‘LLP: Emerging Area for
Professionals’
SIZE & STRUCTURE OF THE ECONOMY
GDP break – up in 1991
$330 Billion
Agriculture
Industry
Service
40.2%
Source: Planning Commission
32.4%
27.5%
GDP break – up in 2008
$1.09 Trillion
17.6%
Agriculture
52.9%
Industry
Service
Source: India Brand Equity Foundation
Despite rapid growth of the service sector in the last
few years, service based organizations such as
doctors, lawyers and accountants have not been able
to grow to their full potential
29.5%
CHANGING BUSINESS ENVIRONMENT
Diversification of
expertise
Increasing convergence
Litigious
environment
Changing consumer
concerns
Emerging
technology
Professionals
Changing basis of
competition
Globalisation
Changing
regulations
Economies of scale
ORGANIZATION FORMS IN INDIA
Three organization forms have dominated the Indian business scene Companies, Partnerships and Sole Proprietorships
Sole Proprietorship & Partnerships
Company
 Largely unregulated and are being used
by entities from small kirana stores to
large international professional outfits
 Regulated entity with various
compliance procedures
 Unlimited liability poses a significant
hindrance to growth
 Besides
corporate
tax,
companies are also liable to
dividend distribution tax
 Traditional form of partnership does
not permit expansion beyond 20
partners
Due to the inherent restrictive characteristics of
the existing forms, a definite need was felt to
evolve a structure which would aid the growth of
professional firms
LIMITED LIABILITY PARTNERSHIP
The Limited Liability Partnership (LLP) Bill, 2008 which was
earlier cleared by the Rajya Sabha, was approved by the Lok Sabha
on 12th December, 2008
Partnership


Companies
Limited
Liability
Partnership
Limited Liability Partnerships combine the characteristics of corporate and
non-corporate entities
The advent of the LLP’s in addition to providing the Indian entrepreneur a
new business form, will provide Indian professional organizations a level
playing field with their international counter-parts.
PARTNERSHIP FIRM IN INDIA

Partnership Firm has been the form of organization of choice for
professionals and small business entities.

Partnership in India was governed exclusively by The Partnership Act,
1932. However, it has the following drawbacks-
 It does not recognize distinction between the firm and its partners.
 Maximum no of partners restricted to 20.
 Liability of each partner unlimited.
GENESIS OF LLP



Limited partnership had its origin in Italy. Eventually the idea of
Limited Liability Partnership spread out to other European countries,
particularly France, Germany, Great Britain and other countries like
U.S.A., Singapore and Japan.
The LLP Act, 2008 heavily leaned on UK and Singapore Acts.
With the spurt in cross border economic activities, small and medium
entities carry on their businesses competing with large enterprises.
Recognition of legal entity status to them was necessitated.
ENTRY OF LLP IN INDIA

MSMEs Development Act, 2006 was passed and the Acts governing the
C.A.s, C.S.s and C.W.A.s professions were amended in 2006.

Naresh Chandra Committee Report II(2003) indirectly suggested this
form of organisation by suggesting to lessen the regulatory impact of the
Companies Act.

Directly, it came out as a recommendation of the J.J. Irani
Committee(2005) to be adopted as a new form of business.

The Government has now enacted LLP Act,2008 which has come into
force from January 9, 2009.

A LLP is an alternative business structure falling between a partnership
firm and a corporate body, combining the limited liability benefits of a
company with the flexibility of a partnership.
MAIN FEATURES OF LLP

LLP can be formed to carry on any lawful trade, business, profession or
occupation.

LLP is a body corporate with a status distinct from its partners and has
a perpetual succession. Addition or departure of partners to the LLP
will not affect its existence.

A partner is not personally liable, directly or indirectly for an obligation
of a LLP, solely by reason of his being a partner of the LLP. However,
personal liability of a partner for his wrongful act or omission
continues.

Foreign LLPs will also be permitted to establish a L.L.P. in India. Rules
will be formulated for this purpose.
MAIN FEATURES OF LLP

LLP will require at least two partners who could be individuals and/or
bodies corporate. Two individuals, of whom one is a resident of India,
will be the ‘designated partner’.

Bodies corporates may nominate their nominees as designated partners.
The designated partners shall be answerable for all acts, matters and
things required to be done by the LLP in respect of compliance of the
provisions of the proposed legislation and be liable for penalties for noncompliance.

