Limited Liability Partnership Act, 2008 : A long way forward
Pranjita Barman & Nishant Prakash
“With the growth of the Indian economy, the role played by its entrepreneurs as well as its technical and professional manpower has been acknowledged internationally. It is felt opportune that entrepreneurship, knowledge and risk capital combine to provide a further impetus to India’s economic growth. In this background, the need has been felt for a new corporate form that would provide an alternative to the traditional partnership, with unlimited personal liability on one hand, and statute based governance structure of the limited liability company on the other, in order to enable professional expertise and entrepreneurial initiative to combine, organize and operate in flexible, innovative and efficient manner.”
The existence of Limited Liability Partnership (LLP) which has its genesis in general partnership is now a reality in India with the enactment of the Limited Liability Partnership Act, 2008, (LLP Act) from March 31, 2009.
It was felt that the Companies Act, 1956 (Companies Act) is not suited to the liability and governance structure intended for LLPs. The overall intent of the legislation to regulate widely-held companies is different. Therefore, in accordance with the recommendations of the Irani Committee, it was felt appropriate to bring a new legislation for LLPs. The administration and enforcement of partnership firms under the Indian Partnership Act, 1932 (Partnership Act) is at the State level. Besides, a partnership firm involves full joint and several liabilities of the partners. Because of this, many enterprises engaged in biotech, information technology, etc find traditional partnerships unsuitable. Also, the traditional partnership firms are very unsuitable for multi-disciplinary combinations like the combination of lawyers and accountants, which is the hot combination today. Thus, the LLP Act is intended to remove the gulf which exists between a company governed by the Companies Act and a general partnership firm governed by the Partnership Act.
NATURE AND STRUCTURE OF LLP
LLP is an alternative corporate business form that gives the benefit of limited liability of a company and the flexibility of a partnership. The LLP is a separate legal entity, is liable to the full extent of its assets but liability of the partners is limited to their agreed contribution in the LLP. It has perpetual succession and a common seal and can sue and be sued in its own name.
It can continue in existence, irrespective of the changes in the constitution of partners. It is capable of entering into contracts and holding property in its own name. Further, no partner is liable on account of the independent or un-authorized actions of other partners, thus individual partners are shielded from joint liability created by another partner’s wrongful business decisions or misconduct. It is organized and operates on the basis of an agreement, without imposing detailed legal and procedural requirement of a joint stock company. The mutual rights and duties of the partners within a LLP are governed by this agreement. Thus, since LLP contains elements of both ‘a corporate structure’ as well as ‘a partnership firm structure’ LLP is called a hybrid between a company and a partnership.
SIGNIFICANCE OF LLP FORM OF ORGANISATION
LLP provides a new corporate form in the country. Thus now the Indian entities also have an alternate choice in corporate organization to compete internationally on level playing field. Internationally, LLPs are the preferred vehicle of business particularly for service industry or for activities involving professionals. It is widely accepted as being an advantageous business model because it is organized and operates on the basis of an agreement. Also, it provides the flexibility without imposing detailed legal and procedural requirements, enabling professional expertise and initiative to combine with financial risk taking capacity in an innovative and efficient manner.
Under the LLP structure, the liability of a partner is limited to his stake and no partner is liable on account of independent or unauthorised acts of other partners. Individual partners are shielded from the joint liability created by another partner's wrongful acts or misconduct. On the other hand, in the traditional law on a partnership firm, every partner is liable, jointly with all other partners and also severally, for all acts of the firm done while he is a partner, irrespective of his stake.
Under the LLP model, chartered accountants, company secretaries or even advocates can set up multi-disciplinary firms that will act as "one-stop" shop for people to avail of various professional services. Existing laws impose the restriction that these professional services cannot be carried out through companies but only through partnership firms. This is specially going to help the lawyers and accountants because it will help them to organise their business better and enlarge the number of partners. The original number of partners allowed under the Companies Act is 20 and now it can be increased, so this means expansion of one’s operations in one’s respective profession. Further, Overseas professionals, like chartered accountants (CAs) and company secretaries (CSs) are expected to come to India and set up business here, as the proposed law allows such foreign nationals to become partners in any LLP incorporated under the proposed provisions.
The framework of LLP is not restricted to professional services alone and several business activities can be undertaken through the structure.Services sector is playing a major role in the national economy and there is a growing diversity in the range of services being offered. The services sector would also find this form very useful. The advantage of the LLP form would be that it will not impose detailed legal and procedural requirements intended for large widely held companies on such enterprises. In this way it will also be useful for small enterprises
Thus, the applicability of the LLP Bill is huge, especially in the near future and thus can be used for many enterprises, such as:
· Persons providing services of any kind.
· Small sector enterprises (including Micro, small and medium enterprises)
· Venture capital funds where risk capital combines with knowledge and expertise.
· Enterprises in new knowledge and technology based fields where the corporate form is not suited.
· Professionals and enterprises engaged in any scientific, technical or artistic discipline, for any activity relating to research production, design and production of services.
· For professionals such as CA, Cost and Works Accountants, CS, Advocates, etc.
Apart from the above mentioned merits in the Act, there are some further observations with regard to LLPs. These are briefly given below:
· With LLP professionals would be able to form multidisciplinary partnerships.
· Business can be expanded depending upon the increase in area of operations.
· A partner is not responsible for any wrongful act or omission of any other partner.
· Flexibility of operations as broad/general and extraordinary general meetings are not required to be conducted.
· The Liability of an LLP is met out of the property of the LLP, the partner is not personally liable
Thus, this form would enable entrepreneurs, professionals and enterprises providing services of any kind or engaged in scientific and technical disciplines, to form commercially efficient vehicles suited to their requirements.
II. HISTORY AND ORIGIN
Limited partnerships can be traced to early French law. Its development can be distinguished into different stages: starting with the development of the concept of general partnership, moving on to the idea of limited partnership which finally led to the concept of limited liability partnership.
The origin of the concept of limited liability partnerships can be traced to the growth of limited liability business forms in United States. Louisiana was the first state to adopt the limited partnership concept. The concept was soon embraced by other states. The first limited partnership act in the United States was adopted by New York in 1822 and was copied largely from the then-extant French statute. Within the following sixty years, all the states adopted limited partnership acts based generally upon the New York model. Most of the early limited partnership acts provided that a limited partner could neither "transact any business on account of the partnership, nor be employed for that purpose as agent, attorney, or otherwise." If a limited partner acted contrary to these prohibitions, the limited partner was deemed a general partner. Thus, under the early acts, the test of a limited partner's personal liability for the obligations of the partnership was whether the limited partner "interfered" with the general partner's management of the partnership business. The drafters of these statutes, however, made no attempt to define the type of conduct that would constitute "interference" by a limited partner. When partnershipcreditors claimed that limited partners had "interfered" in violation of the acts, the courts were required to decide each case on its own facts.
The courts, however, strictly interpreted and enforced the enabling legislation. The slightest deviation from the terms of the enabling statute exposed limited partners to unlimited liability. This state of affairs quite naturally diminished the attractiveness of the limited partnership. Thus ‘The Uniform Limited Partnership Act (ULPA)’ was introduced in 1916 to remedy the courts' harsh treatment of limited partners. The Commissioners approved the ULPA and recommended its adoption by the legislatures of the several states. The ULPA made great strides in protecting the limited partner from unlimited personalliability by expressly allowing limited partners to take part in certain partnership transactions without violating the provision restraining their management of the partnership.
