Post on 25-Dec-2015
Yoganandh & RamChartered Accountants
Walk Through Limited Liability
Partnerships
Yoganandh & RamChartered Accountants
Concept paper on LLPs in India
Based on the recommendations of the NC Gupta committee, and the Irani committee, the Govt had come out with a concept paper and a draft of the LLP bill in late 2005
LLP Bill has been placed before Lok Sabha on 7th Dec 2006 Rajya Sabha on 15th Dec 2006.
LLP Bill approved by Lok Sabha on 15th Dec 2008
Yoganandh & RamChartered Accountants
Concept paper on LLPs in India
First LLP in India expected by 1.4.2009 The Constitution (entry 44, List 1 of
Seventh Schedule) has put “corporations law” in the Union List: As LLP’s are to be given an
incorporated status, they will fall under this list
Yoganandh & RamChartered Accountants
Concept of LLPs The word “partnership” in LLPs is a misnomer, as the entity is not merely a
collective coming together of two persons: Results into creation of a new entity with its own
existence
LLPs are a hybrid between a company and a partnership: Externally, they have all features of a company Internally, they are run and managed by the members,
hence they are like partnerships The idea is to clothe a partnership with
Limited liability Incorporated existence and therefore personality of
its own
The concept of LLPs has inherent inconsistencies, as it has not had benefit of seasoning over centuries:
US law also relates to 1990s – Delaware model is the most commonly used one.
Yoganandh & RamChartered Accountants
LLP legislation in other countries
In UK, LLP law was passed in 2000
The campaign for LLPs was initiated by accounting firms (PwC and E&Y) to limit their liability:
Though UK Companies Act did allow professions to register as companies, accounting firms were reluctant to publish accounts subject to inspections etc
The UK move set the ball rolling in other countries too: Canada (Ontario) introduced LLP law in 1998 Singapore issued consultation paper in 2002, enacted the law in
2005
In UK, the LLP model is available for all businesses; in New York, it is open only for selected professions.
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Advantages of LLP
o Easy to incorporate, very little paper work required
o Low cost of incorporationo Lot of flexibilityo Very little accountability, in terms of legal
complianceo All benefits of a partnership business,
though with a new entityo Taxation as general partnerships
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Overview of the UK LLP law
Most obvious feature: the law is very short, very simple: Just 19 sections, no schedules
Owners and managers are the same: one member designated as “designated member”
May be a founding member or may change Unlimited business capacity Principle of agency/principalcy applicable:
Every member is an agent of the LLP Limited liability must always come with protected capital:
The law provides for capital of each partner, but does not restrict drawing
Capital or liability not mentioned in incorporation documents
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Salient features of the LLP Bill - Constitution
Indian law seems based on the Singapore law LLP is a body corporate, separate entity, perpetual succession:
To ensure perpetual succession, transferability of membership is a must
Persons constituting it are members: Individuals and corporates may be members:
Since body corporate will include an LLP, an LLP may also be a member
At least 2, maximum not specified Existing firms and Companies may convert themselves into LLPs –
Schedule 2 (Firm),3(Private Company) and 4(Unlisted Public Company) provide for the same:
Eligibility in case of a company – no charge subsisting on the assets of the company or in force at the time of winding up
No such eligibility condition in case of firms Partners of newly incorporated LLP comprise only:
Shareholders in case of company Existing partners in case of partnership firm
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Management of LLPs The law requires at least two designated partners
Who are individuals At least one shall be a resident of India The position of designated partners seems to be the same
as in case of directors The designated partner has the ultimate responsibility. He is:
Answerable for all acts matter or things, done or to be done by the LLP, and shall be personally liable for all penalties on the LLP
The LLP is liable for only the contravention of this section (appointment of a manager)
This section has serious implications: by not appointing a designated partner, penalty not less than
Rs. 10000 but up to Rs. 500000 UK law talks of designated member; if no member is
designated, then every member is a designated member
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Preservation of capital One of the most important pillars of the limited liability is definite capital:
Capital is the foundation on which the assets are built The LLP law, limiting liability, leaves the issue of preservation of capital very
vague: Capital is not mentioned in the Incorporation document; hence
not disclosed to the public Capital of partners may be drawn Sec 65 leaves the issue of contribution on winding up completely
open to be provided in the partnership agreement – which is not a public
document The Act provides the liability of the partnership to be met solely from
the property of the partnership: Property means, net property, that is, net worth, which is the capital If there is no capital maintenance clause, the whole concept may be totally
flawed The basis of contracting external liabilities is only a declaration of solvency:
Which does not serve the purpose of credit evaluation, as solvency is only as on the date on which it is made
In absence of capital maintenance, LLP might be NLP – no liability partnership
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Preservation of capital or capital insurance
UK law requires partners to contribute to the extent of drawings made within 2 years prior to winding up
Insolvency rules in India are applicable to only individuals
LLPs may be subject to corporate bankruptcy rules: Undue preference rules may require
returning of drawings made 1 year before winding up [sec 531A]
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Partners and their relationship
Initial partners are subscribers to original document
Any one can be partner in accordance with agreement: Individuals and bodies corporate may be partners
o Designated partners must at least be two individualso In case of bodies corporate as partners, at least two
individuals to be designatedo Insistence comes from the need for individuals to be directors
Partnership interest is not a transferable security but requires agreement with all partners
Mutual rights of partners are allowed to be governed by the partnership deed
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Partners and their relationship
Cessation: Death, etc Mutual agreement Resignation by 30 days’ notice A retiring partner shall be entitled to receive the credit of
his capital and share of accumulated profit determined to the date of his cessation:
The law should provide – subject to mutual agreement
Changes in partners to be notified to the registrar
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Partnership principle Every partner to be agent of the LLP, not of other partners Partnership interest interestingly split into:
