Limited Liability Partnership

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 vis-à-vis Partnership, Companies & LLP

STEPS REQUIRED TO REGISTER LLP

(All the LLP Forms are e-forms which require digital signatures.)

Step 1 – Digital Signature Certificate

• Partner/Designated partner of LLP/proposed LLP, whose signatures are to be affixed on the e-forms, has to obtain Digital Signature Certificate (DSC) from any authorized certifying agency.

Step 2 – Obtain Director’s Identification Number (DIN)

• Every LLP must have minimum 2 DPs having DIN.
• As per rule 2(1)(v) DIN means Identification Number allotted by Central Govt. to an individual or a nominee of a body corporate who intends to be appointed DP of LLP.
• Any individual intending to become DP should file online application for DIN (Rule 10)
• Applicant should attach certified copies of identity and address proofs, Affidavit along with form (scanned copy). In case of foreign national, a certified copy of Passport should be enclosed.
• DIN is valid for life time.
• As per Rule 10(8) every DP should intimate his consent to become DP to the LLP in Form 9 (within 30 days of admission) and the LLP shall intimate the same to the Registrar in Form 4 (within 30 days of admission).

Step 3 – Reservation of Name (Form 1) (Rule 18(5)

• Form-1 for reservation of name shall be filed. Partners shall have to select name of the proposed LLP (up to 6 choices can be indicated).
• Any partner or designated partner in the proposed LLP may submit Form-1 and will append his digital signature and submit the e-form.
• Approval of name for Indian LLP is valid for 3 months (fees ₹200/-).
• Approval of name for foreign LLP is valid for 3 years (fees ₹10,000/-) (Form 25 + Rule 18(3)
• An existing entity can object allotment of name (Form 23).

Step 4 – Form 2 Incorporation: Document + Statements

• After the name is reserved by the Registrar, “Incorporation Document and Statement” (Form 2) shall be filled up and filed electronically.
• Part A of Form 2 contains following particulars:
  • Name of LLP
  • Reg. office address
  • Details of Partners
  • Value and mode of contribution
  • Proposed business, etc.
• Part B of Form 2 contains a statement to be signed by a DP and a Professional engaged by LLP.
• A statement in Part B of Form 2 (the e-form) is to be digitally signed by a person named in the incorporation document as a designated partner having DIN.
• Also a statement to be digitally signed by an advocate/company secretary/chartered accountant/cost accountant in practice who is engaged in the formation of LLP.

Step 5 – Execute LLP Agreement + Stamp

• File Form 3 which is summary of LLP Agreement. As per Rule 21 Form 3 should be filed along with the prescribed fee within 30 days of the date of Incorporation. (Rule 21).

LLP Agreement & Main Features

• It is a written agreement between the partners of the limited liability partnership and between the limited liability partnership and its partners which determines the mutual rights and duties of the partners and their rights and duties in relation to that limited liability partnership.
• It is not necessary to enter into an LLP agreement as per LLP Act, 2008. In the absence of LLP agreement, the mutual rights of partners & in relation to LLP will be determined as per Schedule I of the LLP Act, 2008.
• Due to varied nature of different type of businesses, it may not be practically advisable to have those standard clauses as mentioned in Schedule 1. Therefore, it is advisable to have a legally drafted agreement LLP AGREEMENT.
• Main Features of the Agreement
  1. Parties (Individuals or body corporate Section- 5 LLP)
  2. Objective
  3. Definition and interpretation clause
  4. Commencement of business of LLP
  5. Duration of LLP
  6. Designated Partners (LLP Act) Working partners (IT Act).
  7. Role of Partners in Management (Otherwise any partner can take part in Management)
  8. Contribution of Partners (in cash or in kind).
  9. Partners’ powers, duties and authorities.
  10. Define share in the capital, profit and Losses (otherwise equally as per Schedule 1)
  11. Specify remuneration to working partners (otherwise no remuneration) [(See Income-tax Act - Section. 40(b)]
  12. Define interest to partners [Sec. 40(b) of I.T. Act allows interest up to 12% only]
  13. Power to expel (otherwise nobody can be expelled as per Schedule)

