Overview on LLP and its Taxation in India & US

Globalization in India has made many revolutions in every field. We are seeing Indian companies working abroad as MNC, Few abroad acquisitions too. Thanks to Liberalization & globalization, it opens new doors to our industries, made compete enough to grow across global. But this liberalization also ask for some changes, eg: We are moving from Indian Accounting Standards to IFRS to have international standard across world. We have another change in the format of partnership � LLP. This is newly introduced in India. This article is an effort to give brief introduction on meaning, definition as per act. US LLP definitions & Comparison study of US v/s Indian tax laws on LLP.

Meaning:  A limited liability partnership (LLP) is a partnership in which partners have limited liability. It therefore exhibits elements ofpartnerships and corporations. In an LLP one partner is not responsible or liable for another partner's misconduct or negligence. This is an important difference from that of a limited partnership. In an LLP, some partners have a form of limited liability similar to that of the shareholders of a corporation.

Definition: The Limited Liability Partnership Act 2008 was published in the official Gazette of India on January 9, 2009 and has been notified with effect from 31 March 2009. However, the Act has been notified with limited sections only. The rules have been notified in the official gazette on April 1, 2009. The Minister of Corporate Affairs had suggested that India will have its first LLP by 1st April 2009. The promise has been kept and the LLP Act got notified on 31 March 2009 and the first LLP was also incorporated in the first week of April 2009.

The salient features of the LLP Act, 2008 are as under:-

1. The LLP has an alternative corporate business vehicle that would give the benefits of limited liability but allows its members the flexibility of organizing their internal structure as a partnership based on an agreement.

2. The LLP Act does not restrict the benefit of LLP structure to certain classes of professionals only and would be available for use by any enterprise which fulfills the requirements of the Act.

3. While the LLP has a separate legal entity, liable to the full extent of its assets, the liability of the partners would be limited to their agreed contribution in the LLP. Further, no partner would be liable on account of the independent or un-authorized actions of other partners, thus allowing individual partners to be shielded from joint liability created by another partner�s wrongful business decisions or misconduct.

4. LLP shall be a body corporate and a legal entity separate from its partners. It will have perpetual succession. Indian Partnership Act, 1932 shall not be applicable to LLPs and there shall not be any upper limit on number of partners in an LLP unlike an ordinary partnership firm where the maximum number of partners cannot exceed 20, LLP Act makes a mandatory statement where one of the partner to the LLP should be an Indian.

5. Provisions have been made for corporate actions like mergers, amalgamations etc.

7. While enabling provisions in respect of winding up and dissolutions of LLPs have been made,

8. The Act also provides for conversion of existing partnership firm, private limited company and unlisted public company into a LLP by registering the same with the Registrar of Companies (ROC)

9. Nothing Contained in the Partnership Act 1932 shall effect an LLP.

10. The Registrar of Companies (Roc) shall register and control LLPs also.

LLP in USA

 A limited liability partnership (LLP)  is a general partnership in which the individual liability of partners for partnership obligations is substantially limited.  LLP�s were first designed in Texas to afford certain professionals limited liability.  These professions originally included those such as physicians, architects, attorneys, certified public accountants, and veterinarians. Unlike partners in a general partnership, who are liable for all partnership obligations, partners in a limited liability partnership are not personally liable for partnership obligations unless the obligations are attributable to the fault of the partner.

 As for taxation, LLP�s are a flow-through entity that does not pay federal income tax.   Flow-through entity (FTE) is a entity where income "flows through" to investors or owners, that is the income of the entity is treated as the income of the investors or owners. Flow-through entities are also known as pass-through entities or fiscally transparent entities. Depending on the local tax regulations, this structure can avoid dividend tax and double taxation because only owners or investors are taxed on the revenue. Technically, for tax purposes, flow-through entities are considered "non-entities" because they are not taxed; rather, tax "flows-through" to another tax return. LLP is required to file Form 1065, an informational return & it will give K1s to partners.

As per the Budget 2009-10, LLP will be treated as Partnership firms for the purpose of Income Tax and will be taxed like a partnership firm. Also made amendment to the definitions on definitions -firm, partner & partnership to include feature of LLP.Tax rate will be 30% flat tax rate + 3% education cess & No Minimum Alternate Tax & Dividend Distribution Tax. LLP and general partnership is being treated as equivalent (except for recovery purpose) in the Act, the conversion from a general partnership firm to an LLP will have no tax implication, if the rights and obligation 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 provision of capital gain will apply.

Eligibility (section 184):

In order for Limited Liability Partnership to be assessed as firm as Income Tax Act, it has to satisfy the following criteria

• The LLP is evidenced by an instrument i.e. there is a written LLP Agreement.
• The individual shares of the partners are very clearly specified in the deed.
• A certified copy of LLP Agreement must accompany the return of income of the LLP of the previous year in which the partnership was formed.
• If during a previous year, a change takes place in the constitution of the LLP or in the profit sharing ratio of the partners, a certified copy of the revised LLP Agreement shall be submitted along with the return of income of the previous years in question.
• There should not be any failure on the part of the LLP while attending to notices given by the Income Tax Officer for completion of the assessment of the LLP.

Comparison Study of USA & Indian Tax laws.

Conclusion: LLP is new born child in India, is yet to start having its footage in the business/profession field. This is great opportunity for professionals like CAs, CS & others to come together & start LLP to give all type of services to their clients. In my view, this is an effort from government to make our professionals to make them competitive enough to face challenges from big 4 companies � E& Y, Delloite. Note that these big 4 companies are basically registered as LLP.