If at any time the number of partners of a LLP falls below two and the
business is carried on with only one partner for more than six months,
the lone partner will be liable for the obligations of the LLP during that
period.
ADVANTAGES OF LLPs
Limited compliance
Companies are required to keep detailed minutes to record all proceedings
and resolutions. However the LLP business structure requires lower
compliance and is easier to operate.
COMPARISON
PARTICULARS
PARTNERSHIPS
LLPS
PVT. LTD. CO.
Members
2 to 20
Minimum 2 partners
2 to 50 shareholders
Liability
Unlimited, Partners jointly
liable for action
Limited except in case of fraud,
wrongful act
Limited
Registration
Registration with ROF
optional
Registration with ROC
required
Registration with ROC
required
Documents to be filed
None required unless
registered
File annual accounts & submit
annual statement on solvency
Annual Statement of
accounts, Board meetings,
Share register
Dissolution
By agreement, mutual
consent, insolvency
By agreement or by order of
National Company Law
Tribunal
By court order once the
affairs of the company have
wound up
Transfer / Inheritance of
shares
Not transferable, in case of
death legal heir receives
Transferable, but transferee
may not have management
rights
Transferable with the
consent of Board of Directors
Taxation
Income of partners taxed not
of partnership
Unspecified
Income of Company is taxed
TAXATION ISSUES
Capital gains liability

A situation can arise where the partners could be contributing assets
towards the capital at the time of formation of LLP or receiving their share
of capital and accumulated profits on transfer of their shares. The mode of
valuation of assets for income tax purpose and who would be liable to pay
capital gains on transfer of assets of a partnership / company upon their
conversion into a LLP
Stamp duty
 Whether the assets transferred by a partnership or a company at the time
of their conversion to LLP or in the event of their merger or
amalgamation will attract stamp duty on the book value of their assets is
still not clear
REGISTRATION



An incorporation document is required to be filed with the Registrar of
Companies the State where the registered office of the LLP is to be
situated. Upon fulfilment of the conditions specified in the Act with
respect to the form and content of the incorporation document, the
Registrar will within a period of fourteen days, register the
incorporation document and give a certificate that the LLP is
incorporated.
Upon registration, a LLP, by its name will be capable of:
Suing and being sued;
LEGISLATION

Acquiring, owning, holding and developing or disposing off property,
whether movable or immovable, tangible or intangible;

Having a common seal, if it decides to have one; and

Doing and suffering such other acts or things as bodies corporate may
lawfully do and suffer.

Every LLP shall either have the words “limited liability partnership” or
“LLP” as its last name.
OBJECTS OF LLP

S. 11(2)(c) requires only the proposed business of the LLP to be stated in
the incorporation document with no need to state the Objects as in the
case of a company under the Companies Act.

LLP may state in the incorporation document that its proposed business
is the business as defined in S.2(1)(c) of the LLP Act.

The Registrar cannot refuse to register such a document on the ground
that the objects are not specific.

Para 8 of the First Schedule to the Act provides that no change in the
nature of business may be made without the consent of all the partners.

S. 3(2) provides that the LLP agreement and any changes made therein
shall be filed with the Registrar.

The LLP agreement and changes therein filed with the Registrar are not
open for public inspection.
FINANCIAL YEAR

Financial year means the uniform

Financial Year commencing on 1st April every year and
ending on 31st March of the following year.
RELATION BETWEEN PARTNERS

Typically, the mutual rights and duties (including the limits of
investment) of the partners of a LLP inter se and those of the LLP and its
partners shall be governed by a registered agreement between partners
or between the LLP and the partners. Any change in the LLP agreement
is required to be filed with the Registrar.

A person may cease to be a partner in accordance with the provisions of
the LLP agreement or in the absence of an agreement as to cessation of
being a partner by giving a notice of not less than thirty days of his
intention to resign.
CHANGE IN CONSTITUTION

A person shall mandatorily cease to be a partner upon
(i) his death or dissolution of the partnership;
(ii) being declared of an unsound mind by a competent court; or
(iii) his application to be adjudged an insolvent or being declared an
insolvent.

Upon cessation, unless otherwise provided in the LLP agreement, the
‘former partner’ or a person entitled to his share in consequence of his
death or insolvency will be entitled to receive
(i) an amount equal to capital contribution actually made by the
former partner into the partnership; and
(ii) his right to share in the accumulated profits, after deduction of
accumulated losses determined on the date of cessation.