The principal drafter of the ULPA, Professor William Draper Lewis, stated that the Commissioners' purpose in approving the ULPA was to respond to the perceived "failure of the early limited partnership acts to meet the business need for which they were designed." In 1976 the Commissioners approved the Revised Uniform Limited Partnership Act, (RULPA) and recommended its adoption by the legislatures of the several states. Since the inception of the RULPA, periodic amendments have been made to it, to make the law regarding LLPs consonant with the changing needs of society. The 1985 amendments to the RULPA significantly streamlined and facilitated the use of the limited partnership form by large businesses. In addition, the amended Sec. 401 of the RULPA enabled partners to agree that new general partners may be admitted to limited partnerships without the contemporaneous unanimous consent of all the partners. Other related laws, like the Revised Uniform Partnership Act (RUPA) (as contrasted with the RULPA) which dealt with general partnerships, was also amended during this period. General partnership moved closer to other business associations with the promulgation of RUPA in 1994 by the National Conference of Commissioners on Uniform State Laws (NCCUSL), and the spread of LLP provisions. LLP provisions, which had been adopted in every state and were added to RUPA in 1997, accelerated changes by permitting general partnerships to select governing state law through corporate-type filings. Thus the concept of limited liability partnerships has evolved through a period spanning more than a century in the United States. Different states of the US, depending on the regional needs of the populace, has modified the model law set out by the RULPA, and have legislated their own legislations dealing with LLPs. 
In the UK major accountancy firms, wanting to limit the liability of an individual partner to acts specifically related to that partner launched a campaign for the creation of the LLP vehicle in the UK in the 1980s. As a result, the UK Companies Act, 1989 was amended to allow accountancy firms to work as limited liability companies. The joint and several liabilities of general partners, however, remained. In the 1990s, the accountancy firms in the UK again campaigned to end this, and to secure proportional liability in the LLP. This led to the passing of the Limited Liability Partnership Act, in the year 2000.
Common law countries have inducted this business form at a much later stage
III. GLOBAL PERSPECTIVE
The LLP structure is available in countries like United Kingdom, United States of America, Singapore, Australia, and various gulf countries. However, the LLP Act broadly based on the UK LLP Act, 2000 and the Singapore LLP Act of 2005.
The Limited Liability Partnerships Act 2000 is an Act of the Parliament of the United Kingdom which introduced the concept of the limited liability partnership into English and Scots law. It created an LLP as a body with legal personality separate from its members (unlike a normal partnership) which is governed under a hybrid system of law partially from company law and partially from partnership law. Unlike normal partnerships the liability of members of LLP on winding up is limited to the amount of capital they contributed to the LLP.
Sec 2 of the act provides that an LLP may be incorporated when two or more persons associated for the purpose of carrying on legal business subscribe their names to an incorporation document; that incorporation document, or an approved copy of it, has been delivered to the Companies Registrar at Companies House and a statement either by a solicitor or one of the subscribers that the formalities have been complied with has also been delivered to the registrar. The incorporation document must take either the prescribed form or a form as close to the prescribed form as possible. It must contain the address of the registered office of the LLP, state the name of the LLP, state the name of the members of the LLP on incorporation, state which of those members are to be "designated members" or that all members will be "designated members" and also say whether the LLP's registered office is to be situated in England and Wales, Wales or Scotland.
Sec 3 provides that once the formalities have been complied with the registrar retains the incorporation document or a copy of it and issues a certificate of incorporation. That certificate is regarded as conclusive evidence that the incorporation formalities have been complied with.
Membership of the LLP is initially those who subscribed to the incorporation document. A person may become a new member of an LLP with the agreement of existing members and cease to be a member with their agreement as well. As with a normal partnership a partner of an LLP is not regarded as being employed by the LLP—they are self employed. The relationship between members is governed by agreement between the members. If such an agreement does not exist the act provides that regulations may be made specifying the default form of such an agreement. As with normal partnerships the members of an LLP are agents of the LLP, and the LLP is liable for the actions of a member when that member acts in a wrongful way or makes an omission. However unlike a normal partnership the members of an LLP are not jointly and severally liable for the actions of another member. This is due to the fact that the LLP itself has legal personality separate from its members. If the membership of an LLP changes then the registrar must be informed within 14 days and if a member changes address the registrar must be informed within 28 days.
Members of an LLP are subject to income tax on their income as trading income in the same way as a normal partnership. They also pay class 4 National Insurance contributions in the same way as anyone else who is self employed. Capital gains tax applies to members of LLPs as to those in a normal partnership. Within one year of incorporation of an LLP there is an exception to stamp duty on land transferred to the LLP if the person transferring the property is a member of the LLP and that the proportions of the property are the same as those before the transaction.
LLP's are wound up and subject to insolvency in much the same way as companies. Sec 14 of the act makes provision for regulations to be made applying certain provisions of the Insolvency Act 1986 to LLP's. Similarly sec 15 makes provision for the making of regulations to apply company law or display company law and to apply partnership law as seem appropriate.
LLP was introduced on 11 April 2005. All LLPs must be registered with the Accounting & Corporate Regulatory Authority (ACRA) of Singapore.
In Singapore an LLP is a form of business entity that permits one partner to be shielded from individual joint liability for partnership obligations created by another partner's or person's misconduct. A partner's liability is not limited, except, when the misconduct took place under the supervision or control of the partner. Only liability arising from the misconduct of other partners or persons is covered by this law; the partnership is not relieved from liability for other partnership obligations and individual partners are liable for their own misconduct. An LLP in Singapore may be registered where persons who wish to start a business with a view of profit and have agreed (with or without other terms):
- that the business shall be carried-on in the form of a limited liability partnership, following the registration date.
- that they shall each contribute effort and skill to the business as a member of the limited liability partnership.
- that the profit of the business shall be divided between them as per agreed upon terms.
The salient features of the Act are:
· The partners can be individuals or companies.
- There must be a minimum of 2 partners. There is no maximum number of partners in a LLP.
- An LLP in Singapore is a legal entity (i.e. it can sue or be sued in its own name and can own or hold any property).
- Profits form part of each partner’s personal income and are taxed at personal income tax rates.
- Registration number of the LLP must be printed on all letterheads, invoices, bills or other documents used for the purposes of the business.
- It is compulsory for all LLPs to appoint a local manager who is a Singapore Citizen, Permanent Resident, or Employment Pass holder. There can be more than one local manager.
- The personal assets of the partners are protected. In addition, owners are not personally accountable for the wrongful acts of other owners. However, partners can be personally accountable for debts and losses resulting from their own careless actions.
- The manager must make an Annual Declaration to ACRA stating whether the business is able or unable to pay its debts as it becomes due in the normal course of business. The first Annual Declaration must be made within 15 months of the date of registration.
Any change in the LLP brought about by the retirement or death of a partner shall not affect the existence, rights or liabilities of that legal entity.
