERNING FDI IN LLPs

The Government of India has reviewed the extant policy on FDI and decided to permit FDI in LLP firms in a calibrated manner vide Press Note No. 1 (2011 Series), dated 20-5-2011, effective from 1st April, 2011. These FDI guidelines have been incorporated in the consolidated FDI Policy Circular, issued subsequently. FDI has been allowed subject to conditions specified as below:

1. FDI will be allowed, through the Government approval route, only in LLPs operating in sectors/activities where 100% FDI is allowed, through the automatic route and there are no FDI-linked performance conditions (such as ‘Non-Banking Finance Companies’ or ‘Development of Townships, Housing, Built-up infrastructure and Construction-development projects’, etc.).

2. LLPs with FDI will not be allowed to operate in agricultural/plantation activity, print media or real estate business.

3. An Indian company, having FDI, will be permitted to make downstream investment in an LLP only if both— the company, as well as the LLP — are operating in sectors where 100% FDI is allowed, through the automatic route and there are no FDI-linked performance conditions.

4. LLPs with FDI will not be eligible to make any downstream investments.

5. Foreign Capital participation in LLPs will be allowed only by way of cash consideration, received by inward remittance, through normal banking channels or by debit to NRE/FCNR account of the person concerned, maintained with an authorised dealer/authorised bank.

6. Investment in LLPs by Foreign Institutional Investors (FIls) and Foreign Venture Capital Investors (FVCIs) will not be permitted. LLPs will also not be permitted to avail External Commercial Borrowings (ECBs).

7. In case the LLP with FDI has a body corporate that is a designated partner or nominates an individual to act as a designated partner in accordance with the provisions of section 7 of the LLP Act, 2008, such a body corporate should only be a company registered in India under the Companies Act, 1956/2013 and not any other body, such as an LLP or a trust.

8. For such LLPs, the designated partner "resident in India", as defined under the ‘Explanation’ to Section 7(1) of the LLP Act, 2008, would also have to satisfy the definition of "person resident in India", as prescribed under Section 2(v)(i) of the Foreign Exchange Management Act, 1999.

9. The designated partners will be responsible for compliance with all the above conditions and also liable for all penalties imposed on the LLP for their contravention, if any.

10. Conversion of a company with FDI, into an LLP, will be allowed only if the above stipulations except clause (e) are met and with the prior approval of FIPB/Government.

However, recently RBI vide Notification No. FEMA 298/2014-RB dated 13-3-2014 has amended in the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000. Post issue of RBI notification FDI in LLP is operational.

It has provided that : A person resident outside India (other than a citizen of Pakistan or Bangladesh) or an entity incorporated outside India, (other than an entity in Pakistan or Bangladesh), not being a registered Foreign Institutional Investor or Foreign Venture Capital Investor or Qualified Foreign Investor registered with SEBI or Foreign Portfolio Investor registered in accordance with SEBI guidelines, may contribute foreign capital either by way of capital contribution or by way of acquisition / transfer of profit shares in the capital structure of an LLP under Foreign Direct Investment, subject to the specified terms and conditions.

Chart 1

Forms under the Limited Liability Partnership Act, 2008

* These forms are not available in the electronic form

# For the year ended 31st March, 2012 the due date was extended to 31st July, 2012 due to the integration of LLP system with MCA-21.

# These forms are to be issued by the Registrar.

Chart 2

Fees payable under the Limited Liability Partnership Act, 2008

Chart 3

Penalties under the Limited Liability Partnership Act, 2008

Notes

1. In terms of section 70, in case of second and subsequent offence the person will be punishable with imprisonment provided and in cases where fine is prescribed; it will be twice the amount of fine for such offence.

2. Under section 39, an offence which is punishable with fine only may be compounded. Compounding fee may extend to the maximum amount of fine prescribed for the offence.

3. Under section 76, where offence is committed by an LLP and it is proved that it was committed with the consent or connivance of a partner or a designated partner or is attributable to gross neglect of a partner or a designated partner, then the LLP as well such partner or designated partner shall be guilty and punishable.

Chart 4

Notifications under the Limited Liability Partnership Act, 2008

Chart 5

Circulars under the Limited Liability Partnership Act, 2008