In the advent of globalization, ever growing competition in the world economy, it is necessary to integrate the knowledge capital with the risk capital. Cater to the ever growing requirement of newer avenues of business environment, it has been long standing demand to develop a new form of business for achieve economic of scale and expertise through synergic effects of the limited personal liability of the partners and the flexibility in managing business operations. According to the survey of Ministry of Micro, Small and Medium Enterprises (MSME), over 90% small and medium enterprises (SMEs) are registered as a proprietorship which is not a corporate form of business due to the high compliance cost under the companies Act as a result they are at a comparative disadvantages and face difficulty in collection of their required fund from the financial market. In this highly thirsted situation the Limited Liability Partnership (LLP) is a hybrid form of business which properly adders the requirements with its unique features the unlimited personal liabilities and statute based governed corporate structure. This corporate structure and statutory disclosures requirement enable higher access to credit in the financial market. Its flexibility in operation enables professional expertise and entrepreneurial initiative to combine and operate in an innovative and efficient manner. This form of business undertakes operations across the various industries in India. Actually this form of business organization is an attractive corporate form which enabling the risk taking capacity in an innovative and efficient manner. In this context, this paper makes an attempt to provide an over view of the procedural aspects of LLP and to analysis the present profile to judge the justification of this business vehicle in India.
LLP is hybrid form of a traditional partnership and a limited company. It is an attractive business vehicles use to enjoy the benefit of limited liability of the company along the flexibility of partnership firm. It is simple form of business which organized and managed on the basis of the common agreement without any legal and procedural hares unlike the joint stock company. It is liable to the full extent of its assets but partner’s liability is only limited up to their agreed contribution. It is a special legal entity with perpetual life regardless of changes in any combinations of partners. It is regulated only by the Limited Liabilities Partnership Act, 2008 but not by the Indian Partnership Act, 1932. It encourages the corporate culture in India through creation of LLP by small and medium entrepreneurs. Corporations of professionals and consultancy firms become the same level of global peers.
Any two or more persons can form an LLP to carry on any lawful business with a profit motive. A limited company, a foreign company, an LLP, a foreign LLP, a foreigner can also be a partner in any LLP but a corporate society or a corporation cannot be join as a partner in any LLP. Every LLP should have at least two individuals as designated partners out of them one must be a resident of India. Designated partners should be accountable for regulatory and legal complains. There is no restriction on the maximum number of partners and nature of business to form an LLP. It should be formed and operate on the basis of joint agreement among the partners and if there is no such agreement the Limited Liability Partnership Act, 2008 should be used to determine the nominal rights and liabilities of the partners. It shall be a body corporate and legal entity separate from its partners with perpetual succession. It should able to entering into any contract and hold any property in its name.
Qualification of a partner:
Every person is eligible to form any LLP as a partner and also eligible to joint as a new partner if all other partners agree to admit his/her as a partner. Even a limited company, a foreign company, an LLP, a foreign LLP, or a non resident of India can be a partner except corporation or any corporate society. One notable thing is that at least one of the designated partners should be a resident of India. There is no restriction regarding the maximum number of partners. An existing partner may cease to be a partner either on the consent of other partners or on his death, or retirement or winding-up of the company which was a partner. In this situation a new partnership agreement has to be formed to continue the existing LLP with new set of partners. Information of admission of a new partner or retirement of an existing partner required to come in to notice to the Registrar of the company within 30 days. Any partner may transfer his/her share of economical benefits to any others but not duties of management or activities of the LLP.
Relation of partners:
Generally every LLP established on the written agreement of the partners regarding their duties and rights. Relation of the partners is mainly the profit sharing ratio and voting right which are also clearly specified in agreement paper so that no conflict should be arise among the partners. This agreement may also ask to pay interest on capital or remuneration to the partners. To get the registration certificate this agreement paper has to submit before the registrar of the company. If any change is required in the terms and conditions of the agreement then the partner can amendment the existing agreement through the filled up the from-3 to registrar of the company. If any LLP is formed without any written agreement then the relationship of the partners will be govern by the first schedule of the LLP Act. This schedule becomes into use even if there is a written agreement but not specifically mention certain matters. Some important provisions of this scheduled are given below:
- All partners are entitled to get the profit or loss equally.