In the United States, each individual state has its own law governing their formation. LLPs emerged in the early 1990s: while only two states allowed LLPs in 1992, over forty had adopted LLP statutes by the time LLPs were added to the Uniform Partnership Act in 1996.
The limited liability partnership was formed in the aftermath of the collapse of real estate and energy prices in Texas in the 1980s. This collapse led to a large wave of bank and savings and loan failures. Because the amount recoverable from the banks was small, efforts were made to recover assets from the lawyers and accountants that had advised the banks in the early-1980s. The reason was that partners in law and accounting firms were subject to the possibility of huge claims which would bankrupt them personally, and the first LLP laws were passed to shield innocent members of these partnerships from liability.
Although found in many business fields, the LLP is an especially popular form of organization among professionals, particularly lawyers, accountants, and architects. In some U.S. states, namely California, New York, Oregon, and Nevada, LLPs can only be formed for such professional uses. Formation of an LLP typically requires filing certificates with the county and state offices. Although specific rules vary from state to state, all states have passed variations of the RUPA.
The liability of the partners varies from state to state. Sec 306(c) of the RUPA grants LLPs a form of limited liability similar to that of a corporation:
An obligation of a partnership incurred while the partnership is a limited liability partnership, whether arising in contract, tort, or otherwise, is solely the obligation of the partnership. A partner is not personally liable, directly or indirectly, by way of contribution or otherwise, for such an obligation solely by reason of being or so acting as a partner.
However, a sizable minority of states only extend such protection against negligence claims, meaning that partners in an LLP can be personally liable for contract and intentional tort claims brought against the LLP. While Tennessee and West Virginia have otherwise adopted RUPA, their respective adoptions of Sec 306 depart from the uniform language, and only a partial liability shield is provided.
As in a partnership or limited liability company (LLC), the profits of an LLP are allocated among the partners for tax purposes, avoiding the problem of "double taxation" often found in corporations.
Some US states have combined the LP and LLP forms to create limited liability limited partnerships.
OTHER JURISDICTIONS AT A GLANCE –
The provinces of Quebec, Ontario, Manitoba and Alberta and the territory of Nunavut have permitted LLPs for lawyers. In BC, the Partnership Amendment Act, 2004 permitted LLPs for lawyers and other professionals as well businesses.
In China, the LLP is known as a special general partnership. The organizational form is restricted to knowledge-based professions and technical service industries. The structure shields co-partners from liabilities due to the wilful misconduct or gross negligence of one partner or a group of partners.
The German Partnerschaftsgesellschaft or Part G is an association of non-commercial professionals, working together. Though no corporate entity, it can sue and be sued, own property and act under the partnership's name. The partners, however, are jointly and severally liable for all the partnership's debts, except when only some partners' misconduct caused damages to another party - and then only if professional liability insurance is mandatory. The Partnerschaftsgesellschaft is not subject to corporate or business tax, only its partners' respective income is taxed.
Limited liability partnerships were introduced to Japan in 2006 during a large-scale revamp of the country's laws governing business organizations. Japanese LLPs may be formed for any purpose (although the purpose must be clearly stated in the partnership agreement and cannot be general), have full limited liability and are treated as pass-through entities for tax purposes. However, each partner in an LLP must take an active role in the business, so the model is more suitable for joint ventures and small businesses than for companies in which investors plan to take passive roles. Japanese LLPs may not be used by lawyers or accountants, as these professions are required to do business through an unlimited liability entity.
A Japanese LLP is not a corporation, but rather exists as a contractual relationship between the partners, similarly to an American LLP. Japan also has a type of corporation with a partnership-styled internal structure, called a godo kaisha, which is closer in form to a British LLP or American limited liability company.
IV. LEGISLATIVE HISTORY IN INDIA
The need for LLP legislation has been recognized for a very long time. Various committees and expert groups have, from time to time, recommended introduction of LLP legislation in India. In the last decade itself, Abid Hussain Committee (1997) had recommended this legislation in the context of SSIs. The Naresh Chandra Committee on Regulation of Private Companies and Partnerships (2003) and Dr. Irani Committee on New Company Law (2005) had also made recommendations for a separate LLP Legislation.
LAW COMMISSION REPORT ON PARTNERSHIP ACT, 1932
In the year 1957, Law Commission decided to take up revision of the Partnership Act 1932 and thereby entrusted the task to a sub-committee consisting of Shri G S Pathak and Shri G N Joshi. The Committee thereafter prepared a draft report which was circulated to all members of the public and views were invited thereon. In this regard it was suggested that partnerships with limited liability should be recognized in India either by a special enactment or as part of the Partnership Act. A concrete suggestion made by the Iron, Steel and Hardware Merchant Chambers of India in this respect may be noted:
“Considering the recent amendment in the Indian Companies Act, we feel that a provision should be made in the Indian Partnership Act 1932 by which limited liability partnerships can be entered into on the lines of the Limited Partnership Act. The Indian Companies Act has become o cumbersome that for a small business it is impossible to comply with all the provisions unless a full time Secretary is engaged. Before the amendment was introduced in the Indian Companies Act, two or three partners used to find it convenient to register a Private Limited Company and carry on the work. Now there are so many restrictions on taking loan by the directors or the shareholder even in private limited companies that people will prefer to enter into a partnership instead of forming a limited liability company. That risk can only be minimized by introducing limited liability partnership.”
The Commission carefully considering this suggestion Commission came to the conclusion that having regard to the conditions prevailing in India, the inherent shortcomings of limited liability partnerships, And the fact that even in England, notwithstanding legislation permitting such partnerships, not many such partnerships have been actually formed, it is neither necessary nor expedient to make provision for limited liability partnerships in India. The suggestion if accepted, is also likely to result in rendering ineffective the provisions of the Companies Act which has been recently made stricter.
RECOMMENDATIONS OF THE BHAT COMMITTEE (1972)
The Bhat Committee (1972) had recommended limited liability for Small Scale Industrial entrepreneurs so that more persons could be persuaded to invest in new small enterprises. This would also ensure a greater flow of risk capital, bring in the concept of partnership with limited liability.
RECOMMENDATIONS OF ABID HUSSAIN COMMITTEE (1997)
The 1991 policy for small scale industries had proposed an enactment of a Limited Partnership Act so that it would be easier for SSE entrepreneurs to source additional funding from other partners who could invest in partnership as sleeping partners. Based on this recommendation, the Expert Group recommended that the Limited Partnership Act should be enacted as soon as possible.
It recommended that the proposed Limited Partnership Act should also incorporate the law governing limited management partnerships. These rules should lay down the rights and obligations of the managers and the investors. Since expertise would have to be sought from management companies overseas, the rules for the repatriation of their profits should also be spelt out.
RECOMMENDATIONS OF DR. S.P. GUPTA COMMITTEE
The Committee felt that with Indian professionals increasingly transacting with or representing multi-nationals in international transactions, the extent of the liability they could potentially be exposed to is extremely high. Hence, in order to encourage Indian professionals to participate in the international business community without apprehension of being subject to excessive liability, the need for having a legal structure like the LLP is self-evident. Provisions which restrict the number of partners to twenty prevent the growth of professional firms to the large entities operating on an international scale. Such inhibiting conditions have to be removed. Otherwise, Indian professionals may well get excluded from taking their rightful place in the international community, that their skills otherwise entitle them to.
