A month after the government allowed registration of Limited Liability Partnerships, only 10 firms have availed this new form of doing business that provides advantages of a partnership firm and also a corporation. This is because the government is yet to notify key sections (Sections 55 to 58) of the law that would enable conversion of a partnership firm, private company or unlisted public company into an LLP.
According to an official of the Ministry of Corporate Affairs (MCA), these 10 firms belong to sectors including pharma, advisory services, power and advocate. “There are many queries from those who want to convert to LLP but are unable to register because conversion notification has not been released yet,” added the official. It is not clear when these four sections would be notified.
A limited liability entity is a hybrid of existing partnership firms and full-fledged companies. A minimum of two partners are required for formation of an LLP. Besides, there is no limit on the maximum number of partners, unlike the current limit of 20 members in a partnership firm.
Under the LLP structure, liability of the partner is limited to his stake and no partner is liable on account of any independent or unauthorised acts of other partners. On the other hand, under the “traditional partnership firms”, every partner is liable, jointly with all the other partners, and also severally, for all acts of the firm done while he is a partner, irrespective of his stake.
When the LLP Bill was enacted, it was expected that a large number of existing companies (public as well as private) will convert themselves into LLP entities with an eye on the practical benefits offered, including those related to taxation.
According to MCA secretary Anurag Goel, there will be around 200,000 LLPs in the country in the next two years.
Industry officials, however, feel it would take a while before this concept becomes popular and firms shift to LLP mode. People would like to test it before converting and it would be a very slow process, said B Ravi, a Chennai-based company law expert.
There is still no clarity on whether the LLP would be taxed or the partners would be taxed. The finance ministry will provide a tax structure for LLPs in the next Finance Bill after the Budget. Also, the issues regarding designated partners and remuneration to the partners would need more clarity, according to Ravi.
Even in an LLP, there is a need to have two designated partners to shoulder the responsibility and take onus, especially in multi-disciplinary firms that this type of business allows to have, said Ravi.
Besides, the LLP Act says that no partner would be entitled to remuneration for acting in the business or management of an LLP, which would require to be handled, he added.
Under the LLP model, chartered accountants and company secretaries or even advocates can set up multi-disciplinary firms, which would act as “one-stop” shops for people to avail of various professional services. Existing laws impose the restriction that these professional services cannot be carried out through companies but only through partnership firms.
“While companies would convert for tax benefits and less compliance, partnership firms would convert to LLP for risk aversion since here there is a limited liability,” said an official of a consultancy firm.