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 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.
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).
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
ANNUAL COMPLIANCE OF LLP:
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 firstname.lastname@example.org)