CA Amit Kedia
A Limited Liability Partnership (LLP) is a partnership in which some or all partners (depending on the jurisdiction) have limited liability. It therefore exhibits elements of partnerships and corporations. In an LLP, one partner is not responsible or liable for another partner’s misconduct or negligence. This is an important difference from that of an unlimited partnership. In an LLP, some partners have a form of limited liability similar to that of the shareholders of a corporation. In some countries, an LLP must also have at least one “General Partner” with unlimited liability.
The Limited Liability Partnership was formed in the early 1990s in United States in the consequence of the collapse of real estate and energy prices in Texas in the 1980s. This collapse led to a large wave of bank and savings and loan failures. Because the amounts recoverable from the banks were small, efforts were made to recover assets from the lawyers and accountants who had advised the banks in the early 1980s. The reason was that partners in law and accounting firms were subject to the possibility of huge claims which would bankrupt them personally, and the first LLP laws were passed to shield innocent members of these partnerships from liability.
Apart from India Many Countries like Canada, China Germany, Greece, Japan, Kazakhstan, Poland, Romania, and Singapore have felt the need to recognize LLPs in their country.
Limited Liability Partnership in India
In India, The Limited Liability Partnership Act, 2008 was published in the official Gazette of India on January 9, 2009 and has been notified with effect from 31 March 2009. The first LLP was incorporated in the first week of April 2009. Some sections relating to conversion of existing partnership firms and private as well as public unlisted companies into LLP have been brought into force on 31-5-2009
At present, there are about 10,000 LLPs formed and registered under the Limited Liability Partnership Act.
Salient features of an LLP
Advantages of forming an LLP
Disadvantages of forming an LLP
How to Form of an LLP???
Any two or more persons can form an LLP. Even a limited Company, a foreign Company, a LLP, a foreign LLP or a non-resident can be a partner in LLP. Although, there is no specific mention, a HUF represented by its Karta and a Minor can also be partner in LLP.
An Incorporation document (similar to memorandum) and LLP agreement (similar to articles of association) is required to be filed electronically. The Registrar of Companies (ROC) shall register and control LLPs.
Steps to form an LLP:-
Accounting aspects of Limited Liability Partnership
Every LLP shall maintain books of accounts and submit a statement of accounts and solvency within a period of 30 days from the end of six months of the financial year. It is also required to file annual return within 60 days from the end of the financial year. Apart from that, an LLP is also required to get its accounts audited if annual turnover exceeds Rs. 40 Lakhs or the contribution exceeds 25 Lakhs.
Revised Schedule-VI to the Companies Act, 1956 is not applicable to an LLP. It applies to all companies registered under the Companies Act but LLP is a body corporate and not a company.
Taxation aspects of Limited Liability Partnership
Budget 2009-10 has brought provisions regarding taxation of LLPs. Limited Liability Partnership will be treated as Partnership Firm for the purpose of Income tax and accordingly, all the relevant provisions regarding taxation of partnership firm has been modified.
The Income of LLP will be charged to tax in the hands of the LLP only and not in the hands of individual partners. Remuneration to partners will be taxed as “Income from Business & Profession” and share of profit in the hands of the partner is exempt from tax u/s 10(2A). The LLP is allowed to get deduction of remuneration paid to the partners subject to the maximum of limit prescribed u/s 40(b).
Benefit of presumptive taxation is not given to an LLP. At present, the Income of an LLP is taxable @30% plus education cess but surcharge is not applicable to an LLP.
The LLP is also subject to alternate minimum Tax (AMT) which is similar to minimum alternate tax (MAT) in case of companies. However, there is no concept of book profit and it is calculated based on the adjusted total income. The Income tax law has also been modified for bringing the taxation aspects of conversion of Private Company or unlisted Public Company into an LLP on the paper. There are no tax implications on conversion of a partnership firm into an LLP.
Note: Now all the persons other than company are also subject to alternate minimum tax with effect from 01/04/2012.
For the purpose of Service tax also, an LLP will be treated as partnership firm only. Service Tax Rules, 1994 has been amended by the Service Tax (Amendment) Rules, 2012 to consider LLP as a partnership firm.
Even when the word “body corporate” is used it will not include LLPs despite of its legal status being a body corporate. Accordingly, partial reverse charge is also not applicable to an LLP.
Under Sales tax, LLP is treated as body corporate. The definition of “Dealer” under Central Sales Tax, 1956 includes body corporate also.
Actually, there is no dissimilarity in partnership firm, company, body corporate etc with regard to payment, returns, audit etc. under sales tax. Provisions for different kind of dealers are distinguished based on the volume/size or turnover of the dealer and not on the basis of the status of the dealer.
Different perspective of Limited Liability Partnership
Limited Liability Partnership is recognized as legal form in the manufacturing sector. Many small and medium enterprises have enjoyed the dual advantage of less compliance with higher access to credits in the market.
LLP has come like boon for the service sector and especially for professionals like chartered accountants/company secretaries & advocates.
MCA has also clarified that for the limited purpose of section 226(3) of companies act, 1956, an LLP shall not be treated as body corporate and accordingly, an LLP of Chartered Accountants is allowed to conduct statutory audits of companies.
In short, LLP can be formed to do any type of business (manufacturing, trading, commercial or professional service) for the objects to earning the profit. However, it cannot be formed for the charitable purpose.
Foreign Direct Investment in LLPs
Foreign Direct Investment in Limited Liability Partnership is allowed, with the specific approval of the government, in those sectors/activities where 100% FDI is otherwise allowed under the automatic route and there are no FDI-linked performance related conditions.
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