Limited Liability Partnership Act 08

BRIEF BACKGROUND INDIAN LEGISLATIVE HISTORY THE ACT - OUTLINE THE ACT - SALIENT FEATURES COMPARATIVE ANALYSIS CONCLUSION

BRIEF BACKGROUND In India, businesses mainly operate as companies, sole proprietorships and partnerships. Each of these is subject to different regulatory and tax regimes. At present, being a partner of a firm is a risky affair as the liability is unlimited. LLP is a new form of business structure. It provides an alternative to the traditional partnership where partners are exposed to unlimited liability and the statute based governance structure of limited liability companies.

INDIAN LEGISLATIVE HISTORY 1997 A. Hussain Committee on Small Scale Industries recommended introduction of LLPs in India; 2003 Naresh Chandra Committee Report highlighted the grave need to introduce LLPs in India & suggested application of LLPs to service industry; 2006 LLP Bill, 2006 introduced in parliament; 2007 Parliamentary Standing Committee submitted a Report to the parliament with their recommendations; 2009 President’s assent to the LLP Bill, 2008 given on January 7 and LLP Act, 2008 published in Official Gazette on January 9.

THE ACT – OUTLINE LLP ACT, 08 CHAPTERS 14 SECTIONS 81 SCHEDULES 4 RULES & FORMS 16 Chapters 40 Rules 29 Forms 03 Annexures

CONCEPT LLP IS A NEW FORM OF BUSINESS STRUCTURE = BODY CORPORATE WITH DISTINCT LEGAL IDENTITY (thus can also have transactions with its partners) + PERPETUAL SUCCESSION…COMMON SEAL…SUE/BE SUED. + ORGANIZATIONAL FLEXIBILITY OF PARTNERSHIP + ADVANTAGE OF LTD. LIABILITY FOR ITS PARTNERS (liability will be met out of LLP property) Is an alternative to the traditional partnership (where partners are exposed to unlimited personal liability)

INCORPORATION OF LLP 2 or more persons are required to file incorporating document with the concerned ROC. (Form 2) ROC to register and give Incorporation Certificate within 14 days of completion of all formalities. It would be possible for any LLP to change its object, name or registered office, admit new partners…. by executing a supplemental deed and to file prescribed particulars with ROC. Note :- Procedure for obtaining name of LLP is similar to that of a company. Approve the name. Must not be similar to any existing LLP. Must end with words “LLP” (full/abbreviated, any) Apply to ROC for reservation of name.

PARTNERS & DESIGNATED PARTNERS PARTNER Any Individual/Body Corporate may be a partner. Minimum 2 partners and no limit on maximum partners. If the number of partners falls below 2, the surviving partner will have to admit at least 1 more partner within 6 months. If he does not do so, his liability in LLP will become unlimited and the LLP will get wound up by the Tribunal. DESIGNATED PARTNERS (DP) Must be 2. (both individuals, atleast 1 Indian Resident) To obtain DP Identification Number from Central Government. Responsible for all compliances as required under the Act and is also liable for penalty for contravention.

PARTNERS…THEIR RELATIONS Mutual Rights – of partners inter se and LLP governed by :- If LLP agreement entered – By the agreement In absence of agreement – By provisions of Schedule I LLP agreement (along with modifications) to be filed with ROC. Schedule I not only provides rights and duties of partners in absence of LLP agreement, even if there is a written agreement, but there is no specific mention about any of the specified matters, then such matters will be governed by Schedule I. Every partner of LLP is an agent of LLP but not of other partners. However LLP is not bound by anything done by the partner in dealing with third party, if partner has no authority to act and the third party is aware of the fact.

Contd…. CONTRIBUTION Obligation to contribute shall be as per the LLP agreement. May be in the form of money or property, tangible or intangible or contracts for services . CESSATION Any partner may cease to be a partner :- In accordance with an agreement with other partners. In absence of such agreement, by giving 30 days notice. By death or by dissolution of LLP.

PARTNERSHIP RIGHTS Right of a partner to share profits is transferable (either wholly or in part); Transfer does not imply that the transferor/ assignor has ceased to be a partner; Transferee/ assignee not entitled to participate in the management of the LLP; Transferee/ assignee not entitled to any information relating to transactions of LLP.

ACCOUNTS AND AUDIT Every LLP is required to, in respect of :- BOOKS OF ACCOUNTS Maintain books of accounts (as may be prescribed) at the Registered office for the financial yr, either on cash or accrual basis. To keep all records for a period of 8 yrs. ROC FILINGS Every year prepare and file with ROC, A statement of account and solvency . (Form 8) Annual Return (within 60 days of closure of the financial yr) AUDIT Get its accounts audited as per the prescribed rules. The statement of accounts and solvency and annual return filed by each LLP shall be available for inspection with the ROC.

