Chartered Accountants can practice in LLP Format

The Limited Liability Partnership Act, 2008 (LLP Act) was passed by the Parliament in December, 2008. Some sections of this Act came into force on 31-3- 2009. Some of the other sections have come into force on 31-5-2009. The LLP Rules, 2009, have come into force on 1-4-2009. Limited Liability Partnership (LLP) is a new form of statutory organisation which is gaining its importance and opening new opportunities for practising Chartered Accountants. Section 3 of the LLP Act provides that LLP formed under the Act is a body corporate and is a legal entity separate from its partners. It is also provided that LLP shall have perpetual succession and any changes in its partners will not affect the existence, rights or liabilities of the LLP. In other words, the concept of LLP is akin to a partnership firm with the liabilities of the partners being limited to the amount of capital contributed by the partners. It is a better alternative to a private limited company. The status of the LLP under the Income-tax Act is that of a ‘Firm’. After the amendment of the Chartered Accountants Act, w.e.f. 1-2-2012, the status of LLP formed by Chartered Accountants in practice is also that of a ‘Firm”. Government Notification dated 23-5-2011 provides that for the purposes of section 226(3)(a) of the Companies Act, LLP formed by Chartered Accountants in practice will not be considered as a corporate body. In this article the features of the LLP Act with special reference to eligibility of Chartered Accountants to use LLP format for their audit and tax practice are discussed.

Formation of LLP

Any two or more persons can form an LLP for the purpose of carrying on any business, profession or occupation. Even the LLP can also be a partner in another LLP. It is necessary that at least one of the partners in LLP should be a resident in India. Every LLP should have two designated partners who are individuals, one of whom should be a resident in India. The restriction of 20 partners which is applicable to a partnership firm does not apply to LLP. In other words, LLP with any number of partners can be formed for carrying on any business or profession. It may be noted that u/s.10 (23) of the Income-tax Act the definition of ‘Firm’ includes LLP and all the provisions relating to a partnership firm apply to LLP.

The partners of LLP will have to select a name and apply to the Registrar of Companies (ROC) in Form No. 1 with prescribed fees for approval of such name. The ROC will approve the name only if it is not the same or similar to the name of a limited company, an LLP or a firm. After getting the approval for a name, the partners will have to file the following Forms with ROC with the prescribed fees and follow the following procedure for incorporation of LLP.

(i) Form No. 2 — Form of incorporation document to be signed by all partners who have to join LLP as partners.

(ii) Form No. 3 — Form for filing LLP Agreement. For this purpose LLP agreement will have to be executed.

(iii) Form No. 4 — Notice of appointment and cessation of partners, designated partners, consent of partners/designated partners or any changes in their particulars to be filed by LLP with ROC.

(iv) Form No. 6 — Particulars of names and addresses of partners or changes therein to be intimated by partners to LLP.

(v) Form No. 7 — Application for allotment of Designated Partner Identification Number (DPIN).

(vi) Form No. 9 — Consent to act as designated partner to be filed by such partner with LLP.

(vii) When the above forms are submitted to ROC, he will give certificate of incorporation in Form No. 16. The LLP will be deemed to have been incorporated on that day. It can start its business or profession from that date.

Relationship of partners

Upon registration of LLP, the partners will have to enter into a partnership agreement in writing. This agreement will determine the mutual rights and duties of the partners and their rights and duties in relation to the LLP. Persons who have signed the incorporation document as partners along with other partners, if any, can execute this partnership agreement. The information of this partnership agreement is required to be filed with ROC with Form No. 3. Whenever there are changes in the terms and conditions of the partnership, LLP has to file the details of the change in Form No. 3 with ROC and pay the prescribed fees for the same. If the partnership agreement is executed before registration of LLP, the partners will have to ratify this agreement after incorporation of LLP and file the details in Form No. 3 with ROC.

If the partners do not execute the partnership agreement, the relationship between the partners will be governed by the First Schedule to the LLP Act. This schedule provides that mutual rights and duties of partners of LLP shall be determined as stated in this schedule in the absence of a written agreement. Even if there is a written agreement, but there is no specific mention about any of the specified matters, such matters will be governed by the provisions of First Schedule to the LLP Act.