Economic interest Non economic interest
Economic interest means right to share in profits Economic interest assignable, but assignee is not treated
as a partner, nor gets any right of participation in management:
Creates interesting situation: Partner may be X, assignee of economic interest may
be Y X incurs liabilities, Y has all economic interest, but no
obligation, as he does not have any partner status Companies Act, on the contrary, recognizes no
trusts or equities on the shares
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Transferability of partners’ interest
Seems the share of the partner in the capital of the firm, and share in profits, are two separate interests
Share in profits a transferable interest: sec 42 This has clearly followed the
Singapore model
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Accounting and reporting LLPs are required to maintain records, but not:
Hold meetings and lay accounts File accounts Publish accounts
They only make an annual declaration of solvency To be made within 6 months from end
of FY To be signed by designated partners
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Taxation
In line with UK law, Act provides for taxation of income as in case of general purpose partnerships
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Inspection and investigation
Provisions analogous to sec. 234 and 235/ 237 of Companies Act
Prosecution powers to the Central Govt. – Sec 50
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Winding up Winding up may be either voluntary or
mandated by the Tribunal
Regulations to be provided
Notably, Singapore has a huge set of rules applicable to winding up of LLPs, almost in line with the Companies Act
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Applicability of Companies Act
UK has extended a large chunk of Companies Act provisions to LLPs too: Power contained in sec. 67 to extend
Companies Act provisions: Very likely that several of the administrative
provisions may, over time, be extended
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Penalties and prosecution
The power to impose penalties has been granted to the Tribunal
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Comparing LLPs and private limited companies – Similarities
Incorporated PersonalityPerpetual existence, winding up by lawPlurality of owners Limitation of contributory liabilityLimits on trading powers
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Nature of Difference LLP’sPrivate Limited
Companies
Segregation of management and ownership
Indian law requires designated partners; Designated partners generally liable for all compliances
Law does not lay down powers of designated partners
Directors are different from shareholders; different powers are vested
Agency principle Partners represent the LLP Shareholders are distinct
TransferabilityPartnership is transferable only by agreement
Shares are transferable securities
Fixity of capital LLPs need not have fixed capitalLimited liability companies need to have a minimum capital
Reporting, audit, meetings No requirements Elaborate requirements
Comparing LLPs and private limited companies – Differences
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Separation of management and ownership
One of the key features of LLPs is that there is no separation of ownership and management:
Hence, the foundations of corporate law, with the owners reposing trust in the management do not apply
Much of the reporting and accountability structure of corporate law arises out of this separation
UK LLP law does not provide for separation of management:
In fact, there is a “designated member” who will be answerable to the regulators
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Administrative authorities Incorporation, striking of defunct LLPs: Registrar of
Companies Registry record keeping, inspections, etc:
Registrar of companies Compromise, arrangement, etc
Central Government Rule making powers; powers to notify Companies Act to
be applicable Winding up
Tribunal Prosecution for offences:
Lower courts
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Legal Compliance DPIN for designated partners Particulars of designated partners are to filed Incorporation – by filing incorporation document with the ROC Reservation of name, change of name, etc – provisions similar to Companies
Act Partnership agreement and changes therein to be filed with the ROC:
Surprisingly, the partnership deed is not one of the documents available for inspection u/s 35
While the basic rights of the partners are defined in the document
Registration of changes in partnership (names of partners) Filing of annual accounts and declaration of solvency Audit of accounts Filing of annual return Powers of the registrar to call for information, inspection and investigation
largely the same as in case of companies Compromise, arrangements etc as per rules to be made by Central govt.
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What may the LLP hold LLPs may hold any property, tangible or
intangible Interestingly, partners may transfer, either
as contribution or otherwise, properties in kind also
Unlike in case of companies, no fetters on transfer of property in kind or a separate disclosure: Valuation of the property not given
the seriousness it deserves
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Liberties that the LLP enjoys
Accounting: May write books on either cash or accrual basis
Might lead to a considerable tax advantage Clear conflicts with the audit requirements – cash basis cannot reflect
true and fair value of the state of affairs Accounting standards not applicable
Limitation of liability: Best of both the worlds – limited liability and flexible capital
No minimum capital requirements Audit:
While auditing is mandatory, there is no substantive detailing in the law
Rules are much more liberal than for companies Borrowings:
No restriction on borrowing from partners, or to partners The act puts amounts owned to partners at par with amounts owned
to others No need to create charges
Not in the best interest of lenders
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Ultravires, agency rule and LLPs
The doctrine of ultravires is not applicable to LLPs Since the objects are not required to be specified in
the incorporation document
At the same time, the partners are supposed to be agent of the LLP:
Partner exceeding his authority does not bind the LLP
In other words, the LLP escapes liability for anything done in excess of the assigned authority
Authority of LLPs contained in partnership document Those dealing with the LLP cannot get partnership
document as it is not one of the docs that may be inspected
This leaves those dealing with the LLP at a great risk
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Conversion into LLPs Firms, private companies and unlisted public companies
may convert Firms:
All partners to continue Amount to dissolution of the firm Transfer of property by way of vestation – may be
stamp duty may be escaped Private companies:
There is no security interest on the property All members of the private company continued as
partners There is no need to seek sanction of the lenders,
etc Public unlisted companies:
Same as in case of private companies