2. Formation of LLP
2.1 Any two or more persons can form a LLP for the purpose of carrying on any business, trade, profession, service or occupation. Even a limited company, a foreign company, a LLP, a foreign LLP or a non-resident can be a partner in LLP. Although there is no specific mention, a HUF represented by its Karta can be a partner of LLP. Although the LLP Act is silent, it appears that a minor can be admitted to the benefits of LLP as it is partnership firm. A Co-operative Society or a corporation sole cannot be a partner of LLP. It may be noted that at least one of the partners in LLP should be a resident in India. Every LLP shall have at least two designated partners who are Individuals. At least one of such designated partners shall be a resident individual.
2.2 Every LLP will have to select a name and apply to 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, a LLP or a firm. After getting the approval for a name, the LLP will have to get itself registered with the ROC. For this purpose, the LLP will have to file an Incorporation Document with the ROC of the State in which its Registered Office is situated. Such Incorporation Document is to be filed in Form No. 2 with prescribed fees.
2.3 The Incorporation Document will have to be signed by two or more partners of LLP. This Document will have to be filed with a statement in the prescribed form signed by an Advocate, a Chartered Accountant, a Company Secretary or a Cost Accountant who is engaged in the formation of LLP and any one of the partners who has signed the Incorporation Document. This statement should state that all the requirements of LLP Act and Rules relating to incorporation of LLP have been complied with. It will be necessary for LLP to deposit the prescribed fees with the ROC. On completion of these formalities, the ROC has to register the document and issue a Registration Certificate within 14 days.
2.4 A LLP, upon incorporation, will be treated as a body corporate and will be considered as a legal entity separate from that of its partners. It shall have a common seal and a perpetual succession. Any change in the partners of LLP shall not affect the existence, rights or liabilities of LLP. Every LLP will have to use “LLP” as the last words of its name.
2.5 Section 11 of the Companies Act provides that no company, association or partnership consisting of more than 20 persons shall be formed for the purpose of carrying on a business unless it is registered under the Companies Act or is formed in pursuance of some other Indian Law. For banking business, the above restriction applies with reference to 10 or more persons. In the case of a private limited company maximum number of members can be 50. Therefore, a general Partnership Firm registered under the Indian Partnership Act cannot be formed with more than 20 partners. This restriction for number of partners will not apply for carrying on any business, trade, profession, service or occupation if the partnership is registered as LLP. In other words, LLP with unlimited number of partners can be formed for carrying on any business or profession.
3. Relationship of partners
3.1 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 persons can execute this Partnership Agreement. The information of this partnership agreement is required to be filed with ROC in Form No. 3 and prescribed fees is to be paid as provided in the Rules. 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.
3.2 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 provided in the 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 following matters, such matters will be governed by the provisions of First Schedule to the LLP Act. Some of the provisions in this schedule are as under.
(i) All the partners of LLP are entitled to share equally in the capital, profits and losses of the LLP.
(ii) Every partner may take part in the management of the LLP.
(iii) No partner shall be entitled to remuneration for acting in the business or management of the LLP.
(iv) If a partner, without the consent of the LLP, carries on any business of the same nature as and competing with the LLP, he must account for and pay over to the LLP all profits made by him in that business.
(v) All disputes between the partners which cannot be resolved in terms of the LLP agreement shall be referred to Arbitration under the provisions of Arbitration and Conciliation Act, 1996.
3.3 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 company or LLP which 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 aboutadmission of new partners or retirement of a partner will have to be given to the ROC in Form No. 3 within 30 days.
3.4 The partnership agreement may provide for payment of interest on capital of partners 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 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 the interest on capital paid to a partner is allowable as deduction from business or professional income if it does not exceed 12% P.A. Similarly, the remuneration to working partners is also allowable if this does not exceed the following limits as provided in section 40(b) of the Income-tax Act as amended by the Finance (No. 2) Act, 2009, effective from accounting year 2009 -10 (A.Y. 2010-11). This revised limits apply in the case of a Business or a Professional Firm.
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(i) On First Rs. 3,00,000 of the book profit or in the case of loss |
Rs.1,50,000 or 90% of book profit which is more |
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(ii) On balance of book profit |
60% of book profit |
3.5 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.
4. 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 the 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.
5. Accounts and Audit
LLP has to maintain such books of account as provided in Rule 24 of LLP Rules. 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. The LLP has to prepare a Statement of Accounts and a Solvency Statement within a period of six months from the end of the financial year (i.e., September). 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 LLP Rules. Under this Rule, such audit is to compulsory if the turnover of LLP exceeds Rs. 40 lakhs or contribution of partners in LLP exceeds Rs. 25 lakhs. 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.
6. 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 a 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 has to apply for such conversion to ROC in Form No. 17 with prescribed fees.
(iv) The ROC will give certificate of registration of LLP in Form No. 19.
7. Conversion of a Limited Company into LLP
7.1 Section 56 of the LLP Act provides that an existing private limited company registered under the Companies Act can convert itself into LLP. For this purpose, it has to follow the procedure stated in the Third Schedule.
7.2 Section 57 of the LLP Act provides that an existing unlisted public company registered under the Companies Act can convert itself into LLP. For this purpose, it has to follow the procedure stated in the Fourth Schedule.
7.3 Briefly stated, this procedure is as under.
(i) A company may apply for conversion into a LLP only if (a) there is no security interest in its assets subsisting or in force at the time of application and (b) all the shareholders of the company and no one else are going to be the partners of the LLP.
(ii) The company will have to comply with the provisions of the Third or Fourth Schedule to LLP Act as may be applicable.
