An Overview of Limited Liability Partnership (LLP)

What is Limited Liability Partnership

An LLP is a unique form of legally recognized business vehicle, which integrates flexibility of a traditional partnership firm with the advantages of Separate Legal entity. As it contains the features of both Company and Partnership, it is rightly been called the HYBRID Entity.

LLP is governed by Limited Liability Partnership Act, 2008 which came into force on 1st day of April 2008. This Act was introduced with the idea of promoting MSME Sector (Micro Small Medium Enterprises) with the advantages of self governance and less compliances.

Salient Features of an LLP

• LLP is a body corporate and a legal entity separate from its partners.
• It has perpetual succession and partners may come and go.
• Despite being a partnership registration of LLP is Compulsory.
• LLP can also purchase movable/ immovable property in its own name.
• A firm, Private Company or an Unlisted Company is allowed to convert itself into LLP.
• The Provisions of the Indian Partnership Act, 1932 are not applicable to LLP.
• Every Limited Liability Partnership shall use the words “Limited liability Partnership” or “LLP” as the last words of its name.
• Every LLP shall have at least two designated partners being individuals, at least one of them being resident in India and all the partners shall be the agent of the LLP but not of other partners.

Advantages of Forming an LLP

• LLP is a form of business model which operates on the basis of an agreement.
• LLP has more flexibility and lesser compliances as compared to a company.
• No Requirement of Minimum Contribution, no restriction on maximum limit of partners, simple registration procedure.
• No exposure to Personal assets of the partners except in case of fraud.
• No requirement of Compulsory Audit.
• Non Applicability of Dividend Distribution Tax (DDT).

Disadvantages of Forming an LLP

• Any act of the partner without the consent of other partners can bind the LLP.
• LLP’s are not allowed to raise money from Public.
• LLP cannot avail presumptive taxation scheme u/s 44AC or 44AD of Income Tax Act.
• Under some cases, liability may extend to personal assets of partners.

Steps to form an LLP

What is an LLP Agreement

This is a Document which contains the rules and regulations governing the LLP, just like a combination of AOA & MOA in the case of a Company. As per the provisions of LLP Act, in the absence of agreement as to any matter, the mutual rights and liabilities shall be as provided for under Schedule I to the Act. Therefore, in case any LLP proposes to exclude provisions/ requirements of schedule I to the Act, it would have to enter into an LLP Agreement, specifically excluding applicability of any or all paragraphs of Schedule I. The LLP Agreement is a charter of the LLP which denotes its scope of operation and contains the following details in brief:

• Name, registered office, Partners and their details, Nature of the Business, Duration of the LLP.
• Contribution and its related matters.
• Rights and Duties of the Partners.
• Procedural Aspects of an LLP like Meetings, Minutes, Remuneration, share of Profit or Loss, Change in Partners, Books of Accounts, Audit & Arbitration.

Taxation and Other benefits of Conversion

• For Income tax purpose, LLP is treated at par with partnership firms. Thus, LLP is liable for payment of income tax and share of its partners in LLP is not liable to tax. Thus no dividend distribution tax is payable.
• Provisions of ‘Deemed Dividend’ under income tax law is not applicable to LLP.
• Lower rate of taxation.
• Carry Forward and Set off Losses and Unabsorbed Depreciation.

De-Merits of Conversion

• MAT Credit not available.
• Restriction on interest and remuneration.
• Applicability of S. 45 (4) on distribution of Capital assets.
• Applicable of AMT u/s. 115JC.
• Company specific deduction not available.
• Lower rate of incentive under Chapter VI-A.
• Lapse of some unabsorbed allowances.
• No specific exemption u/s. 47 for amalgamation, demerger.
• No specific exemption provision for exemption on reconversion.

Audit requirement of LLP

Any LLP, whose turnover does not exceed in any financial year 40 lakh rupees or whose contribution does not exceeds 25 lakh rupees is not required to get its accounts audited.

Even then if the partners of such limited liability partnership decide to get the accounts of such LLP audited the accounts shall be audited only in accordance with rules.

The first auditor of an LLP may be appointed by the designated partners at any time but before the end of first financial year.

Tax Audit of LLP

Where the total sales, turnover or gross receipts of the business exceeds Rs. 1 crore (Rs. 25 lakhs in case of profession) in any financial year of the company than the accounts shall be audited by Chartered accountants and tax audit report based on the same is required to be submitted to the tax authorities along with the Return of Income of the business.

Filing of Annual Accounts

All LLP’s are required to maintain the Books of Accounts in Double Entry System and has to prepare a statement of solvency every year ending on 31st March.

E-FORM 8 to be filed with Registrar of LLP’s on or before 30th October every year.

Filing of Annual Return

Every LLP is required to file Annual Return in E-FORM 11 to the Registrar of LLPs within 60 days from the closure of financial year i.e. the Annual Returns has to be filed on or before 30th May every year.

In case of LLPs with turnover more than 5 crore rupees in a financial year or contribution more than 50 lakh rupees, the Annual Return shall be certified by a Company Secretary in Practice.

Filing of Income Tax Returns

In case where Audit is required, the last date for filing income tax return is 30th September every year, and wherein business which do not fall under the Audit requirements criteria will  have to file income tax return on or before 31st July every year.

Dissolution of LLP

As per the terms of LLP agreement, LLP can be dissolved by executing dissolution deed. The net assets of the LLP can be distributed amongst the partners in a manner specified under LLP agreement.

If LLP distributes any other amount over & above the original capital and share of profit for the year till dissolution then the tax issues may arise depending upon the nature of the distribution and the character of amount being received by each partner.

Winding up of LLP

LLP can be wound up when a resolution is passed at the General Meeting of the Partners and 3/4th majority of the partners approve the winding up of LLP.

The competent Court has power to pass the necessary orders on the application made by LLP for winding up.

The consent of the lenders and creditors will be necessary before the Court passes an order for winding up of the LLP.

The creditors also have power to make an application for winding up of LLP if 2/3rd in value of the creditors establish that LLP is not in a position to pay the debts to the creditors.

The author can also be reached at lkpurohit29@gmail.com