Limited Liability Partnerships (LLP) are emerging as a popular business structure for their multiple advantages. It is simpler yet corporate form of business where in all good features of both Company and Partnership firm are present. It is an alternative corporate business form that gives the benefits of limited liability of a company and the flexibility of a partnership.
The LLP is a separate legal entity, is liable to the full extent of its assets but liability of the partners is limited to their agreed contribution in the LLP. The LLP can continue its existence irrespective of changes in partners. It is capable of entering into contracts and holding property in its own name. Further, no partner is liable on account of the independent or un-authorized actions of other partners, thus individual partners are shielded from joint liability created by another partner’s wrongful business decisions or misconduct. Since LLP contains elements of both ‘a corporate structure’ as well as ‘a partnership firm structure’ LLP is called a hybrid between a company and a partnership.
The LLP structure is available in countries like United Kingdom, United States of America, various Gulf countries, Australia and Singapore. On the advice of experts who have studied LLP legislations in various countries, the LLP Act is broadly based on UK LLP Act 2000 and Singapore LLP Act 2005. Both these Acts allow creation of LLPs in a body corporate form i.e. as a separate legal entity, separate from its partners/members.
Advantages of LLP
> LLP can be formed by any amount of capital. There is no need for minimum capital for LLP.
> It requires a minimum of 2 partners and there is no limit on the maximum number of partners of the LLP.
> The cost of registering LLP is low as compared to a company.
> All limited companies have to get their accounts audited but in case of LLP there is no audit requirement unless the contributions of LLP exceeds Rs. 25 lakh or annual turnover exceeds Rs. 40 lakh.
> The LLP has very limited compliances as compared to the Company. It has to file yearly income tax return and two documents with the RoC i.e. annual return and statement of accounts and solvency.
> LLP is treated in par with the partnership firm. The provision of dividend distribution tax is not applicable on LLP. Also under Section 40(b) deductions are allowed on the interest given to partners, any payment of salary bonus commission or remuneration.
What is the need of Conversion from Private Company into LLP?
> LLP will have more flexibility as compared to a company.
> LLP will have lesser compliance requirements as compared to a company.
> LLP does not have to have its accounts audited if the annual turnover of the LLP is less than Rs. 40 lakhs and the capital contribution is less than Rs. 25 lakhs.
> A dividend received from Company is taxable in the hands of shareholders as per their applicable slab rate. While taxation structure for LLP is simpler. LLP is subjected only to Income tax. Dividend Distribution is not applicable on LLP. Once profit is declared and tax is paid by LLP, the distributed income is tax free in the hands of the partners.
> A paying back the capital i.e Buy back is very complex and costly exercise in case of company. However, in LLP, partners can withdraw his/her capital at any point of time by writing a simple letter. There is no tax implications on withdrawal of capital from LLP.
> There is no stamp duty on all movable and immovable properties of the company; on conversion of a private limited company into LLP as such properties automatically vest in the LLP. No instrument required to be executed and hence no stamp duty is required to be paid.
> No Capital gain tax shall be charged on transfer of property from the company to LLP, if the conditions stipulated in the Section 47(xiiib) of the Income Tax Act 1961, are fulfilled.
> Carry forward and set off losses and unabsorbed depreciation of the company is deemed to be loss/depreciation of successor LLP the previous year in which conversion was effected, thus such loss can be carried for further 8 years in the hands of the successor LLP.
Legal Framework for Conversion
Section 56, Third Schedule and Fourth Schedule of LLP Act- 2008
A Private Limited Company or Unlisted Public Company may convert into a Limited Liability Partnership in accordance with the provisions of Section 56 and the Third and Fourth Schedule of LLP Act, 2008.
Eligibility of Conversion
> There is no security interest in its assets subsisting or in force at the time of application; and
> The partners of the limited liability partnership to which it converts comprise all the shareholders of the company and no one else.
Requirements for conversion of company into LLP
> Every member of the company must agree with the decision of conversion.
> All the members become the partners of an LLP and no one else.