RECOMMENDATIONS OF THE NARESH CHANDRA COMMITTEE
The Naresh Chandra Committee-II that developed the concept of LLP in India observed that “in an increasingly litigious market environment, the prospect of being a member of a partnership firm with unlimited personal liability is, to say the least, risky and unattractive. Indeed, this is the chief reason why partnership firms of professionals, such as accountants, have not grown in size to successfully meet the challenge posed today by international competition. This makes an LLP a most suitable vehicle for partnerships among professionals such as lawyers and accountants.”
· Two or more professionals, who wish to associate for the purpose of providing an identified professional service, may subscribe their names in an “incorporation” document in the prescribed form.
· The relations inter se the partners and between the partners and the LLP may be governed by individual agreements between the parties concerned. Such agreement must be filed with the RoC; changes made in the agreement will also have to be filed with the RoC.
· The LLP agreement should contain information as may be prescribed by the Department of Company Affairs.
· No limit be placed on the number of partners in an LLP. Any person may become a partner by entering into an agreement with the existing partners in the LLP. Further, when a person ceases to be a partner of an LLP he/ she should continue to be treated as a partner unless: (a) the partnership has notice that the former partner has ceased to be a partner of the LLP; or (b) a notice that the former partner has ceased to be a partner of the LLP has been delivered to the RoC. A partner having resigned from an LLP would continue to be liable for acts done by him during his tenure as member of the LLP.
· LLPs should be regulated and administered by the Central Government to ensure uniform standards, and since many of the State Governments might not have adequate infrastructure and expertise for ensuring effective regulation.
· Every partner of the LLP would be an agent of the LLP. However, an LLP would not be bound by anything done by a partner in dealing with a person if (a) the member in fact had no authority to act for the LLP by doing that act; and (b) the person knows that he has no authority or does not know or believe him to be a partner of the LLP.
· Where a partner of the LLP is liable to any person or entity as a result of his wrongful act or omission in the course of the business of the LLP, the LLP would be liable in such circumstances. However, the partner would be liable only to the extent of his/her contribution to the LLP.
· In the event of an act carried out by a LLP, or any of its partners, fraudulently, the liability would not be limited; it would, in fact, become unlimited as provided for in sec 542 of the Companies Act, 1956.
· A partner shall not be liable for the personal acts or misconduct of any other partner.
· The provisions relating to insolvency, winding up and dissolution of companies as contained in the Companies Act, 1956 may be examined and suitably modified to conform to the philosophy of LLPs. The partners may have to contribute to the assets of the LLP in the manner provided for in this regard.
· There should be insurance cover and/or or funds in specially designated, segregated accounts for the satisfaction of judgments and decrees against the LLP in respect of issues for which liability may be limited under law. The extent of insurance should be known to, and filed with the RoC, and be available for inspection to interested parties upon request.
· The standards of financial disclosures would be the same as, or similar to, that being prescribed for private companies subject to privilege already available between a professional and his or her client in maintaining confidentiality.
· The LLPs should be governed by a taxation regime that taxes the partners as individuals, rather than taxing the LLP itself, i.e., the LLPs should be treated in the same manner as the firm under the tax laws.
RECOMMENDATIONS OF THE J.J. IRANI COMMITTEE
The Dr. J.J. Irani Committee, while recommending the formation of LLPs, pleaded very strongly for the enactment of a separate legislation in this regard. The Naresh Chandra Committee recommended its application to the service industry while the Irani Committee extended its application to the small enterprises also. The Committee opined that “the service sector is gaining importance by the day, especially professional services such as lawyers, chartered accountants, cost accountants, taxation experts, doctors, etc. In such a situation, to make these professionals globally competitive, the LLP form of business has become a need of the day. This is specially going to help the lawyers and accountants because it will help them to organise their business better and enlarge the number of partners. The original number of partners allowed under the Companies Act is and now it can be increased, so this means expansion of one’s operations in one’s respective profession. Also, no partner would be liable on account of the independent or unauthorized actions of other partners, allowing individual partners to be shielded from joint liability created by another partner’s wrongful business decisions or misconduct.”
The Dr. J .J. Irani Committee on Company law was appointed by the Department of Company Affairs and this Committee too examined the issue of LLP(along with Small Companies) and made the following recommendation: “In view of the potential for growth of the service sector, requirement of providing flexibility to small enterprises to participate in joint ventures and agreements that enable them to access technology and bring together business synergies and to face the increasing global competition through WTO, etc, the formation of LLPs should be encouraged. It would be a suitable vehicle for partnership among professionals, who are already regulated such as Company Secretaries, Chartered Accountants, Cost Accountants, Lawyers, Architects, Engineers, Doctors, etc. However it may also be considered for small enterprises not seeking access to capital markets through listing on the stock exchange”. It seems that the LLP Bill gives precedence to the viewpoint of the Irani Committee’s observations of extending its applicability beyond the professional services. According to the Naresh Chandra Committee, the scope of LLP should, in the first instance be made available to firms providing professional services, as opposed to trading firms and or manufacturing firms, for several reasons. Firstly, because Indian professional firms are precluded from practicing under any other legal form in view of the restrictions imposed by their respective regulatory laws; trading firms or manufacturing firms, however, have the option to carry on business as a private limited or public company under the Companies Act, 1956. Secondly, as the professionals are also governed and regulated by their respective professional, regulatory bodies, which also control and monitor professional conduct, extending the LLP structure only to professionals minimizes the risk inherent in testing new waters. Thirdly, there is no special advantage that small private companies or Small Scale Industrial(SSI) units would derive from being an LLP, especially in light of the fact that this Committee itself had also simultaneously recommended a considerable easing of regulations on private companies, especially small private companies. It was felt that extending the LLP structure to professionals, in the first instance, would help evaluate its advantages and risks; and based on such evaluation and experience, the LLP form can be considered for extension to small-scale manufacturing and/or trading firms as well in the future. However it must be noted that, unlike the Naresh Chandra Committee report(which had advocated the limitation of the LLP concept initially to only the professional services), the Irani Committee had dealt with the issue of LLP in a passing manner, and thus rejecting the detailed recommendations of the Naresh Chandra Committee on this issue does not augur well for the Indian market.
CONCEPT PAPER ON LIMITED LIABILITY PARTNERSHIP LAW
As a first step in such consultative process, the Ministry placed a Concept Paper on LLP Law in the legislative model, along with explanatory notes on chapters, for viewing on the electronic media so that all interested may not only express their opinions on the concepts involved but also suggest formulations, by December 31, 2005, for the consideration of the Ministry on various aspects of LLP Law. The following were some of the features of the Concept Paper:-
· LLP is proposed as a body corporate as a separate legal entity under a new law. Indian Partnership Act will not be applicable to LLPs;
· Any individual or body corporate may be a partner in LLP;
· LLPs can be formed to carry out any trade, profession and occupation;
· Liability of partners shall be limited except in case of fraud;
· Registration of LLP shall be with the Registrar of Companies;
· Contents of LLP Agreement, as may be prescribed, to be filed with ROC;
· Conversion of firm, private company and unlisted public company into LLP allowed;
· 2 minimum partners of LLP and no limit on maximum number of partners;
· Appointment of a manager must in all LLPs. Manager to be accountable for regulatory and legal compliances;
· Annual “Declaration of Solvency” to be filed by manager with the ROC;
· Annual Accounts to be maintained and preserved by LLP for such period as may be specified in rules;
· ROC empowered to strike off defunct LLPs;
· Electronic filing of returns by LLPs would be allowed;
· Enabling provisions made for extension of Company Law to LLPs.