(iii) The company has to apply for such conversion to ROC in Form No.18, with prescribed fees.
(iv) The ROC will give certificate of registration in Form No. 19.
8. Effect of conversion of Firm or Company into LLP
8.1 If an existing partnership firm or a company is converted into a LLP and registered as such, as stated above, under sections 55 to 57 of LLP Act, the effect of such registration shall be as under. This is provided in Second, Third and Fourth Schedules.
(i) On and from the date of registration specified in the certificate of registration –
(a) all tangible and intangible properties vested in the firm/company, all assets, interests, rights, privileges, liabilities, obligations, relating to the firm/company and the whole of the undertaking of the firm/company shall be transferred and shall vest in the LLP without further assurance, act or deed, and
(b) the firm/company shall be deemed to be dissolved and removed from the records of the Registrar of Firms/Registrar of Companies.
(ii) If any of the above properties is registered with any authority, the 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 the LLP in such medium and form as the authority may specify.
(iii) All proceedings by or against the firm/company which are pending in any court, Tribunal or any authority on the date of registration shall be continued, completed and enforced by or against the LLP.
(iv) Any conviction, ruling, order or judgment of any court, Tribunal or other authority in favour of or against the firm/company shall be enforced by or against the 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/company or to which the firm/company is a party, shall continue in force on or after that date as if they relate to the LLP and shall be enforceable by or against the LLP as if the LLP was named therein or was a party thereto instead of the firm/company.
(vi) The amount of paid-up share capital (preference or equity) of the company can be credited to the capital account of each partner in proportion to his/her shareholding in the company on the date of conversion into LLP.
(vii) The credit balances of General Reserve and other reserves can be retained by LLP or transferred to the credit of capital or loan account of each equity shareholder in the proportion of his/her shareholding.
8.2 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. Similarly, a private limited company or a closely held unlisted public company can also be converted into a LLP by following the procedure stated above. Such partnership firms and companies, after such conversion, will not be required to comply with the provisions of the Partnership Act or the Companies Act.
9. Taxation of LLP
9.1 The Finance (No. 2) Act, 2009, now 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 the LLP from A.Y. 2010-11. In view of this provision, no Minimum Alternate Tax (MAT) will be payable by a company converted into LLP. Similarly, no dividend distribution tax will be payable by such a company after conversion into LLP. Explanation to section 73 of the Income-tax Act provides that any loss from the business of purchase and sale of shares suffered by a company is to be considered as speculation loss, subject to certain exceptions. This Explanation does not apply to a Firm. Therefore, it will not apply to a LLP. Remuneration paid to working partners and interest to partners, subject to limit stated in para 3.4 above, will be allowed in computing taxable income of the LLP.
9.2 The return of income of LLP will have to be signed by a designated partner of LLP. For some reason he is not able to sign the return, any partner can sign the return. New section 167C is now added to provide that each partner of LLP is jointly and severally liable to pay tax due from the LLP if it cannot be recovered from the 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 the affairs of the LLP, he will not be liable to discharge this liability. Similar provision exists in section 188A which applies to partners of a “Firm”. It is possible to take the view that when a specific provision is made for the joint and several liability of partners of LLP for tax due from the LLP in Section 167C, the provisions of Section 188A which applies to partners of a “Firm” will not apply to partners of LLP.
9.3 The Explanatory Memorandum attached to the Finance Bill states that since a partnership firm and LLP is being treated as equivalent, the conversion from partnership to LLP will have no tax implications 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. It may be noted that there is no specific mention in this Explanatory memorandum about the liability on conversion of a company into LLP. There is also no provision made in the Income-tax Act for granting exemption when conversion of a partnership or limited company is made into LLP and all assets and liabilities of the firm/company are transferred to and vest in the LLP. Section 47 provides for exemption from capital gains when a proprietary concern or firm is converted into limited company if certain conditions are complied with. No similar exemption is provided on conversion of firm/company into LLP. Unless a specific provision granting such exemption is made in the Income-tax Act, any firm/company will hesitate before converting itself into a LLP.
9.4 Several other issues relating to conversion of a firm/company into LLP will have to be resolved by the Central and State Governments. Some of these issues can be listed as under.
(i) Whether carried forward capital losses, business losses and unabsorbed depreciation in the hands of the firm/company will be allowed to be adjusted against capital gains, business income etc. of the LLP on such conversion.
(ii) Whether unavailed MAT credit u/s 115JAA available to a company will be allowed to the LLP on conversion of Company into LLP.
(iii) Whether any stamp duty will be payable when assets/liabilities of firm/company are transferred to and vest in the LLP on such conversion.
(iv) Whether any VAT liability arises if any stock-in-trade or assets are transferred to and vest in the LLP on such conversion of firm/company into LLP.
(v) Position of transfer of Patents, Copyrights, Licences etc, on such conversion requires clarification.
(vi) Whether transfer fees is payable on plots to MIDC/GIDC (Industrial Estates) by firm/company on conversion into LLP.
(vii) Position of transfer of Tenancy Rights from the firm/company to LLP on such conversion.
(viii) Position of transfer of P.F./ESIC etc. registration on such conversion.
9.5 It appears that the tax department has not visualized the above issues relating to conversion of firm/company into LLP while drafting the provisions of the Finance Act. The amendments made in the Income-tax Act appear to be half-hearted. Unless these and several other related issues are amicably resolved, the new provisions for LLP will not become popular. For this purpose, the Central and State Governments will have to pass appropriate legislation granting exemption of any tax or duty payable on such transfer. This is because, as per LLP Act, there is no transfer but vesting of assets in LLP when the firm/company is converted into LLP.
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