Summary of Forms List

Statements of Accounts and Solvency & Audit (Sec. 34)

1. LLP is required to maintain books of account for each year as prescribed by Rule 24. (Sec.34).
2. Books of accounts to be maintained for 8 years from the date on which they are made.
3. Accounts on cash basis or on accrual basis under double entry system of accounting.
4. Every designated partner shall have deemed to approve the accounts unless one take all reasonable steps to prevent their being approved & signed.
5. Within a period of six months from the end of the year, LLP to prepare a Statement of A/cs and Solvency in Form No.8 as prescribed by Rule 24. It is to be signed by the Designated Partner.
6. Before 30th October in each year, the Statement of Accounts and Solvency for the year ended on 31st March is required to be filed with the Registrar (Rule 24) (Section – 35) Annual Return – Every LLP to file Annual Return within 60 days of closure of financial year. In case of failure DP to be fined (₹10,000/- to ₹100,000/-) Additional fee of ₹ 100/- per day.
7. Accounts shall be audited by Auditors appointed by the LLP, in accordance with Rule 24. Audit compulsory under LLP Act if :
   1. Turnover exceeds ₹40 lakhs
   2. Contribution by partners exceed ₹25 lakhs.
8. Auditor shall be appointed before the end of Financial Year for first year. Subsequent auditor to be appointed before 30 days of end of Financial Year
9. Auditor can resign by giving a notice 14 days prior to the last date for the appointment of auditor along with statement of circumstances connected (Otherwise not effective)
10. Auditor’s term comes to end on deposit of notice or date mentioned.
11. Annual return needs to be certified by CS if Turnover exceeds 5 crores or contribution exceeds 50 lakhs

Conversion to LLP (Sections 55 to 57)

Conversion from firm/company into limited liability partnership. (Section 55 + Schedule – II).

1. Eligibility – A firm can be converted only if all the partners agree to become partners of LLP.
2. A private company can be converted into LLP only if:
   • All shareholders agree to become partners of LLP and
   • There is no security interest subsisting like mortgage
     (Sec. 56 Schedule – III)
3. Conversion from unlisted public company into LLP. (Section 57 + Schedule – IV)
4. Registrar to issue a certificate in Form No. 19.
5. On Registration of LLP erstwhile firm or company will be deemed to be dissolved.

Conversion from Firm to LLP: (As per Second Schedule)

1. On incorporation of LLP all the rights and liabilities under various agreements executed by the firm shall stand assigned to LLP as if those agreements were executed by LLP instead of the firm.
2. All the properties of previous firm would vest in LLP without any assurance.
3. If any property of the partnership firm is registered with any authority, LLP must notify the authorities like SSI etc., about the conversion and submit the particulars in such form as the authority may specify.
4. For a period of 12 months LLP will have to mention its previous Name and Registration number and business Form.
   • If the Registrar refuses registration, the Applicant may apply to the Tribunal within 60 days from such intimation of refusal [Rule 32(2)].
   • Rule 33 provides that upon such conversion the necessary intimation to the Registrar of Firms or Registrar of Companies, as the case may be shall be given in Form No. 14.

Striking off LLP Name (Section – 75 Read with Rule – 37)

• Section – 75 empowers Registrar to strike off the name of LLP on
  • Suo motu basis
  • Application by LLP
• Suo motuaction of Registrar: - LLP shall be defunct for at least two years.
• Application by LLP (in form – 24): - LLP shall be defunct for at least one year.
• NOC from concerned Govt. authority if regulated by them.
• Suo motu notice of ROL/application of LLP be placed on Ministry website for a period of one month before publication of notice in Official Gazette.
• LLP shall be dissolved w.e.f. publication of notice in Official Gazette.

