What is a Limited Liability Partnership (LLP)?
A LLP is a business structure that came into being by passing of the LLP Act, 2008 and the notification of the LLP Rules, 2009. It is a relatively new structure in India. Its features is considered to be amalgamation of the features of a traditional partnership firm, formed under the Indian Partnership Act, 1932 and a Company, formed under the Companies Act, 1956. However, it is closer to the concept of a partnership firm than a Company.
Section 3 of the LLP act declares a LLP as a body corporate formed and incorporated under the Act and is a legal entity separate from its partners. Thus the liabilities of the LLP are not the personal liabilities of the partner and the personal assets of the partner will not be used to pay off the liabilities of the LLP except in certain cases of fraud.While the owners in a LLP have their liabilities limited to the business assets, there is such no comfort for the partners in a partnership firm. Their liabilities are unlimited i.e. it extends to the personal or home assets as well.
Let us take an example:
Suppose Mr. X and Mr. Y are partners in an LLP and have invested Rs. One lakh as Capital. The Company unfortunately makes a huge business loss of Rs. 25 lakhs. But the liability is limited to just the investment in business and the business assets i.e. Rs. One lakh. The Creditors cannot touch their personal and home assets to recover the remaining Rs. 24 lakhs.
But if Mr. X and Mr. Y are partners in a Firm and the business makes the loss of Rs. 25 lakhs, then the partners are personally liable. It means that the partners are personally liable and even their home and business assets can be sold off to recover the Rs. 25 lakhs.
LLP would be most suitable for the following:
1. Smalland medium scale Enterprises
2. Professional Firms
3. Venture Businesses
4. Family operated businesses
5. Information Technology Firms
Comparison of a LLP with a Company and Firm
Comparative Criteria Partnership Company LLP
Applicable Law The Indian Partnership Act, 1932 and the rules made there under. Companies Act, 2013
Notifications of MCA ‘The Limited Liability Partnership Act, 2008
LLP Rules, 2009
Separate Legal Status? Not a separate legal entity Is a separate legal entity under the Companies Act, 2013 Is a separate legal entity under the Limited Liability Partnership Act, 2008.
Registration Registration is optional except in the State of Maharashtra. Mandatory registration with Registrar of Companies Mandatory registration with Registrar of Companies
Main documents Partnership Deed Memorandum of Association
Articles of Association LLP Agreement
Number of Partners/ Share holders Minimum 2 partners
Maximum 20 (10 in case of a Firm carrying on the business of banking) Private Company
Minimum- 2 shareholders
Minimum – 7
No bar on maximum number of shareholders Minimum 2 partners
No bar on maximum number of partners
Liability of Partners/Share-holders Unlimited.
Partners are severally and jointly liable for actions of other partners and the firm and liability extend to their personal assets. Limited to the amount required to be paid up on each share or where the number of share-holders fall below the minimum Limited, to the extent their contribution towards LLP, except in case of intentional fraud or wrongful act of omission or commission by the partner or where the number of partners fall below the minimum.
Tax Structure Income of Partnership is Taxed at a Flat rate of 30%. No surcharge.
Also profit-making firms but tax-exempt don’t have to pay Minimum Alternate Tax (MAT)
Income of Company is Taxed at a Flat rate of 30% or 25% Plus surcharge as applicable.
Profit-making Companies but those claiming Tax Exemption (except SEZ) have to pay 15% Minimum Alternate Tax (MAT) Same as Partnership Firm. But Two disadvantages as compared to a firm:
1. Levy of Minimum Alternate Tax like Companies where book profit taxes is levied in case the income is tax exempt
2. Presumptive taxation benefit not available u/s 44AD.
Two key advantages over Companies:
1. No Deemed Dividend Taxes
2. No Dividend Distribution Taxes
Name of Entity Any name as per choice. Name to contain 'Limited' in case of Public Company or 'Private Limited' in case of Private Company as suffix. Name to contain 'Limited Liability Partnership' or 'LLP' as suffix.
Statutory Meetings No provisions regarding holding of meetings. Board Meetings and General Meetings are required to be held in the prescribed procedure and for the prescribed number of times. Same as partnership Firm.
This makes regulatory hassles much lower than a Company.
Voting Rights Depends upon the partnership Agreement. Generally on the basis of Profit Sharing Ratio. Voting rights are decided as per the number of shares held by the members. As per the terms of LLP Agreement.
Remuneration of Managerial Personnel The firm can pay remuneration to its partners.
Generally the tax laws are kept in mind while devising an efficient remuneration structure. Company can pay remuneration to its Directors subject to Companies Act. Remuneration to partner will depend upon LLP Agreement.
Generally the tax laws are kept in mind while devising an efficient remuneration structure.
Maintenance of Statutory Records No Statutory records but may have to keep records as per the Income Tax Act. Required to maintain books of accounts on Double Accounting System and on an accrual basis. Records involve Ledgers, statutory registers, minutes etc. Required to maintain books of accounts on a Double Entry system and on an accrual basis.
Annual Filing No return is required to be filed with Registrar of Firms. Annual Financial Statements including Balance Sheet, Profit and Loss, Notes to Accounts etc. to be filed with the Registrar of Companies every year. Annual Statement of accounts and Solvency & Annual Return is required to be filed with Registrar of Companies every year.
Audit of accounts Partnership firms are only required to have tax audit of their accounts as per the provisions of the Income Tax Act Companies are required to get their accounts audited annually as per the provisions of the Companies Act, 1956, All LLP except for those having turnover less than Rs.40 Lacs or Rs.25 Lacs contribution in any financial year are required to get their accounts audited annually as per the provisions of LLP Act 2008.
Foreign Equity holding Foreign Nationals and Non Residents cannot form Partnership Firm in India except under very very stringent conditions. Foreign Nationals and Non resident Indians can be a member in a Company as per the FDI policies.
It is much easier to attract FDI in A Company than a partnership or a LLP. Foreign Nationals or Non Resident Indians can be a Partner in a LLP but subject to some restrictive guidelines and compulsory approval. The FDI guidelines have been liberalized to a large extent for LLPs now.
Restrictions on receipt of money from shareholders/ Directors/ Partners and Others (except banks and NBFC) No such restrictions under the Indian Partnership Act, 1932 Considerable restrictions as per the Companies Act 2013and the Acceptance of Companies Deposits Rules. It has become difficult for Shareholders and others to lend money to Companies because of the same. No such restrictions as per the LLP Act or LLP Rules.
Requirements and Procedure for Formation of a Limited Liability Partnership
The primary documents required are:
1. Permanent Account Number (PAN) Cards and acceptable residence proofs for all Partners/ Designated Partners.
2. Digital Signatures
3. No Objection Certificate from the owner and the Address proof of the place which shall be the registered office address of the LLP
Disclaimer: The author CA. Bhavesh Savla is a practicing Chartered Accountant based at Mumbai. Please contact him at email@example.com firstname.lastname@example.org or you can visit www.cabks.in in case of any further queries about LLP. Please note that this write-up is intended to give a general overview and under no circumstances, can be taken as actionable professional advice. While all due care has been taken to provide accurate information,readers are expected to take further professional advice before acting on a LLP. No liability rests or exists or is created against the author for any action taken by anyone on the basis of this article.