1. Introduction :
1.1 31st March, 2009, the last day of the financial year 2008-09, saw the Notification of the Limited Liability Partnership Act, 2008 (‘the Act’). The desirability of LLP as a business entity has been expressed by various committees, such as the Bhat Committee (1972); Naik Committee (1992); Expert Committee on Development of Small Sector Enterprises headed by Sh. Abid Hussain in 1997; Study Group on Development of Small Sector Enterprises (SSEs) headed by Dr. S. P. Gupta (2001), Naresh Chandra Committee on Regulation of Private Companies and Partnerships (2003); Dr. J. J. Irani Committee on New Company Law (2005).
In spite of these recommendations, India has been a bit late in recognising this extremely popular form of a business entity, considering that countries such as the USA have enacted a law dealing with Limited Liability Partnerships (‘LLPs’) as far back as in the early 1800s. Internationally, most venture capital funds/private equity funds/hedge funds are structured in the form of LLPs.
Nevertheless as the old adage goes, ‘better late than never’, India has come out with a law on LLPs at a time when the Small and Medium Sector is growing rapidly and entity such as an LLP is the right answer for this sector. The Finance (No. 2) Bill, 2009 has provided for taxation of LLPs.
1.2 LLPs lie somewhere in between the corporate sector which have limited liability but are highly regulated and the unregulated partnership sector which has unlimited liability. LLPs provide a great deal of flexibility and also limited liability. It is important to note that even though the term LLP signifies a partnership, the Act falls within the purview of the Ministry of Corporate Affairs (MCA) and the Registration and all other procedures are carried out by the RoC and not the Registrar of Firms.
1.3 By a series of Articles, let us examine some of the key features of the Act and some possible issues which may arise.
2. Features of an LLP :
2.1 Body corporate :
The most important aspect of an LLP is that it is treated as a body corporate, i.e., it is an independent legal entity with a distinct identity which is separate from its partners. As compared to this a partnership firm does not have an identity separate from its partners. An LLP has the following features of a body corporate :
(a) It has a perpetual succession.
(b) Its existence is not dependent upon its partners and hence, even if there were to be a change in its partners, the LLP’s status would remain unchanged. Death, insolvency, retirement of any partner has no bearing on the LLP.
(c) The property of an LLP is its own property and not the property of its partners. It can own property, whether immovable, movable or tangible, in its own name since it is a separate legal person.
(d) It is capable of suing and being sued in its own name.
(e) It can have a common seal.
2.2 Liability :
The liability of an LLP is to be met out of its property only and the liability does not extend to the partners. Thus, unlike in the case of a partnership firm, the partners are not personally liable for the dues of the LLP. This feature of an LLP is similar to a company where the shareholders and the company are separate legal entities. If the partner, knowingly, does any act which is outside the scope of his authority, then the LLP will not be bound by any such act. If the LLP does or the partners do any act with an intent to defraud, then the LLP and the partners shall have unlimited liability for all the debts of the LLP.
3. Incorporation Document :
3.1 To incorporate an LLP, the following steps must be taken :
(a) Two or more persons must come together to carry on any lawful business with a view to earn profits.
(b) They must subscribe to an ‘Incorporation Document and Statement’ in eForm-2. The Statement is to be digitally signed by a person named in the incorporation document as a designated partner and he must have a DPIN. The Statement must also be digitally countersigned by an advocate/company secretary/chartered accountant/cost accountant in practice who is engaged in the formation of LLP. In case of foreign nationals residing outside India and seeking to register an LLP in India, their signatures and address on the incorporation documents and proof of identity, where required, shall be notarised before the notary of the country of their origin.
(c) The RoC after satisfying himself about compliance with relevant provisions of the LLP Act will register the LLP, within a maximum period of 14 days of the filing of eForm-2 and will issue a certificate of incorporation in Form-16.
3.2 An LLP should have a registered office. Its name should be as per the guidelines laid down in this respect. The last words of the name should be limited liability partnership or LLP, e.g., the name of an LLP could be ‘Apex Venture Fund LLP’.
3.3 The partners of the LLP have to enter into an LLP Agreement.
4. Partners :
4.1 Just as a company has members, an LLP has partners. As per S. 5 of the Act, any individual or any body corporate can be a partner of an LLP. However, in any of the following cases, an individual cannot be a partner in an LLP :
(a) If he is adjudged to be of unsound mind by a Court.
(b) If he is an undischarged insolvent.
(c) If he has applied to be adjudicated as an insolvent and his application is pending.
Any body corporate can also be a partner of an LLP. The term body corporate has been defined u/s.2 of the Act to mean a company as defined in S. 3 of the Companies Act, 1956, and also includes an LLP registered under the Act, an LLP incorporated abroad, a company incorporated abroad. However, it does not include a corporate sole, a co-operative society and any other body corporate so notified by the Government. Since an LLP is also a body corporate, one LLP can become a partner in another LLP. Two or more companies can also come together to form an LLP. LLPs could be the future for consortium type of arrangements.
