CA Sanjay Joshi, ACCA (UK), DISA, DIRM
Partnership: Partnership (regulated by Partnership Act, 1932) is one of the preferred business vehicles by entrepreneurs in India. In-fact, India is one of a country which recognizes partnership as a taxable entity (assessee) under the Income Tax Act, 1961. Less stringent regulations, low compliance cost, ease, speed and flexibility of the structure are few of the attractions of the Partnership. Unlimited liability of partners, absence of incorporation status and perpetual succession are three significant drawbacks of the Partnership Structure.
Limited Liability Partnership: Globally known as LLP, are recognized separate legal entity having a status similar to that of corporations (company) and a perpetual succession for all commercial and business purposes. LLP is regulated by different countries and jurisdictions as per their local laws, some of the developed countries like US, UK, Canada permits LLP only for accountants and professionals. Further, they also treat LLP as a tax neutral entity or a pass-through vehicle wherein partners pay tax on their relative shares and not the LLP.
We adopted a Limited Liability Partnership Act, 2008 (‘the Act’) on July 7th 2009. The ACT permits a legal structure being LLP for use by entrepreneurs for any business as per the provisions of the Act and the Limited Liability Partnership Rules, 2009 Rules.
Snapshot of the Regulatory Framework: (as per the Act and LLP Rules):
Legal Structure:
- LLP shall be a body corporate and a separate legal entity from its partners
- LLP shall have perpetual succession
- LLP shall be liable its assets and liabilities
- Partners will be liable only to the extent of their contribution in LLP unless their intentions are of fraud
Governance:
- LLP Shall have at-least two partners and out of them or otherwise at-least two designated partners
- The partners are governed as per the LLP Agreement (like partnership deed) and as per the Provisions of the Act.
Compliance:
- LLP shall maintain its accounts reflecting true and fair view of its affairs
- LLP shall submit to the registrar a statement of solvency every year
- LLP is subject to audit (by a chartered accountant) under the act, if the turnover in any financial year exceeds Rs. 40 Lacs and or the contribution exceeds Rs. 25 Lacs.
Restructuring:
- LLP can also seek compromise, arrangement, reconstruction, merger or amalgamations as per the Act
- A partnership firm, a private limited co. or an unlisted public co. can seek conversion from their existing legal structure to an LLP as per the provisions of the act
- Provisions of Companies Act, 1962 w.r.t. winding up applies to LLP subject to certain modifications
SWOT analysis of LLPs:
|
STRENGTH |
WEAKNESS |
| ü Flexibilityto operate any business and to take all decisions like that of traditional partnership
ü World-class e-governancefor LLPs ü The public searchcan be conducted for any LLP to obtain details of an LLP and the partners ü Certificate of Incorporationbrings global commercial identity ü Most suitable business model for professionals, businesses that operates as franchisee models, outlets, license stores. |
ü Stack-holders awareness is minimumü Penalprovisions are not very much clear
ü Investigationof LLP can be arranged by any partner in case of dispute |
|
OPPORTUNITES |
THREATS |
| ü Formation costare as low as few thousand rupees (being filling fees and stamp duty on LLP agreement)
ü Compliance costs are quite competitive compared to companies (statement of solvency and audit will cost only few thousand rupees) ü Conversionby a firm or private limited or unlisted public co. into an LLP ü Foreign companiescan use LLP form as a joint ventures, strategic alliance or partnerships ü LLP is successful for SMEs to attract foreign partnerships |
ü Delay in filling of forms attracts penalty of Rs. 100 per day (these fees are not reversible even if the delay is due to genuine reasons)
ü Banks have not supported LLP funding requirements ü Market perception of Credit risk of LLP is very high |
Step by step formation of an LLP:
| Steps | Process | Form | Filling Fees | Time |
| DIN | Director identification number (two) | DIN 1 |
100-300 |
1 Day |
| DSC | Digital signature (two) | DSC |
500-2,500 |
1 Day |
| 1 | Name reservation | Form 1 |
200-200 |
3 Day |
| 2 | Certificate of Incorporation | Form 2 |
500-5,000 |
7 Day |
| 3 | LLP Agreement | Form 3 |
50-200 |
7 Day |
| 4 | Designated partners details | Form 4 |
50-200 |
2 Day |
| Total |
2,000-11,200 |
21 Day |
||
| Stamp duty on LLP Agreement |
0.1% of capital & max 10,000 |
|
KEY DRIVERS OF LLP:
Where modern business clock is taking a you turn, where a business model is locally global, business relationship is taking over competition in market, customer service and 24*7/365 support is preferred compared to low price and excellent quality, it makes sense for an individual, a partnership firm or a small business to find a way out to sustain and grow. Doing business as a Company (Corporate) is like living in Spider’s house for a layman (an individual) as Laws and regulations for corporate is becoming stringent day by day. LLP is like a ray of hope in times of crisis.
