LLPMohit &

Shailesh

Agenda

LLP v/s LLC9

Audit & Accounts of LLP8

FDI in LLP7

Taxation Aspect on Conversion to LLP6

Taxation Aspects on LLP5

LLP v/s Other Forms4

Merits and Demerits of LLP3

LLP1

Brief Overview of LLP Act, 20082

•A form of business organization which has been introduced in India by way of LLP Act, 2008

•Which Combines the advantages of both the Company and Partnership into a single form of organization

•LLP also limits the personal liability of a partner for the errors, omissions, incompetence, or negligence of the LLP's employees or other agents

•A separate legal entity

LLP

•Chapter I – Preliminary

•Chapter II – Nature of LLP•Section 3•(1) - A LLP is a Body Corporate•(2) - Shall have Perpetual Succession

•Section 4: The Partnership Act, 1932 is not applicable to LLP

•Section 5: Capability of becoming a partner in an LLP (Unsound, insolvent)

•Section 6 (1): Every LLP shall have at least two partners

Brief Overview of LLP Act, 2008

•Section 6(2): If at any time number of partners fall below 2 and LLP carries on business for >6 months, then the partner carrying on business (knowing the fact) is personally liable for the obligations

•Section 7•(1): At least one partner should be resident of India•IF partners are body corporate

•(2): Any partner may be admitted to or retired from a LLP in accordance with LLP agreement

•Section 7•(3): An individual shall not become a designated partner in any LLP unless he has given his prior consent to act as such to the LLP in such form and manner as may be prescribed

•(4): Every LLP shall file with the Registrar the particulars of every individual who has given his consent to act as designated partner in such form and manner as may be prescribed within 30 days of his appointment

•(5): An individual eligible to be a designated partner shall satisfy such conditions and requirements as may be prescribed

•(6): Every designated partner of a LLP shall obtain a DPIN from the CG

•Section 8: Designated partner responsible for doing all the acts, matters and things to be done by LLP and Liable to all penalties imposed on LLP for any contravention of the provisions

•Section 9: A LLP shall appoint Designated partner within 30 Days of a Vacancy for any reasons

•Section 10: •(1): If a LLP contravenes the provisions Section 7(1), LLP and its every partner shall be punishable with fine – 25,000 to 5,00,000•(2): If a LLP contravenes the provisions Section 7(4) & (5), 8 and 9, LLP and its partnership shall be punishable with fine – 10,000 – 5,00,000

Chapter III - Incorporation of Limited Liability Partnership And Matters Incidental Thereto ( Section 11 – Section 21)

•LLP shall only be formed for carrying any business with profit motive•That the incorporation documents shall contain the prescribed information.•Registrar on registration shall issue the necessary certificate of incorporation•Every LLP shall have a registered office to which all communications and notices may be addressed and where they shall be received.•The name of LLP shall end with words “LLP” or “Limited Liability Partnership” as suffix.•The LLP can also change its name•LLP can apply to the CG for directing any other LLP registered with similar nor identical name, to rectify its name.

Chapter IV - Partners And their Relationships (Section 22 to Section 25):

•The mutual rights and duties of the partners of a LLP, shall be governed by the LLP agreement.•In the absence of agreement as to any matter, the mutual rights and duties of the partners shall be determined by the provisions relating to that matter as are set out in the First Schedule.•LLP Agreement can also be amended.•A partner can also cease to be partner of the firm•Cessations , not by itself discharge the partner from any obligation to the LLP or to the other partners or to any other person which he incurred while being a partner the obligation for acts.•Consent is necessary to become a partner in LLP

•Partner to notify change in address or name to the LLP , which in turn will notify the same to the Registrar•Any person ceasing to be partner of the LLP, can himself file the intimation of his cessation to the Registrar of Companies

Chapter V - Extent & Limitations of Liability of LLP & Partners (Section 26 to Section 31):

•The mutual rights and duties of the partners of a LLP, shall be governed by the LLP agreement.•In the absence of agreement as to any matter, the mutual rights and duties of the partners shall be determined by the provisions relating to that matter as are set out in the First Schedule.

•LLP Agreement can also be amended.

•A partner can also cease to be partner of the firm

•Cessations , not by itself discharge the partner from any obligation to the LLP or to the other partners or to any other person which he incurred while being a partner the obligation for acts.

•Partner to notify change in address or name to the LLP , which in turn will notify the same to the Registrar

•Consent is necessary to become a partner in LLP

•Any person ceasing to be partner of the LLP, can himself file the intimation of his cessation to the Registrar of Companies

Chapter VI – Contributions (Section 32 to Section 33):

•A contribution of a partner may consist of tangible, movable or immovable or intangible property or other benefit to the limited liability partnership.•The obligation of a partner to contribute shall be as per the limited liability partnership agreement

•Chapter VII – Financial Disclosures (Section 34 – Section 41)•The LLP shall maintain such proper books of account as may be prescribed.•Prepare & file within 6 months of end of the FY a Statement of Account and Solvency with Registrar of Companies

•Statement of Account and Solvency will be signed by the Designated Partners•Prepare & file within 60 days of end of the financial year an Annual Return with the Registrar of Companies.•The documents filed with ROC shall be available for public inspection.•Central Government can compound offence punishable with fine only.