- Every partner has right to manage the activities of the LLP.
- The partners are only entitled to get share of profit or but not any remuneration, salary or commission etc.
- If any partner carries any business similar to LLP without prior consent from the LLP then this partner is liable to pay the profit of his/her own business to the LLP.
At least two designated partners have to be appointed to form an LLP and at least one of them must be an individual who is resident of India. The appointment of the designated partner should be governed by the partnership agreement. Within 30 days from the vacancy of any designated partner a new partner has to be appointed as a designated partner. Particulars of designated partners and any change therein has to be informed to the registrar of the company in due time. After got the appointment letter from LLP the designated partners should submit the consent letter in writing to the LLP and subsequently the LLP should forward this consent letter to the registrar of the company within 30 days from his/her appointment. Every designated partner has to obtain a designated partner identification number. Day to day activities of LLP are managed by the designated partners and also they are responsible to ensuring the compliance of all the applicable law including filling returns, statements or any vacancy documents etc. To authenticate the financial statements and annual solvency statement every designated partners required to attest these documents. They also liable to settle all penalties arise from any contravention of the rules and regulation.
Any two or more persons want to carryon any lawful profit making business or profession may apply for incorporation of LLP to the registrar of the company by field-up the Form-2 ‘Incorporation Document and Statement’. Before filling the incorporation documents every designated partners have to obtain designated identification number through filling the From 7 and subsequently reserve the name of the proposed LLP by informing details of minimum two designated partners (one of them must be resident of India) through Form 1. In the time of incorporation require fees and some important documents like agreement paper, authorization of partners regarding limited liability, address proof of registrar office, notice for appointment of designated partner, name of partners and their signature etc. have to be submitted. After satisfied, registrar of the company will issue the certificate of incorporation for commencement the business operations.
It can also be formed by conversion of any firm or private company or unlisted public company. When firm wants to convert into LLP it shall be transferred all assets to the LLP and accordingly all liabilities also be vested by the LLP. The certificate of incorporation should be issued by the registrar of the company after the confirmation that all the partners of the firm become partners of the LLP. This event of conversion has to be informed to the concern registrar with which it was registered previously within 15 days.
In case of the company also all assets and liabilities shall be transferred to and vested by the LLP. The certificate of incorporation should issue by the registrar of the company provided that all the members of the company become the partners of the LLP. This event of conversion has to be informed to the registrar of the company with which it was registered under the provision of the Companies Act, 1956.
The LLP can voluntarily winding up or the tribunals can direct to do so for any of the reasons such as i) if the number of partners reduces below two; ii) if it is unable to pay its total debts; iii) if it has operated against interest of the sovereignty or integrity of India; iv) if it fails to submit the annual return for any five consecutive financial years; v) if the tribunal think that it is just and equitable to wound-up the LLP. This Act is also facilitating the reconstruction or amalgamation of LLPs subject to provisions of u/s 60 of the said Act. In this regard one thing is notable that The Indian Income Tax Act, 1961 provides a clear definition and the tax treatments of the amalgamation and merger in respect to the company but silent about the LLP. So it is recommended to amend the said Act or provide a separate set of provisions for this purpose.
LLP is a hybrid form of business entity having the admixture features of both partnership firm and company. Some of the prominent features are given below:
- LLP has a separate legal entity, liable of its assets with limited liabilities of the partners to their agreed contribution.
- A partnership firm, private company or any unlisted public company is aloe to convert itself into LLP.
- Every LLP has at least two partners having limited liabilities to the extent of their agreed capital contribution, but this liability becomes unlimited in case of any unauthorized activities, fraud, and negligence.
- Partners may contribute tangible or intangible assets to the firm as a capital and may involve in any other transaction like extending loan or supplying of raw material etc. as an outsider.
- A partner may transfer his/her economic rights to any other person provided that this transfer should not be a cause of dissolution or winding-up of the LLP. It may wind-up either voluntarily or by the tribunal.
- According to the partnership deed or upon his death or upon the dissolution of LLP a person may cease to be a partner. If a partner wants to cease to be a partner then a 30 days’ notice has to be circulated among the other partners. For any change in partnership or any person cease to be partner is required to notify the registrar of the company.
