Limited liability partnership (LLP) is essentially a partnership constituted in corporate form which has a separate legal identity distinct from its partners. Its primary advantage is the benefit of limited liability, a feature not prevalent in general partnerships. Liability of an LLP’s partners is restricted to the extent of their individual contributions to the LLP; they would not be held responsible for loss caused on account of fraud of other partners, of which they had no knowledge.
LLPs are intended as an alternative business organisation for small scale industries and service sector enterprises, such as lawyers, chartered accountants etc, which at present, are primarily constituted as partnership firms in India.
LLPs – International experiences:
The LLPs are very popular form of business in United States and United Kingdom. In the UNITED STATES1, Limited partnerships emerged in the early 1990s; while only two states allowed LLPs in 1992, over forty had adopted LLP statutes by the time LLPs were added to the Uniform Partnership Act (UPA) in 1996. In the United States, each individual state has its own law governing their formation. Although found in many business fields, the LLP is an especially popular form of organization among professionals, particularly lawyers, accountants and architects. UNITED KINGDOM2: The Limited Liability Partnership is a recent innovation of UK law, has been introduced by the Limited Liability Partnerships Act 2000. The Act became law on 1/4/2001. In an LLP, all partners have a form of limited liability, similar to that of the shareholders of a corporation. However, the partners have the right to manage the business directly, and (in many areas) a different level of tax liability than in a corporation. Under UK law, the LLP is a “fiscal transparency”. In other words, it is not subject to taxation. Only the members are liable to taxation.
The Limited Liability Partnership Bill, 2008 (the Bill) as introduced in Parliament covers all major areas of LLP legislation but there appears to be lack of clarity in terms of taxation.
Taxation of LLPs in our country shall be governed by the Income Tax Act,1961. Accordingly , the Finance Act, 2009 has introduced the provisions regarding taxation aspects Limited Liability Partnership. LLP will be treated as partnership firms for the purpose of Income Tax and will be taxed like a partnership firm.
Finance Act, 2009 has amended the definition of Firm and Partners as follows -
Firms shall have the meaning assigned to it in the India Partnership Act 1932 and shall include a limited liability Partnership as defined in the Limited Liability Partnership Act 2008.
(a) Partner shall have the meaning assigned to it in the Indian Partnership Act 1932 and shall include:
• Any person, being a minor, has been admitted to the benefits of partnership ; and • A partner of a limited liability partnership as defined in the Limited Liability Partnership Act 2008.
( b) Partnership shall have the meaning assigned to it in the India Partnership Act 1932 and shall include a limited liability partnership as defined in the Limited Liability Partnership Act 2008.
In order for Limited Liability Partnership to be assessed as firm in Income Tax Act, it has to satisfy the following criteria-
(a) The LLP is evidenced by an instrument i.e. there is a written LLP Agreement.
(b) The individual shares of the partners are very clearly specified in the deed.
(c) A certified copy of LLP Agreement must accompany the return of income of the LLP of the previous year in which the partnership was
(d) If during a previous year, a change takes place in the constitution of the LLP or in the profit sharing ratio of the partners, a certified copy of the revised LLP Agreement shall be submitted along with the return of income of the previous years in question.
(e) There should not be any failure on the part of the LLP while attending to notices given by the Income Tax Officer for completion of the assessment of the LLP.
LLP can claim the following deductions:-
(a) Interest paid to partners, provided such interest is authorised by the LLP Agreement.
(b) Any salary, bonus, commission, or remuneration (by whatever name called) to a partner will be allowed as a deduction if it is paid to a working partner who is an individual.
(c) The remuneration paid to such working partner must be authorised by the LLP Agreement and the amount of remuneration must not exceed the given limits
So far as exemption of partners share income from LLP is concerned, section 10(2A) exempts the share income from the LLP in the hands of the partner. The share of a partner in the total income of a LLP separately assessed as such shall, be an amount which bears to the total income of the LLP the same proportion as the amount of his share in the profits of the LLP in accordance with the LLP Agreement bears to such profits.
The share of the partner in the income of the LLP is not included in computing his total income i.e. his share in the total income of the LLP shall be exempt from tax.
LLP and general partnership is being treated as equivalent (except for recovery purpose) in the Act, the conversion from a general partnership firm to an LLP will have no tax implication, if the rights and obligation of the partners remain the same after conversion and if there is no transfer of any asset or liability after conversion. If there is a violation of these conditions , the provision of capital gains will apply.