4.2 Each LLP must have a minimum number of 2 partners. This feature is at par with a partnership. There is no limit on the maximum number of partners which an LLP can have. A partnership or an AOP cannot have more than 20 partners/members or else it becomes an illegal association. A private limited company cannot have more than 50 members. However, an LLP has no limit on the number of partners. Thus, in this respect it is at par with a public limited company. It is this feature of an LLP which makes it a very attractive structure from a VC/PE perspective since the fund can have as many investors as it likes.
4.3 Designated Partner:
a) The concept of a ‘Designated Partner’ has been introduced by the Act. S. 7 requires an LLP to have at least 2 designated partners, both of whom should be individuals and one of whom should be a resident in India. If there are only 2 partners in an LLP, then both should be treated as designated partners.
b) In case, both the partners are LLPs/companies, then partners of such LLPs or nominees of such companies should become designated partners.
c) The Act incorporates a part of the definition of the term ‘resident in India’ from S. 2 of the Foreign Exchange Management Act, 1999. A resident has been defined to mean a person who resided in India for not less than 182 days during the immediately preceding financial year.
d) The individual must give his prior consent to become a designated partner.
e) To become a designated partner, an individual must obtain a Designated Partner Identification Number (DPIN).
f) A designated partner is one who is responsible for carrying out all the compliance obligations of the LLP imposed by the Act. He is also liable to all the penalties imposed on the LLP for contravention of any of these provisions of the Act. One may loosely equate him with the Managing Director of a company.
g) Any person can be appointed as a designated partner and he may retire also. Any vacancy must be filled within 30 days.
4.4 Relationship of Partners:
a) The mutual rights and duties of the partners of an LLP are governed by the LLP agreement. If there is no such agreement, then S. 23(4) of the Act provides that the mutual rights and duties of the partners shall be as set out in the First Schedule to the Act. Such an agreement and any changes, therein, must be filed with the RoC.
b) For the purposes of the business of the LLP, every partner of an LLP is an agent of the LLP but not of the other partners. This is a fundamental difference between an LLP and a partnership firm, wherein mutual agency is a key condition of the partnership. Each partner is an agent of the firm and of the other partners. S. 4 of the Partnership Act defines a partnership as “the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all”.
4.5 A person can resign from the LLP by giving a notice to other partners. A person would cease to be a partner on his death or on dissolution of the LLP or if he is declared to be of an unsound mind or if he has been adjudged as an insolvent. When a person ceases to be a partner, the LLP shall file a notice in the prescribed form with the RoC.
5. Contributions:
5.1 A partner of an LLP contributes towards the capital of the LLP. The obligation of a partner to contribute shall be as per the LLP Agreement.
5.2 The contribution can be in the following forms:
a) Tangible, movable, immovable, intangible property or a;ny other benefit to the LLP, e.g., land, goods, IPRs, etc.
b) Money, promissory notes, agreement to contribute cash or property and contract for services to be performed.
The monetary value of the contribution of each partner should be accounted for and disclosed in the accounts.
5.3 If the contribution is in kind, then the same must be valued by a practising CA or an approved valuer. No methodology has been prescribed for the valuation.
6. Tax Treatment:
6.1 The Finance (No. 2) Bill has prescribed the tax treatment for LLPs. The provisions are effective from A.Y. 2010-11. LLPs would now be taxed at par with partnership firms. Thus, the LLP will pay tax on its profits and the partners will receive their share in the LLP tax-free [5. 10(2A)]. The LLP will pay tax @ 30%. The Finance Bill has abolished the surcharge of 10% payable by firms and hence, even LLPs will not have to pay any surcharge. The 3% cess continues and hence, the net rate will be 30.9%.
6.2 LLP will get a deduction for remuneration paid to its working partners. The limits of S. 40(b) have been streamlined and simplified both for firms and LLPs:
a) On the first Rs.3 lakhs of book-profit – A deduction which is the higher of Rs.1.5 lakhs or 90% of the book-profits
b) On the balance book-profits – A deduction @ 60% of book-profits.
Any interest payment by the LLP to a partner in excess of 12% p.a. would be disallowed and any salary, remuneration, commission to non-working partners would be disallowed.
6.3 There will be no incidence of MAT or Divi-dend Distribution Tax or liability to Deemed Dividend on the LLP.
6.4 S. 45(3) would apply to the admission of a partner and S. 45(4) would apply to the dissolution of an LLP or retirement of a partner.
6.5 There is no express provision for the tax treatment of merger or demerger of two LLPs. The provisions contained for amalgamation or demerger in the Income-tax Act, only apply to companies and not to LLPs. It would be beneficial if the Finance Act, 2009 provides for this situation.