LLP & TAXATION

1. Worldwide LLP taxation practice.
   1. Tax Transparent (Pass through). In U.K. & Singapore, Tax is not payable by LLP.
   2. Tax opaque juridical entity. In Belgium and Australia, LLP is taxable entity.
   3. Flexible – In USA – Left to the decision of the partners.
2. Section - 2(23) of Income-tax Act amended to treat LLP as a Partnership Firm.
3. In India LLP is tax opaque juridical entity – Tax payable by LLP.
4. LLP registered in India will be a resident even if only a part of control and management is in India.
5. No surcharge, effective tax rate 30.9%.
6. No MAT (Minimum Alternate Tax) A company must pay MAT@18.5% (effective rate 20.007% of Book Profit (Section.115JB of Income-tax Act), However LLP must pay Alternate Minimum Tax (AMT) @ 18.5% effective rate 19.055%.
7. No DDT (Dividend Distribution Tax – Section.115-O) Amount distributed by the company as dividend is liable for additional income tax @15%
8. Profits distributed by LLP is exempt in the hands of the partners Section-10(2A) of the Income-tax Act.
9. Profit earned by the Assignee of economic Interest (as per Section – 42 of LLP Act) is taxable in his hands.
10. Deemed dividend provisions do not apply to LLP – If a private limited company gives any loan to any shareholder holding not less than 10% of share then that loan is taxed as dividend received from the company. [Section-2(22)(e) of Income Tax Act]
11. Corporate law provisions for inter-corporate deposits will not apply. (Sec. 58-A/73 of New Companies Act. LLP is free to receive deposits from other LLPs whereas a company can invite deposits from public as per rules only).
12. Interest paid to partners is allowable – deduction provided capped at 12% [Section – 36(1)(iii), Section – 40(b), Section- 184 of the Income Tax Act].

As per Section 36(1)(iii) the interest paid on the capital borrowed for the purpose of business is allowed as deduction. However as per Section 40(b)(v) interest paid to partners if not specified in the Partnership Deed is not allowed. Moreover, interest is allowed only to the extent of 12%. As per Section 184 a partnership will be assessed as a firm provided there is an instrument of partnership (Partnership Deed or LLP Agreement) and the shares of partners are specified therein. In case of unwritten partnership the deductions for salary and interest are not allowed. The provisions will equally apply to LLP.

13. Remuneration to working partners allowed subject to 
    cap. u/s. 40(b)(v) – if paid in accordance with Deed/Agreement.
    1. On the first 3 lakhs of book profit or in the case of loss ₹ 1,50,000/- or 90% of book profit.
    2. On the balance profit in excess of 3 lakhs – @ 60% of book profit.
14. Retiring/deceased partner’s share in loss cannot be carried forward in the hands of LLP Section-78(1) – There is a contrary view also.
15. Foreign LLPs shall be taxed as companies under the I.T. Act (and not as a firms).
16. Wealth Tax not applicable to LLPs. But interest of the partner in the assets of the firm may be liable to wealth Tax [Sec. 4(1)(b) of Wealth Tax Act]. The issue is debatable. Since LLP is not equated with firm under Wealth Tax Act, the provision may not have applicability in the case of partners of LLP.

STATUS AFTER 1-4-2011

Transfer of Assets on conversion u/ss. 56 & 57 of the Act shall not be regarded as transfer if –

1. The total sales, turnover or gross receipts in business of the company do not exceed sixty lakh rupees in any of the three previous year preceding previous years the shareholders of the company become partners of the LLP in the same proportion as their shareholding in the company as on the date of the conversion;
2. No consideration other than share in profit and capital contribution in the LLP arises to partners;
3. The erstwhile shareholders of the company continue to be entitled to receive at least 50 per cent of the profits of the LLP for a period of 5 years from the date of conversion;
4. All assets and liabilities of the company become the assets and liabilities of the LLP; and
5. No amount is paid, either directly or indirectly, to any partner out of the accumulated profit standing in the account of the company as on the date of conversion for a period of 3 years from the date of conversion. [this condition means that no accumulated profits which are lying in reserve or in the profit and loss (surplus) balance as on date of conversion should be distributed to any partner or transferred to their capital accounts until 3 years from date of conversion.]

Note: – LLP is allowed carry forward and set-off of business loss to the successor LLP which fulfils the above-mentioned conditions for a fresh period of 8 years from the expiry of the year of conversion and unabsorbed depreciation indefinitely. 72A(6A)

Miscellaneous

The Government may by notification direct that provisions of the Companies 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.

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. 3.44.

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, RBI vide Notification No. FEMA 298/2014-RB dated 13-3-2014 has amended 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

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