- Every Partner is only an agent of the firm but not an agent of another partner, so partner shall not be personally liable for wrongful act or omission of any other partners. The liabilities of the LLP should be settled out of the property of the LLP.
- Every LLP has at least two designated partners one of them must be a resident of India. The right and duty of the partners are governed by the partnership deed.
- It has a legal obligation to maintain its books of accounts in a proper manner so that true and fair view of its affairs should be reflected in the financial statements.
- It should be registered with registrar of company and must have a registered office.
- To get registration certificate every LLP should submit all required documents along the agreement deed.
- Central government may appoint an inspector to investigate the affairs of an LLP in any dispute cases and the technique of investigation has also specified in the Act.
Accounts and Audit:
The LLP has to maintain proper books of account which shall contain particulars of receipts and expenses, records of assets and liabilities and statement of cost of goods purchased, stock work-in-progress, finished goods and cost of goods sold. These books may be prepared either on cash basis or accrued basis. These books should be preserved at least for eight years. The accounting period must be ended on 31st march and LLP could not choose any other accounting period which would be ended on any other date. A statement of accounts and a solvency statement have to prepare on or before 30th September in each year. The audit is not compulsory for every LLP, books of accounts are required to audit only when the total turnover is exceeds rupees forty lakh or total contribution of the partners exceeds rupees twenty five lakh. These statements of accounts and solvency duly signed by the designated partners should be submitted to the registrar of the company within a period of thirty days from the end of six months of financial year with the prescribed fees.
Taxation of LLP:
The finance (No. 2) Act, 2009 has governed the taxation aspects of the LLP. The definition of ‘firm’ and ‘partnership’ are amended in u/s 2(23) of income tax Act and it is stated that the term ‘firm’ and ‘partnership’ will included LLP with effect from 01.04.2009. Further the definition of ‘partner’ is also included a partner of LLP. Thus LLP shall be taxable at par with the ordinary partnership firm that is tax burden on profit should be bear by the partnership firm itself but not partners. But if any remuneration or interest received by any partners that should be taxed under the head of ‘profit or gain from business or profession’ in the hand of such partner. LLP shall pay tax at flat rate of 30.09% on its profit (i.e. 30% + 3% for education cess). There is no surcharge on this income tax. To determine the taxable income in the hand of LLP amount of salary, bonus, compensation paid to the working partners should be deducted subject to the provision of u/s 40(b) of Indian Income Tax Act. Interest on loan extended by the partners is also deductable subject to the maximum rate of interest is 12% p.a. In the time of return submission the LLP must be submitted a certified copy of agreement deed having clearly specification of the profit sharing ratio.
Comparison with other form of business:
In this section a comparison is made only with limited company and ordinary partnership to judge the better form of business which is given below:
|Parameters||Limited Company||LLP||Partnership Firm|
|Statute||Companies Act, 1956||Limited Liabilities Partnership Act, 2008||Partnership Act, 1932|
|Registration||Must with Ministry of Corporate Affairs||Must with Ministry of Corporate Affairs||Optional with the registrar of the firm|
|Constitution||Memorandum of Association and Articles of Association||Mutual agreement among the partners or Schedule I of the LLP Act, 2008||Partnership deed and in the absence of this deed U/S 13 of the Partnership Act, 1932|
|Status||Has a separate artificial juridical legal personality||Has a separate legal personality||Not a separate legal entity|
|Identification number||Director identification number||Designated partners identification number||Not required|
|Number of owners||Minimum 2 and maximum 50 for private limited company & minimum 7 and no ceiling in maximum for public limited company||Minimum two partners and no ceiling for maximum number of partners||Minimum 2, maximum 10 for banking firm and 20 for others|
|Capital||Company limited by share must have a minimum authorized and paid-up share capital||No mandatory requirement for capital contribution that should be govern by the joint agreement||No mandatory requirement for capital contribution that should be govern by the partnership deed|
|Digital signature||Digital signature of at least one director required||Digital signature of at least one designated partner required||No such requirement|
|Management||At least two directors for private company and at least three directors for public company||At least two designated partners one of them must be a resident of India||At least two general partners
|Profit||May pay salaries or dividend out of divisible profit||LLP agreement should govern this issue||Partnership deed should govern this issue|
|Audit||Mandatory||Exemption for small LLPs with turnover less than Rs. 40 lakh and capital less than Rs. 25 lakh||Not mandatory|
|Taxation||Taxable as a separate entity||Taxable as a separate entity but the profit earned from the firm by partners are exempted from tax||Taxable as a separate entity but the profit earned from the firm by partners are exempted from tax|
|Annual accounts and return||Accounts to be filed with ROC||Accounts to be filed with ROC though disclosure requirement is lesser than that of the company.||Not required to be filed|
|Conversion||Unlisted company and private limited company can be converted into an LLP||LLPs can also be converted into limited company||It can be converted into an LLP or into a company|
So it is clear from the above comparison is that the compliance of rules and regulation are almost similar for the LLP with the company. Despite the paper formalities and procedure the LLP is better than that of the other forms of business in term of some remarkable features particularly in Indian scenario.
