Limited Liability Partnerships – In India’s Perspective
Limited Liability Partnerships as a concept was originated in the United States in the 90s. Ever since its origination, it has been spread around the world with many countries now recognizing LLP as a legal entity.
LLP is basically a partnership in which some or all partners have limited liability coupled with the corporate form i.e. it is considered as a legal entity separate from its partners. It is basically an alternative corporate business vehicle that provides the benefits of limited liability of a company, but allows its members the flexibility of organizing their internal management on the basis of mutually arrived agreement similar to partnership form.
LLP was recognized as a business structure in India in 2009 through the LLP Act, 2008. Since its inception in 2009, at present, there are more than 10,000 LLPs formed and registered under the LLP Act, 2008.
Salient Features of LLP Structure
- Body corporate and a legal entity separate from its partners.
- Perpetual succession.
- Being a separate legislation, it is neither governed by the Indian Partnership Act not the Companies Act.
- The last words of the limited liability shall compulsorily consist ‘LLP’
- Minimum 2 designated partners who are individuals, with one being resident of India and all partners are agent of the LLP and not of other partners.
- Liability of partners is limited to their agreed contribution in the LLP and no partner is liable on account of the independent or unauthorized actions of other partners.
- More flexibility and less compliance requirements as compared to a Company.
- Simple registration Procedure coupled with no minimum capital requirement, and no restriction on maximum number of partners.
- Easy to leave or become a partner in LLP.
- Ownership can be transferred in accordance with the terms in LLP agreement.
- Can sue and be sued in its own name.
- No restriction on the limit of remuneration as prescribed in the Companies Act, but remuneration details should be mentioned in the LLP agreement and it cannot exceed the amount specified in the agreement.
- LLP Act provides the simple procedures for conversion of firms, companies, unlisted public companies in LLP.
- No double taxation as in the case of companies.
- Any act of partner without the consent of other partners can bind the LLP.
- Under some cases, liability can extend to the personal assets of the Partners.
- Cannot raise money from Public.
- Difficult to wind up a LLP than a firm.
Formation of LLP.
- Deciding the partners and the designated partners for formation.
- Obtaining the Director Identification Number and Digital Signature
- Name availability checking.
- Drafting of the LLP Agreement.
- Filing of the incorporation documents.
- Obtaining the certificate of incorporation.
Taxation Aspects of the LLP in India.
For the purpose of the Income Tax Act, LLP will be treated as a partnership firm and accordingly, all the relevant provisions regarding taxation of partnership firm will be applicable.
- Income of the LLP will be taxed in the hands of the LLP only and not in the hands of individual partners.
- Remuneration to Partners will be taxed to the partners under ‘ income from business and profession’ and share of profit will be exempt under section 10(2A).
- LLP is allowed to get a deduction of remuneration paid to partners subject to maximum allowable under section 40(b).
- Benefits of presumptive taxation is not allowed to LLP. At present, the rate of taxation to LLPs is 30% + Cess + surcharge as applicable.
- The provisions of Alternate Minimum Tax (AMT) as applicable to structures other than Companies will also be applicable to LLP.
Indirect taxes such as the Service Tax, Excise, Sales Tax will be charged considering the LLP as a Partnership Firm.
Foreign Direct Investment in LLPs in India
- FDI in LLPs will be allowed only through the Government Approval Route. FDI in LLP will be allowed only in those sectors where 100% FDI is permitted under automatic route. This implies that any foreign corporate structure or individual can invest in LLP in India only through the Government Approval. This means there is a regulatory hurdle for foreigners to form an LLP in India. This is mainly because the Indian Government wants foreigners to form Companies in India whose rules of compliance are stricter than LLP.
- Any Indian Company who is already having FDI can make downstream investment in LLP provided both the Company as well as the LLP are operating in sectors which allow 100% FDI through automatic route and there are no performance conditions attached to FDI.
- LLP with FDIs shall not be allowed to make further downstream investment in LLPs or Companies in India.
Suitability of LLPs
A note by the Ministry of Corporate Affairs on LLP which is available on the website http://www.llp.gov.in states that LLPs are suitable mainly for service sector as well as professionals as follows:
- Service Providers
- Enterprises in new knowledge and technology based fields where corporate structure would be cumbersome.
- CAs, CWAs, CS, Advocates etc.
- Venture Capital Funds.
- Small Sector Enterprises
- Producer companies in Handlooms, Handcrafts sector.
The form of corporate structure as LLP is suitable for Startups for Indian Residents as it will limit their liability and also provide the flexibility to run the firm as per their terms. The form of LLP is not suitable for foreigners as there are numerous restrictions on LLPs in which there is foreign investors. Also, many venture capital firms and angel investors are now open to investing in LLP business structure. This is mainly because the LLP agreement can also consider their terms and conditions.