INVESTIGATION OF AFFAIRS Provisions similar to those in the Companies Act, 1956. Central Government can investigate the affairs of an LLP. Whistle blower provision in the Act also lays that penalty against any partner can be waived, if satisfied that he has provided useful information during such investigation.

CONVERSION - EXISTING FIRMS INTO LLP If all the partners agree to become part of LLP, the firm can apply to ROC in prescribed format for such conversion. On such conversion :- All the assets and liabilities of the firm would get vested in LLP. Firm stands dissolved If Registered, will be removed from records. The LLP shall ensure that for a period of 12 months commencing not later than 14 days after the date of registration, every official correspondence of the LLP bears a statement that it was, from the date of registration converted from a firm into an LLP and name and registration, if applicable, of the firm from which it was converted.

CONVERSION - EXISTING COMPANIES INTO LLP Any Private/ Unlisted Public Company may apply to ROC for conversion into LLP, only if :- there is no security interest on the assets of the Company. all the shareholders of the Company agree to become partners. All the shareholders become partners of LLP; All the assets and liabilities of the Company would get vested in LLP. Section Company which can be converted into LLP Procedure contained in 56 Private Limited Third Schedule. 57 Unlisted Public Fourth Schedule.

FOREIGN LLPs The Act provides for establishment of foreign LLPs and permits them to carry on business activities in India. The Act states that the Central Government may make Rules for establishment of place of business for foreign LLPs in India and conduct of business by such foreign LLPs. We hope suitable changes are made in exchange control regulations to include foreign LLPs as an eligible organizational structure for investing in India.

COMPROMISE OR ARRANGEMENT The first schedule of the Act lays down detailed provisions for allowing compromise or arrangement including mergers and amalgamations. These should be agreed by majority of members and creditors of LLP representing three-fourths in value and confirmed by National Company Law Tribunal (NCLT).

WINDING UP OR DISSOLUTION An LLP can be Either wound up voluntary; or By the Tribunal under certain circumstances like: Inability of the LLP to pay its debts; or Defaults in filing the statement of account or Solvency; or Default in filing of Annual Return with the ROC for 5 consecutive financial years or Any other ground which is just and equitable in the opinion of Tribunal. The Central Government will make rules for provisions relating to winding up and dissolution of LLP.

ANALYSIS - TAXATION ASPECTS Act is silent on taxation aspects of LLP. An appropriate amendment could be brought to the Income-tax Act,1961 to address the same. Internationally, (in UK and Japan), LLPs are treated as pass through entity and income is taxed in hands of partners and not in the hands of the LLP. MCA concept paper on LLP recommended the above concept. However in India, income is taxed in the hands of the firms. In such a scenario, treating LLP as a pass through entity on one hand and taxing firms on the other hand would lead to anomaly. Further if LLP carries its business in another country, the fact that such entity is not taxable may bring challenges in various tax treaties that India has entered into. Contd….

Contd…. Thus, following options are available for taxing of LLP: Treat LLP as a pass through status, where individual partners are taxed and not the firm; or Taxing LLP at the firm level and exempting income received by partners from LLP in line with the current treatment of partnership firms under the Income Tax Act; or Either taxing the LLP at the firm level or providing it with a pass through status and taxing partners at the option of LLP as prevalent in USA. Pending specific exemption from taxation at the time of conversion, authorities may seek to tax conversion as a capital gain. Clarity is required on this front too.

COMPARATIVE ANALYSIS GENERAL PARTNERSHIP LLP Liability of partners unlimited. Liability of partners limited to contribution. Partners jointly and severally liable. Partners not liable for act of other partners. Partnership firms are neither body corporate nor do they have perpetual succession and legal entity. LLP is a body corporate having perpetual succession and legal entity. Registration of partnership is not mandatory. Incorporation of LLP is mandatory. Partnership can not have more than 20 partners. LLP can have more than 20 partners.

COMPARATIVE ANALYSIS COMPANY LLP Incorporation procedure comparatively complex than LLP. Incorporation procedure relatively simple and expeditious. Management structure usually complex – shareholders do not ordinarily participate in day to day management. Flexible management structure – Partners are entitled to participate in management. Capital structure relatively less flexible than LLP. Flexible capital structure. Elaborate provision relating to redressal in case of oppression and mismanagement. No provision relating to redressal in case of oppression and mismanagement. Complex statutory compliance requirements. Limited statutory compliances as compared to Companies.

CONCLUSION Flexible and hybrid structure of LLP will facilitate entrepreneurs, service providers, small and medium enterprises, venture capitalists and professionals to organize and operate in an innovative and efficient manner for effectively competing in the global market. THE INTRODUCTION OF LLPs IN INDIA IS A GOOD BEGINNING TOWARDS A LONG JOURNEY.

Limited Liability Partnership Act 08

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