New partnership law in place, but legal and tax hurdles remain

    The Ministry of Corporate Affairs (MCA) has started registering firms under the newly-enacted Limited Liability Partnership (LLP) Act. However, a flow of applications is unlikely till tax laws are changed, say experts. At present, the Income-tax Act does not recognise LLP firms.

    A limited liability entity is a hybrid of existing partnership firms and full-fledged companies. A minimum of two partners will be required for formation of an LLP and there will not be any limit to the number of partners, unlike the current limit of 20 members in a partnership firm.

    On the other hand, in the traditional law on a partnership firm, every partner is liable, jointly with all other partners and also severally, for all acts of the firm done while he is a partner, irrespective of his stake.

    India recognises several forms of business entities, including sole proprietorship, Hindu Undivided Families, partnership firms (which provide flexibility, but with unlimited liability jointly or severally) and companies, which have limited liability but far less flexibility and high compliance requirements.

    Under the LLP model, chartered accountants, company secretaries or even advocates can set up multi-disciplinary firms that will act as ‘one-stop’ shop for people to avail of various professional services. Existing laws impose the restriction that these professional services cannot be carried out through companies, but only through partnership firms.

    The Income-tax law does not recognise an LLP. There are two ways to tax an LLP : The first is to tax only the partners and not the firm. This is followed in the US under what is called a ‘pass- through vehicle.’ The second way it to tax an LLP firm on the lines of corporates.

    Both the Corporate Affairs Ministry and the Parliamentary panel had recommended that companies and firms be exempted from capital gains tax for the purpose of conversion to LLP.

    The ICAI Act hasn’t recognised LLP but it is being considered by the Council. A group has given draft recommendations to the Council, which would come out with a regulation soon.

    (Source : Business Standard, 05.04.2009)