Finance and Accounts With Harshal

Introduction

Limited Liability Partnership commonly known as LLP is a concept which adopts corporate form. Thus it has an organizational flexibility of a company and a tax status of partnership with limited liability on its partners. LLP Bill was tabled in Rajyasabha on 15^th December 2006 and is influenced by Limited Liability Partnership Act 2000 of UK. The LLP will help in bridging the gap between the partnership firms and corporate entities which are governed by Partnership Act, 1932 and the Companies Act, 1956. It will be a win-win situation for professionals as well as for users. It will help professionals of various fields in integrating and providing various services under one roof and increase their global competitiveness. For e.g.: Chartered Accountants, Company Secretaries, Cost Accountants, Advocates, and Architect etc. may join their hands together to explore their respective expertise in order to achieve the ultimate goals.

What is a LLP & its international experience?

In LLP all partners have a limited liability, similar to that of shareholders of a company. However, the partners have right to manage the business directly and (in many areas) with a distinct advantage of nil tax liability as compared to partnership firm and a company. LLP is a body corporate (i.e. it acquires legal status of its own, separate and distinct from its members) formed and incorporated under LLP Act. The word ‘Body Corporate’ as defined in the bill means a company referred in the Companies Act, 1956 and includes LLP- registered under LLP Act, LLP’s incorporated outside India and companies incorporated outside India. The LLP has a perpetual succession. Any change in the partners will not affect the existence, rights or liabilities of LLP.

Limited Liability Partnerships are very popular form of business organizations in United Kingdom, United States and Singapore. In United Kingdom, Limited Liability Partnerships are governed by Limited Liability Partnership Act, 2000. The Act become a law on 1^stApril 2001. Under U.K. law, the LLP is a “fiscal transparency”. It means that it is not subject to taxation. Only members are liable to pay taxes.

Incorporating the LLP

1. LLP can be incorporated when two or more persons intend to join together for a lawful business with a motive of earning profit and subscribe their names to the incorporation documents. The incorporation document should be filled in a prescribed manner along with fees with the registrar under whose jurisdiction its registered office is situated. The incorporation document should be accompanied with the statement in prescribed form made by an advocate, company secretary, or chartered accountant who is engaged in formation of LLP and one partner who has subscribed to the incorporation document. This statement states that all the requirement of the Act and the rules made there under have been complied with respect of incorporation.

2. The requirements for incorporation are (i) the incorporation document shall be in a prescribed form (ii) the proposed name of LLP (iii) the nature of business (iv) the name & address of the registered office and (v) the name & address of each partner. The names of the designated partners of LLP should also be given. The certificate of incorporation will be the conclusive evidence that the LLP is incorporated by the name specified in the incorporation document.

The key features of a LLP

The key features of a LLP incorporated in India are as follows:

1. LLP is a body corporate. It is must for every LLP to get registered with the Registrar of Companies (ROC) similar to that of setting up of a company. Its name should be unique i.e. there should not be another LLP having similar name.

2. LLP is distinct from its members. The liability of members is limited to the extent of their contribution.

3. The LLP must have at least 2 members. Any legal person may be a member of a LLP. Each partner is the agent of the firm and not of the other partners. The LLP shall not be liable for the acts of a partner if the partner in fact does not have an authority to act on behalf of the LLP even if the third person knows or does not know this fact and believes that he is a partner of the LLP.

4. Management includes at least 2 members as ‘designated members’ out of whom one member should be resident in India. The designated members will have the statutory responsibility to comply with the various regulatory authorities. According to U.K. LLP Act (2000), there are some extra responsibilities on designated members. In particular they are responsible for (i) Appointment of an auditor (ii) Signing the accounts on behalf of the members (iii) Delivering the accounts to the Registrar (iv) Notifying any changes in case of memberships, registered office address, or the name of limited liability partnership (v) Preparing, signing and delivering to the registrar an annual return, and acting on behalf of limited liability partnership if it is wound up and dissolved.

The Designated members will be held liable for the penal action in the event of failure of compliance with their responsibilities. Unless otherwise specified to the ROC, all the members of LLP will be designated members.

5. The LLP has a complete flexibility in setting up its internal structure and management. The duties and responsibilities of partners towards the LLP and towards each other depend on the agreements between the partners and the agreement between LLP respectively subject to the provisions under proposed legislation.

6. Similar to that of Companies, LLP will have an obligation of maintaining annual accounts reflecting a true and fair view. A Statement of Accounts and Solvency shall be filed by every LLP with the ROC every year. The LLP should get its Book of Accounts audited, subject to any class of LLP’s being exempt from this requirement by the Central Government. There is a provision that the government will have powers to investigate the affairs of a LLP and for that purpose the government may appoint one or more competent persons as inspectors.

How LLP would be taxed?

The aspect of tax treatment of LLP is not clear. The bill tabled in Rajyasabha on 15^th Dec. 2006 states that a LLP will be treated as a firm as defined under Income Tax Act 1961. This means that a LLP shall be liable to tax on profits after charging interest on capital and salary to partners. However, Naresh Chandra Committee and the concept paper on LLP, which was released by Ministry of Corporate Affairs in Nov. 2005, had clearly advocated tax transparency for LLP’s. This means that only LLP partners will be taxed and not the LLP itself. This committee, as per clause no.5 of the First Schedule has suggested that no remuneration or salary will be paid to LLP’s partners. There would only be sharing of profits and the partners would be taxed as per applicable tax rates. Concept paper on LLP also advocates the deeming provisions which mean that the every activity carried on by LLP with a view of profit earning shall be deemed to be carried on by its partners. The property of LLP shall be deemed to be the property of its partners in their capital contribution ratio. Any dealing by LLP will be treated as by partners and will be subject to capital gains tax on the sale of any assets. Contribution made by partners irrespective of its nature i.e. tangible (money) or intangible assets (goodwill) should be disclosed in the books of accounts. There is an ambiguity in the Bill relating to the methodology of valuation of assets as well as the provisions of taxation of LLP. There is also uncertainty regarding the stamp duty in the event of amalgamation or merger. If their will be stamp duty then at what rates it will be levied and are there any concessional rates provided by the government?

Conversion from an existing entity into LLP

The LLP Bill provides flexibility of conversion of existing entities into LLP as under:

• Clause 54 of schedule II deals with the provisions of converting existing professional firms or business firms to LLP.
• Clause 55 of schedule III shall apply at the time of conversion of a private limited company to a LLP.
• Clause 55 of schedule IV shall apply at the time of conversion of an unlisted public company to a LLP.

Epilogue

This kind of business organization has been structured keeping in mind the present day needs of business. It is the form of business entity which assigns limited liability to the partners. No doubt that the bill will benefit the businessmen as well as professionals. Introduction of LLP in India will open the avenues for professionals where the services rendered will be of global standards. It will lead to more productivity and will definitely help in the overall growth of economy as well.