Any person may join the LLP as a partner if all partners agree to admit him as a partner. Similarly, a partner will cease to be a partner on his death, retirement or on winding up of the LLP in which he is a partner. For this purpose, the partners will have to execute a fresh partnership agreement recording the terms and conditions of the partnership with revised constitution. Intimation about admission of new partners or retirement of a partner will have to be given to the ROC in Form No. 3 and Form No. 4 within 30 days.

The rights of a partner to share profits or losses of LLP are transferable either in whole or in part. Such transfer will not mean that the partner has ceased to be a partner or that the LLP is wound up. Such a transfer will not entitle the transferee or assignee to participate in the management or conduct of the activities of the LLP. Similarly, the transferee will not get right to any information relating to the transactions of LLP.

The partnership agreement may provide for payment of interest on amount contributed by partner in LLP or remuneration payable to the partners. Further, the agreement will have to provide the share of each partner in profits or losses of LLP. The partnership agreement should also provide for the voting rights of each partner. The conditions relating to payment of interest, remuneration or share in profits or losses can be changed by amendments in the partnership agreement. It may be noted that under the Income-tax Act interest and remuneration paid to the partners is allowable as deduction from business or professional income of LLP if it does not exceed the limits provided in section 40(b). The provisions of section 40(b) of the Income-tax Act are applicable to an LLP since its status under the Income-tax Act is that of a ‘Firm’.

 Limited liability of partners

A partner of LLP is not personally liable, directly or indirectly, for any debts or obligations of LLP. However, a partner will be personally liable for any liability arising from his own wrongful act or omission. If such liability arises due to wrongful act or omission of any partner, the other partners will not be personally liable for the same. Each partner of LLP will have to contribute such amount for the business of LLP as may be determined by the partnership agreement. The liability of each partner will be limited to the extent of the amount as specified in the partnership agreement.

As stated earlier, at least two partners (individuals) have to be appointed as designated partners. It is also necessary that at least one of the designated partner is a resident of India. Appointment of such partners will be governed by the partnership agreement. In the event of any vacancy due to death, retirement, or otherwise, LLP has to appoint another partner as a designated partner within 30 days. Particulars of designated partners or changes therein have to be filed with ROC in Form No. 4. If LLP does not appoint at least two designated partners or if the number of designated partners fall below two, all partners shall be considered as designated partners. It may be noted that the designated partner has to give consent in writing to the LLP in the prescribed Form No. 9 of his appointment. LLP has to file this consent letter with ROC in Form No. 4 within 30 days of his appointment.

The following will be the obligations of designated partners.

(i)    They are responsible, on behalf of LLP, for compliance with the provisions of the LLP Act and Rules, including filing of any document, return, statement, etc. as required by the Act and the Rules.

(iii)    Every designated partner will have to sign the annual financial statements and annual solvency statement.

(iv)    Each designated partner will have to obtain a ‘Designated Partner Identification Number’ (DPIN). For this purpose, the application is to be made in Form No. 7.

Accounts and audit

LLP has to maintain such books of accounts as prescribed in Rule 24 of the LLP Rules. These books should be retained for 8 years. Such books may be maintained either on cash basis or accrual basis of accounting. It may be noted that the accounting year of each LLP will have to end on 31st March. LLP cannot choose accounting year ending on any other date. LLP has to prepare a statement of accounts and a solvency statement on or before 30th September each year. These statements have to be signed by the designated partners of LLP. The accounts of LLP have to be audited by a Chartered Accountant in accordance with Rule 24 of the LLP Rules. Under this Rule, such audit is compulsory if the turnover of LLP exceeds Rs.40 lac or contribution of partners in LLP exceeds Rs.25 lac. Rule 24 provides for procedure for appointment, removal, resignation, remuneration, disqualification, change of auditors, etc. There is no specific form of Audit Report which is required to be given. ICAI will have to issue guidance in this respect. The particulars of statement of accounts and solvency statement have to be filed with ROC in Form No. 8 on or before 30th October each year with the prescribed fees. LLP has to file an annual return with ROC on or before 30th May each year in Form No. 11 with the prescribed fees.

Conversion of partnership firm into LLP

Section 55 of the LLP Act provides that an existing Partnership Firm (Firm) can be converted into LLP by following the procedure laid down in the Second Schedule. Briefly stated, this procedure is as under.