Worldwide recognized form of business LLP has now been introduced in India with its glorious advantages over any other forms of business. Some of the prominent advantages discuss below
- Most important benefit of LLP is the limited liability unlike sole proprietor or partnership firm the partners of LLP can’t be at a risk in the event of failure of business. It is pivotal to secure the personal assets of the partners in any unfortunate events which are not always under the control of the business entity.
- It as alternative form of business vehicle with flexible internal structure that enables professional expertise and entrepreneurial initiative to combine and operate in an efficient and innovative manner.
- Professional would be able to form multidisciplinary partnership and also able to expand their area of business operation with this form of business vehicle to meet the changing economic environment.
- Audit is not mandatory for all LLP but if the total capital exceeds Rs.25 lakh or total turnover exceeds Rs.40 lakh then only audit become mandatory.
- Every LLP should be established under the Limited Liability Partnership Act, 2008. It is an artificial juridical legal separate corporate entity in the eye of law. It helps to enhance the sense of confidence in the mind of supplier, customers and also the quality employee results into a work culture should be established.
- Unlike the limited liability company it has no required to pay any dividend tax as the partners are personally liable to pay the income tax. The tax rate is also lower than that of Limited Liability Company. Partners’ salary is treated as expenses so LLP is required to pay tax on some proportion of total income that is why the tax burden is lower than that of the sole proprietor business.
- To form any LLP required to maintain very lesser statutory records compare to Limited Liability Company. It has no lower level capital and no maximum ceiling of partners which leads to flourish in future.
- However LLP with foreign Direct Investment (FDI) will not be allowed to operate in agriculture sector, print media or real estate business but the government has permitted FDI in LLP in a calibrated manner, starting with the ‘open’ sector through government route or government approved route since May, 2011 and there are no FDI-linked performance related conditions.
It has been criticized by many of the research scholars and some of the theorists. It is not a new concept just an admixture of two existing form of business. So it may satisfy some entrepreneur but what will be the net contribution towards the economy is still open to question. Some of further weaknesses are given below
- The first schedule of the Act is not exhaustive to settle all the disputes arise in LLP, when the agreement paper remains silent on any point.
- Lack of maximum ceiling of the partners may allow to form an LLP with huge number of partners which leads to cumbersome situation.
- The act does not permit the conversion or re-construction of the existing LLP into any other form of business.
- Heavy fine or penalties create irritation in the mind of the entrepreneur and financial disclosers may act as a restraint to form any LLP.
- Central government has the massive power to form the rule as specified in the sub-section 2 of u/s 72 of this Act. This indicates that the Act is dull, hefty and expensive.
To achieve the long standing demand of a new corporate form of business for small and medium size enterprise, the government of India has also enacted the Limited Liability Partnership Act, 2008 in the same line of other countries like United Kingdom, United States of America, Australia, Singapore etc. This Act enforced on and from 31st march, 2009. The first LLP in India comes into the light on 2nd April, 2009.
Mr. Satyajit Ghorai
Head, Department of Commerce,
Bangabasi Evening College
Dr. Ram Prahlad Choudhary
Assistant Professor, Department of Commerce,
University of Calcutta