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Limited liability, unlimited benefits

An LLP combines the ease of running a partnership with the limited liability of a company.

Till a few months ago, the two most common ways to establish a business in India were to set up a partnership or form a company under the Companies Act. Both options presented their own problems. In case of the former, the partners are liable for the acts of the firm, while running a company requires greater compliance.

But after the Limited Liability Partnership Act, 2008 came into effect on 1 April this year, a third option is now available. An LLP combines the ease of running a partnership with the limited liability of a company. With the only ambiguity of taxation being cleared in the Budget, LLP should now be an attractive proposition for professionals and closely held enterprises.

An LLP will be taxed like a general partnership and not as a company, which means it will be spared the 10% surcharge and dividend distribution tax that the companies pay. The LLP will pay an effective tax of 30.9% compared with 33.99% that the companies pay. Tax professional Dinesh Verma looks at the basic rules governing LLPs.

How is an LLP different from other business entities?
An LLP scores over other forms of business on several counts. Under a traditional partnership structure, every partner is liable—jointly with other partners, as also separately—for all acts of the firm. But in case of an LLP, a partner is not liable for the acts of other partners. So individuals are shielded from the joint liability created by the partner’s misconduct. An LLP also enjoys greater flexibility compared with a company. There are fewer compliance requirements and no minimum capital.

What are the other benefits of an LLP?
An LLP combines the ease of running a partnership with the status of a separate legal entity. The structure has a comparatively low cost of formation, is easy to manage and simple to wind up.

Who can be a partner in an LLP?
An LLP must have at least two designated partners and one of them must be a resident of India. Only individuals can be designated partners of an LLP. In case a corporate entity is a partner, it has to nominate an individual. The designated partner is responsible for all the LLP’s acts and liable for all penalties imposed on the LLP for any contravention of provisions.

What can a partner contribute?
The LLP Act allows partners to contribute tangible, intangible, moveable or immoveable property, including cash and services. A partner can hold a significant share in the LLP for contributing his knowledge on a subject without making any cash contribution. The monetary value of the consideration of each partner is accounted for in the books of accounts.

Are there any guidelines for LLPs?
The relationship among partners and their ties with the LLP are governed by the LLP Agreement. The Act provides considerable flexibility in the management and administration of the LLP. If the partners and the LLP do not have any Agreement, the rights and duties of the partners and the LLP are determined by the First Schedule of the LLP Act.

How can an LLP be incorporated?
An LLP can be formed only for ‘a lawful business with a view to profit’, which rules out partnerships for charitable purposes. The process is similar to that of incorporation of a company under the Companies Act. While the LLP must have at least two partners, there is no upper limit. After incorporation, an LLP is allocated a unique identity number called the Limited Liability Partnership Identity Number (LLPIN). The designated partners of an LLP are required to obtain a unique number called the Designated Partner Identity Number (DPIN). The registration and application fee depend on the total contribution in the LLP.

What disclosure norms is an LLP required to follow?
The LLP Act makes the maintenance of proper books of accounts mandatory. This has to be done for every financial year (1 April to 31 March). It is obligatory for every LLP to file a statement of account within 30 days of the end of six months of the financial year. The Act also stipulates the filing of return within 60 days of the end of the financial year.

Do the accounts need to be audited?
The audit of the accounts is required only if the contribution exceeds Rs 25 lakh or the annual turnover exceeds Rs 40 lakh. However, the government retains the right to inspect the books of account of an LLP. Income-tax inspectors can call for documents and books of accounts and retain them for up to 30 days. The power of seizure also lies with the inspector, subject to the order of a first class judicial magistrate.

Can the partnership rights be transferred?
A partner can transfer his rights to receive the share of profits and losses of an LLP and distribution of assets. The transfer of rights, however, does not entitle a person to participate in the management of the LLP, or access information concerning the transactions of the LLP. This feature lends itself to easier succession planning compared with that of companies.

How can an LLP be merged or wound up?
In case of the winding up of the business, an LLP can make an application to the Registrar of Companies for declaring the company defunct and removing the name of the LLP from its register. The partners may mutually decide to wind up the operations and all the assets of the business can be disposed of. The power to order mergers lies with the National Company Law Tribunal (high court for the time being).

What happens if the LLP is involved in a fraud?
An interesting aspect in the LLP Act is the provision for whistle blowing. The Act stipulates reduction or even waiver of penalty which may be levied upon any partner or employee of LLP, if the court is satisfied that he has provided useful information during investigation. The Act provides for protection of the employee-turned-approver against discrimination.

Dinesh Verma is a chartered accountant and can be reached at dinesh@dvaindia.org.