(i)    A firm may apply to convert into an LLP if and only if the partners of the LLP to which the firm is to be converted, comprise all the partners of the firm and no one else.

(ii)    The firm will have to comply with the provisions of the Second Schedule to the Act.

(iii)    The firm will have to follow the procedure for getting the name of LLP approved and procedure for incorporation of LLP as stated above.

(iv)    Further, the firm has to apply for conversion into LLP to ROC in Form No. 17 with prescribed fees. The firm has to attach documents listed in that Form.

(v)    The ROC will then give certificate of conversion into LLP in Form No. 19.

(vi)    Thereafter, the LLP will have to inform the Registrar of Firms about conversion of firm into LLP in Form No. 14. The Registrar of Firms will then remove the name of the firm from his records. Thus, the firm will be deemed to have dissolved.

Effect of conversion of firm into LLP

If an existing partnership firm is converted into a LLP and registered as such, as stated above, u/s.55 of the LLP Act, the effect of such registration shall be as under. This is provided in Second Schedule.

(i)    On and from the date of registration specified in the certificate of registration —

(a)    all tangible and intangible properties vested in the firm all assets, interests, rights, privileges, liabilities, obligations, relating to the firm and the whole of the undertaking of the firm shall be transferred and shall vest in LLP without further assurance, act or deed, and

(b)    the firm shall be deemed to be dissolved and removed from the records of the Registrar of Firms.

(ii)    If any of the above properties is registered with any authority, LLP shall, as soon as practicable, after the date of registration, take all necessary steps as required by the relevant authority to notify the authority of the conversion and of the particulars of LLP in such medium and form as the authority may specify. If any stamp duty is payable under the relevant law, the same will have to be paid.

(iii)    All proceedings by or against the firm which are pending in any court, tribunal or any authority on the date of registration shall be continued, completed and enforced by or against LLP.

(iv)    Any conviction, ruling, order or judgment of any court, tribunal or other authority in favour of or against the firm shall be enforced by or against LLP.

(v)    All deeds, contracts, schemes, bonds, agreements, applications, instruments and arrangements subsisting, immediately before the date of registration of LLP, relating to the firm or to which the firm is a party, shall continue in force on or after that date as if they relate to LLP and shall be enforceable by or against LLP as if LLP was named therein or was a party thereto instead of the firm.

From the above discussion, it will be noticed that a partnership firm, with unlimited liability of partners, can now be converted into limited liability partnership (LLP) by following the above procedure. Such partnership firm after such conversion will not be required to comply with the provisions of the Partnership Act.

Taxation of LLP

The Finance (No. 2) Act, 2009, provides for taxation of LLP. In the definition of the term ‘Firm’ and ‘Partnership’ in section 2(23) of the Income-tax Act, it is stated that the term ‘Firm’ or ‘Partnership’ will include any LLP w.e.f. 1-4-2009. Further, the definition of a ‘Partner’ will include a partner of LLP. Therefore, all the provisions for taxation of ‘Firm’ will apply to LLP. The tax will be payable by the LLP at 30% plus Education Cess. No surcharge will be payable by LLP from A.Y. 2010-11. In view of this provision, no Minimum Alternate Tax (MAT) will be payable by LLP. Similarly, no dividend distribution tax will be payable by LLP. As discussed above, the remuneration paid to working partners and interest to partners, subject to the limits prescribed in section 40(b), will be allowed in computing taxable income of LLP.

The return of income of LLP will have to be signed by a designated partner of LLP. If for some reason he is not able to sign the return, any partner can sign. New section 167 C is added to provide that each partner of LLP is jointly and severally liable to pay tax due from LLP if it cannot be recovered from LLP. If such partner proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of LLP, he will not be liable to discharge this liability. Similar provision exists in section 188A which applies to partners of a ‘Firm’. It may be noted that to this extent liability of partners LLP is unlimited.

Position under Chartered Accountants Act

The C.A. Act, 1949, has been amended by the Chartered Accountants (Amendment) Act, 2011 in December, 2011. This Amendment has come into force from 1-2-2012.

The following provisions are made by the Amendment Act.

(a) ‘Firm’ is defined in section 2(1)(ca) as under.

“(ca)    ‘Firm’ shall have the meaning assigned to it in section 4 of the Indian Partnership Act, 1932, and includes —

(i)    The Limited Liability Partnership as de-fined in clause (n) of s.s (1) of section 2 of the Limited Liability Partnership Act, 2008.

