Introduction To Limited Liability Partnership (LLP)

- Tushar Mittal

Introduction

• Limited Liability partnership’s concept was introduced in order to adopt :-

• a corporate form

• With Organizational Flexibility

• Tax Status of Partnership

• Limited Liability for its Partner.

Features

• Perpetual Succession

• Separate Legal Entity from its Partner

• Liability of LLP, to the full extent of its Assets

• Liability of Partners of LLP, limited to their agreed contribution in the LLP.

• Registered Body Corporate.

LLP’s International Experiences

• United State – 1990 with two states• Get its legal status by “Uniform

Partnership Act, 1996” with 40 states.• United Kingdom- Limited Liability Act

2000• Under this act the LLP has “Fiscal

Transparency.”• China- Special General Partnership• Only for Knowledge based profession

and technical service industry.

LLP’s International Experiences

• Also adopted by many well-known economies like:-

• Japan

• France

• Romania

• Australia

Introduction to LLP’s In India

• The LLP Bill was tabled in Rajya Sabha on 15th Dec 2006

• By Ministry Of Company Affairs

• Bill is divided into XIV Chapters, having 73 Sections & Four Schedules.

• Broadly based on the UK and Singapore LLP Acts.

Features of LLP Bill2006

• Bill defines LLP as a Partnership formed & Registered under this Act.

• It stipulates two Requirements-

• A Partnership• Registration under

this act.

Features of LLP Bill20061. LLP shall be:-• Body Corporate• Separated From its

Member• Two or more person• Carrying on a lawful

business• With a view to profit• Having its Perpetual

Succession

Features of LLP Bill2006

2. The mutual rights and duties of partners of an LLP inter se and those of the LLP and its Partners shall be governed by an agreement between partners or between the LLP and the partners subject to the provisions of the propose legislation.

Features of LLP Bill2006

3. LLP will be:- • a separate legal entity, • liable to the full extent of

its assets,• with the liability of the

partners being limited to their agreed contribution in the LLP.

Features of LLP Bill2006

4. Number of Partners:-• At least two partners

and,• At least two individuals

as Designated Partners,• Of whom at least one

shall be resident in India.

Features of LLP Bill2006

5. The LLP shall be under obligation:-

• to maintain annual accounts reflecting true and fair view of its state of affairs.

• to filed the statement of accounts and solvency with the Registrar every year.

• To get audited its accounts, subject to any class of LLPs being exempted from this requirement by the central government.

Features of LLP Bill2006

6. The Indian Partnership Act, 1932 shall not be applicable to LLPs.

7. Other entities may convert themselves to LLP in accordance with provisions of law.

8. The Central Govt. shall have powers to make rules for carrying out the provisions of the proposed legislation.

Taxation Issues

• The concept shows the way one to the following two implications in respect of tax treatment:-

• First way:- • LLP will pay tax on its profit after deduction

of business expenditure, salary and interest paid to partners.

• Partners will be liable to pay tax on salary and interest receipts, whereas the share in profit is exempt. (same as current provisions of Income Tax Act,1961)

Taxation Issues

• Second way:-

• The profit in the hands of the LLP partners will be taxed.

• The LLP will have Tax Transparency.

• In other words, LLP is not subject to taxation. Only the members are liable to taxation.

Taxation Issues

• Out of these two options the second option appears to be logical and acceptable on account of the following two reasons:-

i. The Naresh Chandra Committee Report as well as Concept Paper on LLPs which was released by the Minister of Company Affairs had clearly recommended tax transparency for LLPs.

Taxation Issues

ii. The Bill has vide its first Schedule (Clause No. 5) prohibited partners of LLPs from accepting any remuneration.

(This implies that they will be subject to the Income Tax in respect of their share of profits received by them.)

LLPs have been in trend in various other countries such as UK, USA, Australia, Singapore etc.

It is the form of business entity, which allows individual partners to be restricted from joint liability of partners in a particular firm.

This is a great relief to the partners, particularly professional like Company Secretaries, Chartered Accountants, Cost Accountants, Advocates and other professionals.

CONCLUSION

CONCLUSION

But it is necessary to made suitable changes in the provisions of income tax related to taxations issues, because taxation is one of the major motivational factor other than limited liability for the partner of LLPs as individual partner can take benefit of Slab Rates of income tax.

The introduction of LLPs in the India is a good beginning towards a long journey.

CONCLUSION

The hybrid structure of LLP will facilitate entrepreneurs, service providers and professionals to organize and operate in an innovative and efficient manner for effectively competing in the global market.