Anjali Goyal
Limited Liability Partnership is a partnership where some or all partners have limited liabilities which may depend on the jurisdiction. It is basically the combination of advantageous features of both partnership and company form of organisation. LLP has introduced in India via Limited Liability Partnership Act, 2008. What makes LLP a better form of organization?
LLP combines the benefits of both partnership and company and thereby makes a better form of organisation. For Instance:
- In an unlimited partnership, all partners are liable for the negligence or misconduct of other partners whereby in LLP, partners are only responsible for their own deeds. They are not bound by the acts of other partners. They are solely responsible for what they do, how they do and the outcomes of their actions.
- In LLP, partners have limited liabilitye. restricted to their part of sharing in the association unlike the biggest issue in the partnership was due to unlimited liability of all partners. In such case, other partners had to suffer the loss due to the misconducts of any other or some partners in the partnership.
- In a Company form of organisation, even though the shareholders are considered as the real owners but they cannot be involved into the management directly. They face long procedures and legal compliances in order to take actions in the management. In LLP, the real owners directly participate into the management.
In simple words, under LLP a partner without facing the risk of unlimited liability can directly participate into the management. Thus, it makes LLP a better form of organisation.
TAX IMPLICATIONS
Conversion involves transfer of assets from company to LLP and in the absence of any specific provision, Capital Gains would have been applied which might have become the biggest hindrance to conversion of company into LLP.
Income Tax Act has come with the rescue of this hindrance with Sec 47(xiib).
Sec 47(xiiib)
provides that, any transfer of Capital asset or intangible asset to LLP or any transfer of share or shares held in the company by a shareholder on conversion of a private company or unlisted company into an LLP in accordance with sections 56 & 57 of the limited liability partnership act,2008 shall not be regarded as a transfer for the purpose of the capital gain tax, subject to the following conditions:
Conditions referred above:-
1. All the assets and liabilities of the company /firm are transferred to the LLP.
The above condition states that all the assets whether Capital asset or not and liabilities should be transferred to the LLP.
But, the above exemption is limited to only Capital Assets, since ‘transfers’ from which Capital Gains arises are exempt. Therefore, those assets which do not comply with the definition of Capital Asset under the Act shall be taxable accordingly.
e.g. Inventory – Transfer of inventories from company/firm to LLP during conversion shall be taxable under ‘Profits and Gains from business & profession’. Valuation shall be done on ‘Fair Market Value’.
2. All the shareholders/partners of the company/firm immediately before the conversion become the partners of the LLP.
This condition bound all the partners to become partners in LLP. Also it restricts additional partners to be admitted on conversion. Admission or Retirement of partner(s) can be done after conversion. Since no ‘lock in period’ for stay or duration of any partner in LLP is given, reconstitution can be done whenever required, once registration process of LLP has been completed.
3. The capital contribution and profit sharing ratio of the shareholders/partners in the LLP are in the same proportion as their shareholding/profit sharing ratio in the company/firm on the date of conversion.
No change shall be made on profit sharing ratio during conversion into LLP.
Analysis- This condition is necessary since change in profit sharing ratio among partners may amount to profit as well as loss to involved partners. Also, no consideration in any other form than capital contribution and share in profits or profits out of accumulated profits is allowed t give to partners.
4. The consideration to the shareholders/partners of the company/firm is in the form of share in profit and capital contribution in the LLP only.
5. The shareholders/partners shall continue to be entitled to receive at least 50 percent, in aggregate, of the profits of the LLP for a period of 5 years from the date of conversion.
This condition does not states the number of old partners/shareholders should continue as partners in the LLP. It states the quantum of profit sharing with partners which should be continued after the conversion for 5 years.
e. g. Mr A holding 55% in old partnership is solely enough to fulfil above condition for 5 years after conversion into LLP.
6. The total sales, turnover or gross receipts in the business of the company/firm in any of the three preceding years is not more than sixty lakhs rupees.
The above limit will render a big section of companies willing to convert as ineligible.
7. No amount is paid to any partner out of accumulated profits standing in the accounts of the company on date of conversion, for a period of three years from the date of conversion.
It is a safeguard against misuse by a company to escape Dividend Distribution Tax since LLP is not liable to DDT. Also, provisions of deemed dividend u/s 2(22)(e) does not apply to LLP
OTHER ISSUES
ANNUAL COMPLIANCE OF LLP:
- Maintenance of proper Books of Accounts on cash basis or on accrual basis and according to the Double Entry System of accounting.
- Maintained at registered office and to be preserved for at least 8 years .
- Audit is compulsory if turnover exceeds Rs40 lakhs or contribution of LLP exceeds Rs 25 lakhs (Rule 24 of LLP Rules, 2009)
- Form-11 (Filing of Annual Return) – within 60 days of closure of Financial Year.
- Form- 8 (Filing of Statements of Accounts & Solvency) – within 30 days from the end of 6 months from the closure of Financial Year.
Other Aspects:
- Stamp Duty may be payable on conversion of company into LLP as per the State Stamp Duty Laws.
- LLP is not a company, therefore Dividend Distribution Tax would not be applicable on distribution of profits by an LLP.
- The accumulated business loss and unabsorbed depreciation of the predecessor company shall be allowed to be carried forward and set-off of by the successor or LLP if conditions referred u/s 47(xiib) are satisfied.
- Under section 115JB, MAT provisions are applicable to companies. Therefore, MAT provisions are not applicable to LLP’s.
The MAT credit of the predecessor company shall not be available to the successor company. Thus if a private company which has MAT credit u/s 115JAA converts to LLP, it shall lose the MAT credit. (Sec 115JAA(7)) - Provisions of deemed dividend u/s 2(22)(e) are not applicable to LLP’s.
- A partner is entitled to receive interest on his capital contributions (irrespective of whether LLP makes a profit or not) if LLP agreement so provides, subject to Sec 40(b).
- Benefit of amortization of VRS payments made by predecessor company is available to LLP.
Provided, employees of LLP are not yet granted exemption u/s 10(10C) in respect of VRS payments received by them from employer LLP. - There is no expressed provision in LLP Act with respect to Admission of Minor.
- LLP may not be qualified for following deductions:
Sec 35D – Amortization of certain preliminary expenses
Sec 35DD – Expenditure in respect of amalgamation/demerger
Sec 35(2AB) – Weighted Deduction for Scientific Research and Development
Sec 47(vi)/(via)/(vib)/(vid)/(vii) – Tax neutrality on amalgamation/demerger
Sec 80-IA(4)(i) – deduction on profits of infrastructure projects - Entitled for deduction at lower rate:
Sec 80-IB – Residual Period – Firm @ 25% vs. Company @30%.
CONCLUSION:
From the taxation point of view, a LLP has distinct advantages. Immunity has been provided to small companies by not treating ‘conversion’ as ‘transfer’.
(Author is a Licentiate Company Secretary and CA Final student of ICAI and she can be reached For any queries or suggestions, at anjaligoyal0602@gmail.com)
Dear M’am
Whtehr LLP can take loan from Individual.