LIMITED LIABILITY PARTNERSHIP BILL 2006
Comments and suggestions received from different quarters were examined and Limited Liability Partnership Bill, 2006 was drafted. Various stages behind the drafting of the Limited Liability Partnership Bill, 2006:
· Two high level expert committees
(i) Naresh Chandra Committee II and
(ii) Dr. J.J. Irani Committee
on New Company Law were set up by the Ministry of Corporate Affairs who recommended a separate LLP Legislation for the country;
· A concept paper on LLP law was prepared by a technical group comprising representatives of ICAI/ICSI/ICWAI working with the Ministry officials, and placed on the website in November 2005 seeking public comments;
· The concept paper was also circulated to a large number of other departments and ministries and received good response and comments which were then internally examined by the ministry;
· Corresponding legislations of other countries like the United Kingdom, United States of America and Singapore were consulted during examination;
· Taking the feedback received into consideration, a draft LLP Bill was prepared based on the concept paper. A draft Cabinet Note was circulated to the concerned Ministries/Departments.
PARLIAMENTARY STANDING COMMITTEE REPORT, 2007
The Bill after being approved by the Cabinet on December 7, 2006, was introduced in the Rajya Sabha on December 15, 2006. It was later referred to the Department Related Parliamentary Standing Committee on Finance for examination and report. The Committee submitted its report to both Houses of Parliament on November 27, 2007, recommending some changes along with some suggestions.
LIMITED LIABILITY PARTNERSHIP BILL, 2008
Thereafter, the Limited Liability Partnership Bill, 2008 was drafted and introduced in the Rajya Sabha. The Bill incorporated the views the recommendations made by the Standing Committee and other relevant inputs. Minister of Corporate Affairs, presented the Bill for consideration and passage by the House. All members supported it, thereby giving it the nod of the Rajya Sabha. Thereafter Bill was introduced in the Lok Sabha and same was passed by the House on 11 December, 2009.
LIMITED LIABILITY PARTNERSHIP ACT 2008
The LLP Bill received the assent of the President of India on January 7, 2009 and it became the LLP Act, 2008. The Government of India vide Notification S.O. 891(E), in the Official Gazette of India, has appointed the 31st Day of March, 2009 as the date on which the various sec of LLP Act would become applicable.
LIMITED LIABILITY PARTNERSHIP RULES 2009
In exercise of the powers conferred by sub-secs (1) and (2) of sec 79 of the LLP Act, Central Government has enacted the Limited Liability Partnership Rules 2009. Rules 1 to 31, rules 34 to 37 and rule 41 of these rules has come into force on the 1st day of April, 2009. Rules 32 and 33 and rules 38 to 40 of these rules shall come into force on such date as the Central Government may, by notification in the Official Gazette, appoint.
V. STATUTORY PROGNOSIS
The long title of the Act declares that it is an Act to make provisions for the formation and regulation of limited liability partnerships and for matters connected therewith or incidental thereto.. It extends to the whole of India and shall come into force on such date as the Central Government may by notification in the Official Gazette, appoint. Different provisions of the Act may come into force on different dates, and any reference in any provision about the commencement of the Act, would be construed as a reference to the coming into force of the sec itself. Thus the Act follows the nature of a conditional legislation. The Act has 81 secs and 4 Schedules, and thus, is rather comprehensive in nature. Discussed herein below are some of the essential features of the Act.
APPLICABILITY OF THE LLP BILL, 2006
Any two or more persons engaged in a lawful activity for profit may avail of the LLP form of organization. It may be mentioned that the Naresh Chandra Committee had suggested that the LLP form should be initially made available only to professionals such as lawyers, company secretaries, accountants and the like which are governed by statutes that control and discipline errant professional conduct. However, during various discussions held and inputs received by this Ministry, it was felt that the framework should not be restricted to professional services alone, but should be permitted for various knowledge-based entities and small scale enterprises
that could benefit from this new framework. As a result of those discussions and inputs, the proposed Bill does not restrict the benefit of LLP structure to professionals only.
FORMATION OF THE LLP
The Act has defined “limited liability partnership” to mean a partnership formed and registered under this Act. This stipulates two requirements:
· a partnership and;
· the need for its registration.
Thus the registration of the LLP has been made compulsory under the proposed Act.
Clause 3 of the Act provides that a limited liability partnership is a body corporate formed and incorporated under this Act and which has legal entity separate from that of its partners; and which has perpetual succession; and any change in the partners of a limited liability partnership shall not affect the existence, rights or liabilities of the limited liability partnership. Since the LLP would be a partnership having distinct legal identity, and thus be a body corporate, the provisions of the Indian Partnership Act, 1932 would not be applicable to LLPs.
INCORPORATION OF LLP
Sec 11 and 12 of the Act contain provisions concerning the formation and incorporation of the LLP. The LLP may be incorporated by two or more persons associated to carry on a lawful business with a view to profit, shall have subscribed their names to an incorporation document. The registering authority will be the Registrar of Companies under the Companies Act. The ROC would register the incorporation document and issue a certificate of incorporation within fourteen days on completion of all formalities specified under the Act. After incorporation, every LLP shall ensure that its name, address of its registered office, registration number and a statement that it is registered with limited liability is mentioned on all its invoices, official correspondence and publications. Sec 13 confers the status of an incorporated body. Accordingly, the LLP shall, by its own name have the power of—
- suing and being sued;
- acquiring, owning, holding and developing or disposing of property, both movable and immovable;
- having a common seal; and
- doing and suffering other such other acts and things as bodies corporate may lawfully do and suffer.
NAME OF LLP
The name of an LLP needs to be approved and should not be similar to the name of any other existing entity and must end with the words ‘Limited Liability Partnership’ or ‘LLP’. A person may apply to the ROC for reservation of name for proposed LLP or for proposed change in name of an existing LLP. If the ROC is satisfied, then subject to certain conditions, the name may be reserved for 3 months.