Chapter VIII - Assignment and Transfer of Partnership Rights (Section 42):•The rights of a partner to a share of the profits and losses of the limited liability partnership are transferable either wholly or in part.•Transfer does not entitle the partner to participate in the management or the conduct of the activities of the LLP.

•Chapter IX – Investigation (Section 43 – Section 54):

•The CG shall appoint one or more competent persons as inspectors to investigate the affairs of a LLP and to report thereon in such manner as it may direct if—

(a) the Tribunal (b) on an application received from >1/5th of the total number of partners LLP, by order, declares that the affairs of the LLP ought to be investigated; or (c) any Court, by order, declares that the affairs of a LLP ought to be investigated.

•The CG may appoint one or more competent persons as inspectors to investigate the affairs of a LLP.

Chapter X - Conversion to LLP (Section 55 to Section 58)

Chapter XI - Foreign Limited Liability Partnerships (Section 59)

•The CG may make rules for provisions therein by applying or incorporating, with such modifications, as appear appropriate

Chapter XII - Compromise or Arrangement of Limited Liability Partnerships

•LLP can enter into compromise or arrangement with its creditors or the partners

•Consent of 3/4th in value of the partners or creditors will be required•An application is required to be filed with the High Court for any compromise or arrangement.

Chapter XIII - Winding Up and Dissolution (Section 63 – Section 65)

•A LLP can be wound up either voluntarily or by the order of tribunal•The Act prescribes the circumstances under which the LLP can be wound up compulsorily by the High Court.

•Renowned form of business•Easy to Form•Body Corporate ( Separate Legal Entity)•Limited Liability•Perpetual Succession•Flexible to Manage•Easy Transferable Ownership•Capacity to sue•Lesser Compliances

Merits of LLP

•Any act of the partner without the other partner, may bind the LLP

•Under some cases, liability may extend to personal assets of partners.

•Cannot raise money from Public.

Demerits of LLP

Category Partnership Company LLP

LLP v/s Other Forms

Separate Legal Entity and Perpetual Succession

r a a

Cost of Formation

Negligible Minimum Statutory Fees

Pvt. Co. – 6,000Public Co. – 9,000

800 Only

Common Seal r a Depends

Evidence of Ownership

Partnership Deed

Share Certificate LLP Agreement

Category Partnership Company LLP

Dissolution Agreement, Mutual

Consent, or by Court Order

Voluntary or by order of National

Company Law Tribunal.

Voluntary or by order of National

Company Law Tribunal.

Annual Filing Not Required With ROC With Registrar of LLP

Applicability of Accounting Standards

Not Applicable Compulsory The necessary rules in this regard not yet issued.

Creation Created by Contract

Created by Law Created by Law

Principal / Agent Relationship

Partners are agents of the

firm and other partners.

The directors act as agents of the

company and not of the members

Partners act as agents of LLP and not of the other

partners.

Category Partnership Company LLP

Prevailing Law The Indian Partnership Act,

1932

The Companies Act, 1956

The LLP Act, 2008

Whistle Blowing No Such Provision

No Such Provision

Provision made to protect

employees & Partners

Annual Filing Not Required With ROC With Registrar of LLP

Contracts with Partners / Director

Partners are free to enter into any

contract.

Restrictions on Board regarding some specified

contracts, in which directors are interested.

Partners are free to enter into any

contract.

•LLP will be treated as Partnership firms for the purpose of Income Tax and will be taxed like a partnership firm.

•Section 40(b) : Interest to partners, any payment of salary, bonus, commission or remuneration allowed as deduction in the hands of Partnership firm

•LLP not covered under presumptive taxation

Taxation Aspect on LLP

Section 184: In order for Limited Liability Partnership to be assessed as firm as Income Tax Act, it has to satisfy the following criteria: •The LLP is evidenced by an instrument.

•The individual shares of the partners are very clearly specified in the deed

•A certified copy of LLP Agreement must accompany the return of income of the LLP of the previous year in which the partnership was formed (If LLP Agreement amended, submit return of income with LLP agreement)

•No Failure on the part of LLP while attending notices given by ITO

Section 184

•Section 185 applies to the LLP

•Section 185: When section 184 is not complied with, the consequence is that no deduction towards interest and remuneration is allowed. This is the mandate of the section 185.

What happens if section 184 is not complied by firms?

•Capital Gain on conversion of Partnership into LLP

•No tax implication •If the rights and obligation of the partners remain the same after conversion •If there is no transfer of any asset or liability after conversion

•If there is a violation of these conditions , the provision of capital gain will apply.