A notice to the Registrar has to be given regarding any change in
partnership.
DEFINATIONS
Foreign Limited Liability Partnership S. 2(1)(m) –
Foreign LLP means a LLP formed, registered or incorporated outside India
and which establishes a place of business in India for carrying on their
business in India in accordance with the rules to be made by the Central
Government pursuant to S. 59.
Limited Liability Partnership S. 2(1)(4) –
LLP means a partnership formed and registered under the Act.
The term ‘partnership’ not defined. Application of the Partnership Act not
barred S. 71.
Definition of partnership given under s. 4 of the Partnership Act, 1932 ought
to hold good for the purposes of the LLP Act also. Partnership under the
LLP Act should connote the relationship between the persons who have
agreed to share the profits of a business.
CONVERSION FIRM INTO LLP

A firm, private company and a public unlisted company (“Converting
Entity”) can be converted into a limited liability partnership in
accordance with the provisions of the Act.

Pre-conditions for Conversion to a LLP:
 If the Converting Entity is a private company or an unlisted
public company, then its assets should be free from any security
interest at the time of making the application.
 The partners of the LLP will have to comprise only of all the
shareholders/partners of the Converting Entity.
CONDITIONS FOR CONVERSION
1) Transfer of the property, assets, interests, privilleges, obligations and
undertaking of the firm to the LLP subject to the partners of the firm
becoming partners of the LLP and the LLP consenting to be bound by the
provisions of the LLP Act.
2) All partners of the firm to be comprised as the partners of the LLP.
3) Application for conversion to be filed with the Registrar of Companies.
4) Within 15 days of registration, LLP to inform the R.O.F. about the
conversion.
5) In case of refusal to register, appeal lies to Tribunal / CLB.
6) Registration in relation to property stands vested in the LLP.
7) Pending proceedings to continue in the name of the LLP.
8) Continuance of conviction, ruling, order of judgement enforceable against
the LLP.
CONDITIONS FOR CONVERSION
9) Existing and subsisting agreements of the firm bind the LLP fully.
10) Existing contracts of the firm bind the LLP.
11) Partners of the erstwhile firm who continue shall be jointly and severally
liable for pre-conversion liability and obligations of the firm subject to
indemnification by the LLP, if nothing contrary to it exists in the LLP
agreement.
12) Every official correspondence of the LLP to bear a notice of such
conversion for 12 months commencing not later than fourteen days after
the date of registration.
Caution –
The conversion procedure does not preserve or protect any approval,
permit or licence issued under written laws as specific to none but the
firm before the date of registration of its conversion into LLP.
APPLICATION PROCESS

The Converting Entity will need to submit the application to the
Registrar along with a statement of all the shareholders/partners (as
applicable) in the prescribed form and within 15 days of registration,
intimation of conversion to the concerned Registrar of Companies or
Registrar of Firms (as applicable) shall be made.

Upon Conversion to LLP:
 All tangible and intangible property owned by the Converting
Entity shall without requirement of any further act vest in the LLP.
 All legal proceedings by or against the Converting Entity shall be
continued, completed and enforced by or against the LLP.
 All contracts, deeds, bonds, agreements etc shall continue in the
name of the LLP.
FINANCIAL DISCLOSURES

The limited liability partnership is required to maintain proper books of
accounts and yearly file its ‘statement of accounts and solvency’, and
‘annual return’.

All documents filed by the limited liability partnership including
incorporation documents and statement of accounts and solvency will be
available for inspection by any person in the manner prescribed.
COMPROMISE, ARRANGEMENT,
WINDING UP AND DISSOLUTION

There are provisions in the Act relating to compromise and arrangement
between a limited liability partnership and its creditors and/or partners
and provides for mechanisms in the event of a proposed merger of a
limited liability partnership with another.