LIMITED LIABILITY PARTNERSHIP AGREEMENT
The most important document of a limited liability partnership is the limited liability partnership agreement. “Limited liability partnership agreement” has been defined as ‘any written agreement between the partners of the limited liability partnership or between the limited liability partnership and its partners which determines the mutual rights and duties of the partners and their rights and duties in relation to limited liability partnership’. The mutual rights and duties of partners of an LLP inter se and those of the LLP and its partners shall be governed by an agreement between partners or between the LLP and the partners subject to the provisions of the proposed legislation. The Act provides flexibility to devise the agreement as per choice. In the absence of any such agreement, the mutual rights and duties shall be governed by the provisions of the Act
PARTNERS OF THE LLP
Every LLP must have a minimum of two partners. If at any time, the number of partners of a limited liability partnership is reduced below two and the limited liability partnership carries on business for more than six months while the number is so reduced, the person who is the only partner carrying on business after the six months and having the knowledge of being so, shall be personally liable for the obligations of the limited liability partnership incurred during that period. In the LLP Act there is a concept of ‘designated partner’, which is defined as a partner designated as such. According to Sec 7(1), every LLP must have at least two designated partners, both of whom must be individuals and at least one of them must be a resident of India, that is, a person who has stayed in India for at least 180 days, during the immediately preceding one year. However as per the proviso to Sec 7(1), if all the partners of the LLP are bodies corporate, they must nominate their respective individuals who agree to act as ‘designated partners’, and one of the nominees must be a resident of India. Every designated partner has to fulfil the conditions and criteria as prescribed by the proposed Act. It must be noted that it is the limited liability partnership agreement which appoints or removes the designated partner. If there is a vacancy to the post of a designated partner for more than 30 days or if there is only one designated partner at any period of time, then every partner shall be a designated partner.
Thus the Act seeks to create a special status for a designated partner. In actuality the post of the designated partner is similar to the post of the general partner under RULPA of United States. Clause 9(2) of the Bill seeks to make every designated partner individually:
· answerable for the doing of all acts, matters and things as are required to be done by the LLP in respect of compliance of the provisions of the Act, and
· liable for all the penalties imposed on the LLP for the contravention of the provisions of the Act.
EXTENT AND LIMITATION OF LIABILITY
As noted above the LLP will be a legal entity which trades with limited liability for its members, unlike a partnership where liability is unlimited. Chapter V of the Bill, comprising Secs 26 to 30, deals with the ‘Extent and Limitation of Liability’ of members of the LLP. Sec. 26 provides that every partner of LLP is the agent of LLP, but not of the other partners. According to Sec.27 a limited liability partnership is not bound by anything done by a partner in dealing with a person, if,
· the partner in fact has no authority to act for the limited liability partnership in doing a particular act; and
· the person knows that he has no authority or does not know or believe him to be a partner of the LLP.
The LLP is liable if a partner of the LLP is liable to any person as a result of a wrongful act or omission on his part in the course of the business of the LLP with its authority. An obligation of the LLP, whether arising in contract or otherwise, is solely the obligation of the LLP. The liabilities of the LLP have to be met out of the property of the LLP. Under Sec. 28, a partner is not personally liable, directly or indirectly, for an obligation referred to in Sec. 27(3), solely by reason of being a partner of the LLP. Neither is a partner personally liable for the wrongful act or omission of any other partner of the LLP.
By Sec. 29, in the event of an act carried out by the LLP, or any of its partners, with the intent to defraud creditors of the LLP or any other person, or for any fraudulent purpose, the liability of the LLP and its partners who acted with the intent to defraud creditors or for any fraudulent purpose shall be unlimited for all or any of the debts or liabilities of the LLP. But if any such act is carried out by a partner, the LLP is liable to the same extent as the partner unless it is established by the LLP that such act was without the knowledge or authority of the LLP.
CONTRIBUTIONS BY PARTNERS
A contribution of a partner may be in the form of money, tangible or intangible property or by contracts for services performed or to be performed. The obligation of a partner to contribute money or property for a LLP shall be as per the LLP agreement. In the absence of any provision to contrary in the LLP Agreement, all partners are entitled to share equally in capital, profits and losses of LLP.
BOOKS OF ACCOUNT, OTHER RECORDS AND AUDIT
Each LLP is required to maintain books of account at its registered office for the financial year3. An LLP would be required to maintain such books of accounts as may be prescribed, either on cash basis oraccrual basis of accounting. LLP is also required to prepare a statement of account and solvency signed by designated partners which shall be filed with the ROC every year. Every LLP shall be required to file an annual return signed by designated partners with the ROC within 60 days of closure of its financial year. Every LLP shall be required to get its accounts audited as per the prescribed rules. As per Rule 24 (8) an limited liability partnership whose turnover does not exceed, in any financial year, forty lakh rupees, or whose contribution does not exceed twenty-five lakh rupees shall not be required to get its accounts audited. However, if partners of such LLP decide to get the accounts of such LLP audited, the accounts shall be audited in accordance with the rules prescribed under the LLP Rules 2009. Provided also that where the partners of such LLP do not decide for audit of the accounts of the LLP, such LLP shall include in the Statement of Account and Solvency a statement by the partners to the effect that the partners acknowledge their responsibilities for complying with the requirements of the Act and the Rules with respect to preparation of books of account and a certificate in the form
specified in Form 8.The statement of accounts and solvency and annual return filed by each LLP shall be available for inspection with the ROC.
ASSIGNMENT AND TRANSFER OF PARTNERSHIP RIGHTS
The rights of a partner to a share of the profits and losses of the LLP and to receive distributions in accordance with the LLP agreement are transferable either wholly or in part. The transfer of any rights by any partner would not by itself cause the disassociation of the partner or a dissolution and winding of an LLP. The transfer of rights would not entitle the transferee or assignee to participate in the management or conduct of the activities of the LLP or access information concerning the transactions of the LLP.
Foreign LLP can establish a place of business in India and its regulatory mechanism will be as per the rules prescribed by the Central Government. Thus as per Rule 34 of the LLP Rules 2009, a foreign limited liability partnership shall, within thirty days of establishing a place of business in India, file with the Registrar in Form 27 —
· a copy of the certificate of incorporation or registration and other instrument(s) constituting or defining the constitution of the limited liability partnership;
· the full address of the registered or principal office of the limited liability partnership in the country of its incorporation;
· the full address of the office of the limited liability partnership in India which is to be deemed as its principal place of business in India; and
· list of partners and designated partners, if any, and the names and addresses of two or more persons resident in India, authorized to accept on behalf of the limited liability partnership, service of process and any notices or other documents required to be served on the limited liability partnership.
MERGERS AND WINDING UP OF LLPS
It is proposed to provide for compromises by LLPs with their creditors or arrangements, including mergers and amalgamations, involving LLPs, through rules to be notified by the Central Government. Same has been notified vide Rule 35 of the LLP Rules. Sec. 58 of the LLP Act provides for compromise, arrangements or reconstruction of LLPs. Secs 59-61 talk about the winding up and dissolution of a limited liability partnership. Winding up of an LLP may be either voluntary or by the Tribunal. The various grounds of winding up of an LLP by a tribunal are5:
· If the LLP decides (by resolution) that the LLP would be wound up by the tribunal;
· If the number of partners of the LLP is reduced below two;
· If the LLP is unable to pay its debts;
· If the LLP has acted against the interests of the sovereignty and integrity of India, the security of state or public order;
· If the LLP has made a default in filing with the Registrar the statements of accounts and solvency or annual return for any five consecutive financial years;
· If the tribunal is of the opinion that it is just and equitable that the LLP be wound up.
INVESTIGATION INTO THE AFFAIRS OF AN LLP
Secs 42 to 53 of Chapter IX deal with provisions relating to investigation into affairs of an LLP on certain mentioned grounds. The Central Government suo moto or on recommendations of the Tribunal or any Court may appoint inspectors to carry out the investigations. These provisions also contain powers of inspectors for search or seizure, and regarding the evidentiary value of their reports and expense relating to such activities. 