Taxation aspect on Conversion to LLP

•Any transaction concerning transfer of a capital asset or intangible asset by a Private Company or unlisted Public Company to a Limited Liability Partnership

•As a result of conversion of the company into a LLP in accordance with the provisions of section 56 or section 57 of the LLP Act, 2008

•Would be exempted from the provision of Capital Gain Tax, , only if the following conditions are satisfied :

Capital Gain on conversion of Company into LLP

•All the assets and liabilities of the Company immediately before the conversion shall become the assets and liabilities of the LLP

•All the shareholders of the Company immediately before the conversion shall become the partners of the LLP and their capital contribution & PSR in LLP should remain in the same proportion as their shareholding in the company on the date of conversion

•The shareholders of the company do not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of share in profit and capital contribution in the limited liability partnership

•The aggregate of the PSR of the shareholders of the company in the LLP shall >50% at any time during the period of 5 years from the date of conversion

•The turnover in business of the company in any of the 3PPY in which the conversion takes place does not exceed 60 Lakhs

•No amount is paid, either directly or indirectly, to any partner out of balance of accumulated profit standing in the accounts of the company on the date of conversion for a period of 3 years from the date of conversion.

•If conditions not satisfied, profits taxed as deemed profits

•Conversion of a Private Company or unlisted Public Company to Limited Liability Partnership;•Compliance of conditions laid down under 47(xiiib) – Benefit of Carry forward and Setoff and amortization allowed

•Non-compliance of conditions laid down under 47(xiiib) – No benefit of Carry forward and Set off and amorization

Carry forward and set off of accumulated loss and unabsorbed depreciation allowance, on

conversion into LLP and Amortization of expenditure incurred under

Voluntary Retirement Scheme

•Any benefit of the MAT credit in hands of Private Company or unlisted Public Companies will not be continued in the hands of successor LLP

Benefit of tax credit in respect of Minimum Alternate Tax (MAT) paid by the Company

FDI in LLP•Allowed – •LLPs with FDI will be allowed, through the Government approval route, in those sectors/activities where 100% FDI is allowed, through the automatic route and there are no FDI-linked performance related conditions.

By FDI-linked performance related conditions, it is meant that in sectors, where conditions like minimum capitalization etc are prescribed like development of Townships, NBFC, even though 100% FDI is allowed under automatic route, LLP’s will not be allowed to bring FDI with the approval of Government of India.

•Not Allowed – •To operate in agricultural/plantation activity, print media or real estate business•LLP having FDI, cannot make further investment in LLP or companies engaged in any business

•Funding of LLP:•Allowed: •Downstream investment by company•Investment by Cash Considerations

•Not Allowed: FII’s, Foreign Venture Capitalists and ECB’s

•Ownership and management of LLPs

•Determination of Designated Partner: •At least one designated partner shall be person resident in India

•Body Corporate as Designated Partner:•Registered under The companies act, 1956

Tax on LLP (Summary)

•LLP’s will be treated as Partnership Firms for the purpose of Income Tax w.e.f assessment year 2010-11•No surcharge will be levied on income tax.•Profit will be taxed in the hands of the LLP and not in the hands of the partners.•Minimum Alternate Tax a nd Dividend Distribution Tax will not be applicable for LLP.•Remuneration to partners will be taxed as “Income from Business & Profession”.•No capital gain on conversion of partnership firms into LLP.

•Designated Partners will be liable to sign and file the Income Tax return.

•LLP shall not be eligible for presumptive taxation.

•Capital Gain on conversion of Company into LLP will be exempt from tax, if prescribed conditions are complied with.

•On conversion, the successor LLP , will be allowed to carry forward and set off of accumulated loss and unabsorbed depreciation allowance

• On conversion, the successor LLP will be allowed to amortize the expenditure incurred under voluntary retirement scheme On conversion, the successor LLP will not be allowed to take the credit of MAT paid by the predecessor company.

Accounts of LLP

•LLP has to maintain books of accounts as prescribed in Rule 24 of LLP Rules•These books to be retained for 8 years•Either on Cash or on Accrual Basis•The accounting year of each LLP must end on 31st March ( LLP cannot choose accounting year ending on any other date)•It has to prepare statement of accounts and solvency statement on or before 30th September each year (To be signed by designated partners)

Audit of LLP

•To be audited by a CA in accordance with rule 24 of LLP Rules•Audit is compulsory if:•Contribution exceeds 25Lakhs or;•Turnover exceeds 40Lakhs(No specific form of audit report is required to be given)

•Appointment of Auditor: •Appoint auditors within 30 Days before the end of each FY•If 1st FY, appointment to be done before the end of first FY

Annual Return Compliance

•LLP has to file an annual return with ROC

•On or before 30th May each year

•In form no. 11 with the prescribed fees

LLP V/s LLCBasis of Difference LLP LLC

Formation Easier to from than LLCs

Most states require filing of articles of

organization and other docs

Paperwork Partnership agreement to be drafted

Operating agreement along with company bylaws to be drafted

Size Minimum of 2 partners required

LLCs may be single member operated.

Basis of Difference LLP LLC

Reduced Liability Personal creditors can seize the business

assets; likewise, business creditors can seize

personal assets

Biz creditors cannot go after personal assets

to recover debts

Profession(Business) LLPs are more likely to consist of

Professionals(CAs, Lawyers etc…)

LLCs are more likely to consist of Small/mid

sized owners.

Thank YOU

Mohit &Shailesh