(ii)    The sole proprietorship registered with the Institute”

(b)    ‘Partner’ is defined in section 2(1)(eb) as under.

“(eb)    ‘Partner’ shall have the meaning assigned to it in section 4 of the Indian Partnership Act, 1932, or in clause (q) of s.s (1) of section 2 of the Limited Liability Partnership Act, 2008, as the case may be.”

(c)    ‘Partnership’ is defined in section 2(1)(ec) as under.

“(ec)    ‘Partnership’ means —

B.    a limited liability partnership which has no company as its partner.”

(d)    Further, the Explanation to section 2(2) is amended to clarify that “a firm of such chartered accountants” shall include a firm or LLP consisting of one or more chartered accountants and members of any other professional body having prescribed qualifications.

Hitherto, the terms ‘Firm’, ‘Partnership’ or ‘Partner’ were not defined. The Amendment Act of 2011 now defines these terms. Therefore, LLP in which partners are Chartered Accountants holding CoP and members of other recognised professions, as may be prescribed, are also partners will be entitled to practice as Chartered Accountants if LLP is registered by ICAI. Such LLP can undertake any audit or attest function.

Conversion of a CA Firm into Limited Liability Partnership (LLP)

ICAI has issued detailed guidelines for conversion of CA Firm into LLP on 4-11-2011. These guidelines are published on pages 939-941 of CA Journal for December, 2011. Some of the salient features of these guidelines are as under.

(i)    All existing CA firms who want to convert themselves into LLPs are required to follow the provisions of Chapter-X of the Limited Liability Partnership Act, 2008 read with Second Schedule to the said Act containing provisions for conversion from existing firms into LLP.

(ii)    In terms of Rule 18(2)(xvi) of the LLP Rules, 2009, if the proposed name of LLP includes the words ‘Chartered Accountant’ or ‘Chartered Accountants’, as part of the proposed name, the same shall be referred to ICAI by the Registrar of LLP and it shall be allowed by the Registrar only if the Secretary, ICAI approves it.

(iii)    If the proposed name of LLP of CA firm resembles with any other non-CA entity as per the naming Guidelines under the LLP Act and its Rules, then the proposed name of LLP of CA firm which includes the word ‘Chartered Accountant’ or ‘Chartered Accountants’, in the name of the LLP itself, the Registrar of LLP may allow the same name, subject to compliance with Rule 18(2)(xvi) of LLP Rules as referred above.

(iv)    For the purpose of registration of LLP with ICAI under Regulation 190 of the Chartered Accountants Regulations, 1988, the partners of the firm shall apply in ICAI Form No. ‘117’ and the ICAI Form No. ‘18’ along with copy of name registration received from the Registrar of LLP and submit the same with the concerned regional office of the ICAI. These Forms shall contain all details of the offices and other particulars as called for together with the signatures of all partners or authorised partner of the proposed LLP.

(v)    The names of the CA firms registered with the ICAI shall remain reserved for the partners as one of the options for LLP names subject to the provisions of the LLP Act, Rules and Regulations framed thereunder.

(vi)    There are provisions relating to seniority of firms.

(vii)    These guidelines will apply to conversion of proprietary firm into LLP.

(viii)    There are similar provisions for formation of new LLP by Chartered Accountants in practice.

Position for statutory audit under the Companies Act

In July, 2011 issue of CA Journal, the President has, in his letter to the members, specifically stated that LLP will not be treated as Body Corporate for the limited purpose of appointment of statutory auditors. Following is the extract from the President’s letter which clarifies that the Ministry of Corporate Affairs have clarified by Circular No. 30A of 2011, dated 26-5-2011 that LLP of Chartered Accountants will not be treated as Body Corporate and MCA has taken the view that LLP can be appointed as a statutory auditors of the company.