LIMITED COMPANY VIS-A-VIS LLP VIS-À-VIS PARTNERSHIP FIRM
After studying the three Acts, i.e. Companies Act 1956, Limited Liability Partnership Act 2008 and Partnership Act 1932, the researcher has finally come up with the following analysis:-
Companies Act, 1956
LLP Act, 2008
Limited to amounts
unpaid on shares
Limited to amount of
capital agreed to be
according to LLP
unlimited; jointly as
well as severally.
and Articles of
are the basic
which a company
would regulate its
affairs. Filing of
MOA and AOA and
any change there in
must with ROC.
recommended but not
essential. In case of
no agreement, default
provisions as per
schedule I to the Bill
would be applicable.
Further only certain
of the Agreement, to
be specified by way
of rules, would be
required to be filed
with the ROC at the
time of registration of LLP.
not essential. Filing
nts relating to
with the Registrar
of Firms mandatory
for registration of
Registration of a firm under the
Partnership Act is
there are effects
contracts etc) which
follow pursuant to
sec 69 of the
Partnership Act, in
case a firm is not
registered under the
Has a separate legal
personality – can own
land, can borrow in
its name, sue and be
sued in its name etc.
Has a separate legal
personality – can own
land, can borrow in
its name, sue and be
sued in its name etc.
Can do any thing
which a body
corporate can do.
Not a separate legal
entity. Can act only
through its partners.
Company limited by
shares must have a
and paid up share
capital. Share capital
has to be divided into
This would be
LLP Partners. Capital
is not divided into
capital in the Act.
Agreement is the
basis for capita
awal etc. Capital is
not divided into
May pay salaries and
would determine all
determines all such
companies may be
able to purchase or
redeem their own
shares subject to
provisions of the Act.
Depends on the LLP
Depends on the
‘Board of directors’.
Private company to
have at least two
company to have at
least three directors.
At least two
are must. One of
must be resident in
India. Subject to this
requirement and subject to LLP
partners would have
Companies may also
become partners of
At least two
partners are must as
per Partnership Act,
number of members
restricted to 10 in
case of banking firms and to 20 in
case of other firms.
of partners has been
sec 11 of the
1956 and not under
the Partnership Act,
prevails in directors
meetings. In case of
can be ordinary
rule) or there can be
(not less than 75%
LLP Agreement to
taking mechanism. In
case there is no LLP
in the Bill would be
to such Default
provisions, except for
a few decisions on
approval of partners
is required, majority
rule would prevail.
decides decision making
In the absence of
provisions of the
1932 are applicable.
At least one Annual
(AGM) of members
required. Board of
directors to meet at
least four times in a
No such requirement.
No such requirement.
Decisions are taken
by way of written
There is no
requirement in the
proposed Bill of
taking decisions by
way of written
may contribute share
capital subject to
MOA and AOA and
become members of
Outside investors can
not become partners
which would enable
cessation of partners.
can not become
which would enable
Accounts to be filed
with ROC. Annual
Return and other
like changes in
office etc. required to
be filed with ROC.
Provisions similar to
companies would be
applicable for LLP.
stringent in case of
No requirement of
filing of accounts.
Mandatory for all
smaller LLPs are
being provided for in
Audit not provided
Though for bigger
tax audit has been
the Income Tax
Company taxable as a
From tax angle, LLP
would be given
treatment similar to
what is given to
“Firm” as per
1932. Under the
Income tax Act, 1961
a ‘partnership firm’ is
taxable as a separate
entity and the profits
from firm earned by
partners are exempt
is taxable as a
Profits from firm
earned by partners
are exempt from
as a Non for
sec 25 of the
VI. CONVERSION INTO LIMITED LIABILITY PARTNERHIP
The LLP Act contains enabling provisions pursuant to which a firm (set up under the Indian Partnership Act, 1932) and private company or unlisted public company (incorporated under the Companies Act, 1956) would be able to convert themselves into LLPs.
Sec. 55 of LLP Act 2008 provides that- “A firm may convert into a limited liability partnership in accordance with the provision of this Chapter and the Second Schedule”. Clause 3 of Second Schedule to LLP Act 2008 provides that- “A firm may apply to convert into limited liability partnership in accordance with this Schedule if and only if the partners of the limited liability partnership in to which the firm is to be converted, comprise, all the partner of the firm and no one else.”
Sec. 56 of LLP Act 2008 provides that- “A private company may convert into a LLP in accordance with the provision of this Chapter and the Third Schedule”; and Sec.57 of LLP Act 2008 provide that- “An unlisted public company may convert into a LLP in accordance
with the provision of this Chapter and the Fourth Schedule” . Accordingly, Clause 2(2)(b) of Third Schedule and Clause 3(b) of Fourth Schedule of the LLP Act 2008 provides that- “A company may apply to convert into limited liability partnership in accordance with this Schedule if and only if the partners of the limited liability partnership in to which the firm is to be converted, comprise, all the shareholders of the company and no one else.”
The procedure for conversion of existing firms into LLP –
· A firm may apply to ROC in the prescribed form along with the prescribed documents for converting itself into an LLP provided all the partners of the firm become partners of the LLP.
· On registration of the LLP, all assets and liabilities of the firm shall be transferred to and vest in the LLP, and the firm shall be dissolved and if earlier registered under the Indian Partnership Act, 1932, removed from the records maintained under the said Act.
· The LLP shall ensure that for a period of twelve months commencing not later than fourteen days after the date of registration, every official correspondence of the LLP bears a statement that it was, from the date of registration converted from a firm into an LLP and name and registration, if applicable, of the firm from which it was converted.
The procedure for Conversion of existing private / an unlisted public company into an
· A private or an unlisted public company may apply to RoC in the prescribed form along with the prescribed documents for converting itself into an LLP provided;
Ø there is no security interest subsisting in assets of the company at the time of making an application; and
Ø partners of the LLP comprise all the shareholders of the company.
· On registration of the LLP, all assets and liabilities of the company shall be transferred to and vest in the LLP, and the company shall be deemed to be dissolved and removed from the records of the RoC.
· The LLP shall ensure that for a period of twelve months commencing not later than fourteen days after the date of registration, every official correspondence of the LLP bears a statement that it was, from the date of registration converted from a company into an LLP and name and registration number of the company from which it was converted.
It is to be noted that listed public companies cannot convert into an LLP.
VII. TAX TREATMENT
The Corporate Affairs Ministry and the Standing Committee on Finance had considered three options available internationally for taxing such entities. They were-
· Treating LLP as a pass through status, where individual partners are taxed and not the firm; or
· Taxing LLP at the firm level and exempting income received by partners from LLP in line with the current treatment of partnership firms under the Act; or
· Either taxing the LLP at a firm level or providing it with the pass through status and taxing partners at the option of LLP as prevalent in the USA.
Internationally, LLPs are treated as a pass through entity and accordingly, income is taxed in the hands of partner and not in the hands of LLP. It is pertinent to note that the Concept Paper on LLPs prepared by the Ministry of Corporate Affairs had suggested that LLPs should also be given a pass through status. However, in India, as per Finance Act 2009 LLP will be treated as partnership firms for the purpose of Income Tax and will be taxed like a partnership firm.