> The latest copy of Income tax return is to be filed with ROC.
> Not just the members, all the creditors of the company must also agree with the conversion.
> Under Companies Act, no prosecution should have been initiated procedure to be followed.
> No open (unsatisfied) charges should be pending against the company.
> At least one balance sheet and annual return should have been filed by the company after its incorporation.
> The company should be having share capital.
> The company should not be a Section 25 company/Section 8 Company under Companies Act, 1956/2013.
Process for Conversion of Company into LLP (Private and Public)
> Call for Board Meeting and pass Board Resolution for the conversion of the company into LLP.
> Take the Written consent of all the shareholders for conversion of Company into LLP.
> File application for name availability in web based form ‘RUN-LLP’ with the RoC. Attach the Board Resolution and proposed object clause with the name availability application.
> Once the name is approved, execute all necessary documents like consent, subscriber sheet etc. and file form FiLLip and form 18 with the RoC.
Attachments of form FiLLip
Attachments of form 18
> Once conversion is approved by the RoC execute LLP Agreement and file the same with the RoC in e-form LLP 3 within 30 days of approval of conversion by RoC.
Capital Gain on transfer of Assets and Liabilities
The finance Act, 2010 has inserted a new Clause (xiiib) in section 47 and a new sub-section (4) in section 47A of the Act with effect from assessment year 2011-12. If the following conditions are satisfied then the transfer of capital asset or intangible asset to LLP or any transfer of share or shares held in Company by a shareholder on conversion of Company into LLP shall not be regarded as transfer:
> all the assets and liabilities of the company immediately before the conversion become the assets and liabilities of the limited liability partnership;
> all the shareholders of the company immediately before the conversion become the partners of the limited liability partnership and their capital contribution and profit sharing ratio in the limited liability partnership are in the same proportion as their shareholding in the company on the date of conversion;
> the shareholders of the company do not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of share in profit and capital contribution in the limited liability partnership;
> the aggregate of the profit sharing ratio of the shareholders of the company in the limited liability partnership shall not be less than fifty per cent at any time during the period of five years from the date of conversion;
> the total sales, turnover or gross receipts in the business of the company in any of the three previous years preceding the previous year in which the conversion takes place does not exceed sixty lakh rupees;
> the total value of the assets as appearing in the books of account of the company in any of the three previous years preceding the previous year in which the conversion takes place does not exceed five crore rupees; and
> no amount is paid, either directly or indirectly, to any partner out of balance of accumulated profit standing in the accounts of the company on the date of conversion for a period of three years from the date of conversion.
If all the above conditions are complied with, the conversion shall not attract capital gains tax either for the Company or the Successor LLP or for the shareholders of the Company, who became partner in the successor LLP and get share of profits and capital in the LLP in lieu of their shares in the Company.
If any of the above conditions are not complied with, then as per provisions of Section 47A(4) such transfer of Capital Assets & Intangible assets deemed to be liable to Capital gains of the successor LLP or the Shareholders of the predecessor Company in the previous year in which such non-compliance took place.
What if Predecessor Company does not have any capital assets and intangible assets?
Transfer as per Income Tax includes disposing of or parting with an asset or any interest therein or creating any interest in any asset in any manner whatsoever. Even if there is no capital assets and intangible assets in a Predecessor Company, there is conversion of the equity shares into partnership interest in an LLP and hence this transaction is clearly covered within the definition of transfer. So, Even if there is no transfer of immovable property, LLP has to follow the above mentioned conditions otherwise respective shareholders have to pay capital gain tax on the difference between the values of their interest in LLP less cost of acquisition of shares in erstwhile LLP.
(Advance ruling in the matter of Domino Printing Services PLC)
Owing to flexibility in its structure, compliances, tax and operation, LLP would be useful for small and medium enterprises, in general. Internationally, LLPs are the preferred vehicle of business, particularly for service industry or for activities involving professionals. The conversion from the existing corporate structure can be made to a LLP while retaining the advantages of Limited Liability and less compliances.