“Important Clarifications

LLP will not be treated as Body Corporate for Limited Purpose of Appointment as Statutory Auditors:

Limited Liability Partnership (LLP) has now become a new form of statutory organisation which is gaining its importance and opening up new opportunities for the practising Chartered Accountants. The practising Chartered Accountants can now take the advantage in forming/realigning their firms as Limited Liability Partnership. As per section 3(1) of the Limited Liability Partnership Act, 2008, since a limited liability partnership is a body corporate, it is precluded from appointment as Statutory Auditors of the company u/s.226(3)(a) of the Companies Act, 1956 which provides by way of disqualification for appointment of auditor of a company that a body corporate cannot be appointed as an Auditor. To remove this lacuna, on a representation made by us, the Ministry of Corporate Affairs has clarified vide its Circular No. 30/2011, dated 26-5-2011 that Limited Liability Partnership of Chartered Accountants will not be treated as body corporate and has taken the LLP out of the purview of the definition of Body Corporate u/s.2(7)(c) of the Companies Act, 1956 and therefore, LLP can be appointed as Statutory Auditors of the company.”

It may be noted that in the Companies Bill, 2011, which is pending before the Parliament, section 139 dealing with appointment of auditors provides that any individual Chartered Accountant holding CoP or any firm of Chartered Accountants can be appointed as auditors of a company. Explanation to section 139(4) clarifies that a firm of Chartered Ac-countants shall include LLP practising the profession of Chartered Accountants. In view of the above, it is now evident that with effect from 1-2-2012, when the C.A. (Amendment) Act, 2011, has come into force, Chartered Ac-countants can join as partners and practice in LLP format. Such LLP will be eligible to be appointed as statu-tory auditors of a company under the Companies Act. Similarly, such LLP can also undertake tax audit assignment u/s.44AB of the Income-tax Act. Such LLP can also undertake any attest function under other laws as the definition of ‘Firm of Chartered Accountants’ in the C.A. Act now includes ‘Limited Liability Partnership’ registered with the Institute.

Taxation on conversion of a C.A. firm in LLP

As stated earlier, the C.A. Act has been amended with effect from 1-2-2012 to permit Chartered Accountants to practise in LLP format. ICAI has issued guidelines on 4-11-2011 for conversion of C.A. Firms into LLPs. ICAI is making all efforts to encourage those in business or profession to adopt LLP form of organisation. However, the Income-tax Act does not contain any specific provision granting exemption from tax on conversion of a Firm into LLP.

Since ‘Partnership Firm’ and ‘LLP’ are separate entities, on conversion of C.A. Firm into CA LLP the tax authorities are likely to treat such conversion as transfer of assets of the Firm to LLP. The tax authorities may treat this as transfer, as the firm will stand dissolved u/s.55 read with Second Schedule of the LLP Act, as discussed above. They may invoke the provisions of section 45(4) dealing with transfer of firm’s assets on dis-solution of the firm and levy capital gains tax on the difference between the market value of the assets of the firm on the date of such conversion and the cost of the assets of the firm.

It may be noted that section 47(xiii) and 47(xiv) of the Income-tax Act provides for exemption from capital gains tax on conversion of a firm or a proprietary concern into a limited company, subject to certain conditions. Further, the Finance Act, 2010, has inserted section 47(xiiib) to provide for exemption from capital gains tax on conversion of an unquoted limited company into LLP, subject to certain conditions. No such exemption is provided in the Income-tax Act when a firm is converted into LLP.

Explanatory Memorandum attached to the Finance (No. 2) Bill, 2009, stated that since a partnership firm and LLP is being treated as equivalent, the conversion from partnership to LLP will have no tax implication, if the rights and obligations of the partners remain the same after conversion, and if there is no transfer of any asset or liability after conversion. If there is a violation of these conditions, the provisions of section 45 will apply and capital gains tax will be payable. This is a very vague statement and does not specify any conditions in clear terms. There is no specific provision made in the Income-tax Act for granting exemption when conversion of a partnership firm is made into LLP and all assets and liabilities of the firm are transferred to LLP.

It may be noted that the Standing Committee on Finance, while considering Clause 47 of the Direct Taxes Code, Bill, 2010 in para 4.14 of their report has recommended that the Ministry should modify this Clause so that conversion of a partnership firm into LLP does not attract any tax liability.

If the LLP format is to be made popular for Chartered Accountants and others, it is necessary that ICAI and various chambers, representing the business community, should strongly represent to the Government to amend section 47 of the Income-tax Act. This can be achieved by inserting a new clause similar to section 47(xiii), granting exemption from capital gains tax, to any firm, which is converted into LLP under the provisions of section 55 read with the Second Schedule of the LLP Act.