A limited liability partnership may also be wound up voluntary by its
partners or by the National Company Law Tribunal for reasons such as
inability of the limited liability partnership to pay its debts, default in
filing returns etc for five consecutive years, if in the opinion of the
Tribunal it is just and equitable to wind it up.
TAX AND OTHER IMPLICATIONS
Taxing it as a ‘Company’
Since in India, LLP is visualized as company and it will be regulated under
the Companies Act, it may be taxed like a company and ignore the existence
of partners for tax purposes like that of shareholders.
Taxing it as a ‘Firm’
This will be on the same line of that of company; however certain variances
such as ceiling of remuneration to partner, interest on capital etc., have to be
made on the same line as Partnership Firms. On the same basis as an
ordinary partnership firm, the LLP will pay tax on its profits after deduction
of business expenditure, salaries and interest paid to the partners and in
turn, partners will be liable to pay tax on their salary and interest receipts.
TAX AND OTHER IMPLICATIONS
Treat it as a ‘Pass through or fiscally transparent’ entity
Another way is that the profits of the LLP will be taxed directly in the hands
of its partners and not the entity. This treatment was proposed by the
Naresh Chandra Committee and also the same is being followed in
countries such as United Kingdom etc. Here the partners will be liable to
pay tax on share from LLP’s profits received in their hands as per their
taxable status which is a major incentive especially for the Individual
shareholders.
TAX AND OTHER IMPLICATIONS

The tax treatment of the LLP is not addressed in the Act and would need
to be dealt with separately as a part of the Income Tax Act, 1961

In the United Kingdom the concept of 'fiscal transparency' has been
applied to a LLP, i.e. where the LLP itself is not taxed as an 'entity' but the
partners of the LLP are taxed individually based on their tax status and
tax positions. The same concept of 'pass through' was introduced in
Section 10(23FB) of the IT Act for any income of a Venture Capital
Company (VCC) or Venture Capital Fund (VCF) in a Venture Capital
Undertaking (VCU).

However by way of amendments by Finance Act 2007 the applicability of
the said section was restricted by amending the definition of VCU and
making the same applicable only to a few sectors. This also gave
administrative convenience by taxing only the VCC or VCF. The investors
in their desire to be taxed on a pass through basis, are attempting to
structure VCF so as to effectively achieve tax pass through for their
investments by resorting to 'trust taxation' mechanism.
ET dated 16 Feb., 2009
“An LLP would be taxed for its income while the income of individual
partners would be tax free. This benefit is not available to companies,” said an
official privy to the development. Companies pay tax on their profits and
again pay dividend distribution tax when they distribute profits among
shareholders. The LLP format protects partners from double taxation.
“Although LLPs can be registered in India from April this year, the
announcement of the tax code can be done by the Government that comes into
power after the general elections as annual accounts of LLPs will be finalised
only at the end of the 2009-10 fiscal year,” the official said. Therefore, the
details of the LLP tax regime will be unveiled in the Finance Bill presented by
the new government later this year. The proposals will be implemented
through an amendment to the Income-tax Act.”
ISSUES

The Income tax Act does not have a provision exempting transfers of
assets from firm, private company or unlisted public company to LLP.

New clauses may be inserted in Section 47 of the Income tax Act to
exclude such transactions from the meaning of ‘Transfer’.

Definition of ‘Employer’ may be amended to include LLPs for the
purposes of FBT.

Transfer pricing provisions would require amendment to S.92A to
provide criteria for determining non resident entities to be regarded as
‘Associated Enterprise’.

Since, foreign limited liability partnerships have been permitted under
the Act, the Foreign Exchange Management Act will need to be
amended accordingly. As of now only non resident Indians and persons
of Indian origin can make investments in partnerships on a nonrepatriation basis.
ISSUES

Section 36 of the Act provides that the incorporation document, names of
partners and changes (if any), statement of account and solvency and
annual return shall be available for inspection by any person.

Since the accounts of the LLP also need to be made public, the
professional firms before taking the decision to convert into a LLP will
also have to consider these Corporate Governance aspects which are
inherent to a LLP but different from the way traditional law firms have
been operating in India.

Court related mergers, acquisitions and winding up of companies have
traditionally been time consuming and expensive. Unless the rules made
under the Act, specify for a settlement of these in a time bound manner,
mergers, and winding up of the limited liability partnership may also face
the same challenges as faced by an incorporated company.
YOUR
QUESTIONS
PLEASE !!!
Nihar Jambhusaria
Executive Director
Direct Line: +91 22 66729709
Mobile: +91 98202 37681
nihar.jambusaria@bdoharibhakti.co.in
Disclaimer
The views contained in this presentation is solely that of the
Speaker and should not necessarily be construed as an Opinion of
the Company. Before implementing any of the views the expert
guidance is recommended.