Accordingly, the Finance Act, 2009 amended the definition of Firm and Partners as follows –
Firms shall have the meaning assigned to it in the India Partnership Act 1932 and shall include a limited liability Partnership as defined in the Limited Liability Partnership Act 2008.
a) Partner shall have the meaning assigned to it in the Indian Partnership Act 1932 and shall include:
· Any person, being a minor, has been admitted to the benefits of partnership ; and
· A partner of a limited liability partnership as defined in the Limited Liability Partnership Act 2008.
b) Partnership shall have the meaning assigned to it in the India Partnership Act 1932 and shall include a limited liability partnership as defined in the Limited Liability Partnership Act 2008.
In order for Limited Liability Partnership to be assessed as firm in Income Tax Act, it has to satisfy the following criteria-
a) The LLP is evidenced by an instrument i.e. there is a written LLP Agreement;
b) The individual shares of the partners are very clearly specified in the deed;
c) 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;
d) If during a previous year, a change takes place in the constitution of the LLP or in the profit sharing ratio of the partners, a certified copy of the revised LLP Agreement shall be submitted along with the return of income of the previous years in question;
e) There should not be any failure on the part of the LLP while attending to notices given by the Income Tax Officer for completion of the assessment of the LLP.
LLP can claim the following deductions:-
a) Interest paid to partners, provided such interest is authorised by the LLP Agreement;
b) Any salary, bonus, commission, or remuneration (by whatever name called) to a partner will be allowed as a deduction if it is paid to a working partner who is an individual; and
c) The remuneration paid to such working partner must be authorised by the LLP Agreement and the amount of remuneration must not exceed the given limits.
So far as exemption of partners share income from LLP is concerned, sec 10(2A) exempts the share income from the LLP in the hands of the partner. The share of a partner in the total income of a LLP separately assessed as such shall, be an amount which bears to the total income of the LLP the same proportion as the amount of his share in the profits of the LLP in accordance with the LLP Agreement bears to such profits.
The share of the partner in the income of the LLP is not included in computing his total income i.e. his share in the total income of the LLP shall be exempt from tax. LLP and general partnership is being treated as equivalent (except for recovery purpose) in the Act, the conversion from a general partnership firm to an LLP will have no tax implication, if the rights and obligation of the partners remain the same after conversion and if there is no transfer of any asset or liability after conversion. If there is a violation of these conditions, the provision of capital gains will apply.
Lastly, as an LLP and a general partnership is being treated as equivalent (except for recovery purposes) in the Income-tax Act, the conversion from a general partnership firm to an LLP will have no tax implications if the rights and obligations of the partners remain the same after conversion and if there is no transfer of any asset or liability after conversion.
VIII. UNADDRESSED PRIMORDIAL ISSUES
The new LLP Bill has been criticized by many theorists and some have even gone to the extent of saying that “the LLP Bill is no more than a hotchpotch of existing statutes as in culinary recipe.” It may satisfy the tastes of some consumers but whether it is healthy is open to question. Some of the most widely criticized provisions are discussed herein below:-
CONVERSION OF ENTITIES WITH SUBSISTING SECURITY INTEREST
One key condition for the conversion of a company (Private or unlisted Public) to an LLP is that the company may convert into an LLP provided there is no security interest subsisting on its assets or in force at the time of application. It is difficult for most companies to be in a scenario where there is no security interest subsisting on any assets.
CONSENT OF LENDERS FOR CONVERSION
For conversion of an unlimited liability partnership concern to a Limited Liability Partnership concern, there are no provisions requiring the consent of the lenders. Even though lenders may have a position on the re-organisation the Act has totally negated this concern. However, basis, for this is possibly, due to the fact, that as personal liability will continue for all contracts and liabilities which were contracted prior to such conversion, even after such conversion, hence even if the contract is deemed substituted with a contract with an LLP, protection against individual lenders continues.
CONVERSION FROM LLPS
The entire proposal of LLPs is based on a one way street. While you can convert from a firm or a company to an LLP, there are no provisions for erring and deciding to reconvert back into a partnership or a company. In such a case, the decision has to be well weighed realising that there is no “u turn” available down the road.
APPLICATION OF OTHER LAWS NOT BARRED
Sec 71 of the Act states that the provisions of this Act would be in addition to, and not in derogation of, the provisions of any other law for the time being in force. Therefore one would need to analyse provisions of various statutes governing professionals to decide whether they can take advantage of this LLP
For instance, the Chartered Accountants Act, 1949, provides uses in a number of places the term “firm”, which would usually refer to a firm under the Indian Partnership Act, 1932. The said Act also prohibits companies from practising as chartered accountants. Similarly, for lawyers, under the Advocates Act, only Advocates can appear before courts. As a firm is not a person in the eyes of law, a partnership firm is permitted. In light of the LLP Act, where a firm would be treated as a person in the eyes of law with perpetual succession, it is difficult to see how an LLP can be a firm under the provisions of the Advocates Act, which could be recognised as having a right to practice. Thus, even today, a lawyer cannot be part of a company and a company cannot be the lawyer appointed for a client.
SUBORDINATION OF DEBTS WHERE LENDER IS A PARTNER
Sec. 66 states that a partner may lend money to and transact other business with the limited liability partnership and has the same rights and obligations with respect to the loan or other transactions as a person who is not a partner. This has widely criticised as the said sec tends to prohibit subordinate debt, where partners agree not to recover their debts until external debt is paid off.
PAID PARTNER AND ZERO SHARE PARTNERS
Questions have arisen, a to whether like a traditional partnership, there could be paid partners, who do not have a share in profit or have a fixed share of profit, without being liable for losses. Could one also have a zero share partner. In this regard, it is pertinent to note the provisions of sec 23(1) provides that the mutual rights and duties of the partners of a limited liability partnership, and the mutual rights and duties of a limited liability partnership and its partners, shall be governed by the limited liability partnership agreement between the partners, or between the limited liability partnership and its partners. Accordingly, so long as it could be contractually provided, there should be no restriction to having such partners. It is pertinent to note that the provisions of equality come into play under Schedule 1 of the Act only in the absence of any such agreement/provision. Accordingly, contractually it could be provided that certain partners may have zero share, fixed shares, receive only remuneration or commission, etc.
EXTENT OF LIABILITY
Sec 27(4) of the Act states that the liabilities of a limited liability partnership shall be met out of the property of the limited liability partnership. One issue that arises is whether this would preclude in any manner, lenders and contracting parties from obtaining personal and corporate guarantees from the partners as a precondition to providing any loans. The arguments against this are that the principles of a guarantee arise from contract law and this would not preclude the application of such principles. The argument in favour of treating such guarantees as void is that this is a special law that mandates that the liability is to be met out of the property of a limited liability partnership. This needs to be cleared to avoid litigations.
CAPITAL GAINS TAX LIABILITY
It is not clear whether the partners contributing assets towards the capital at the time of formation of the LLP will be receiving their share of capital and accumulated profits on transfer of their shares or what the mode of valuation of assets is for income tax purposes and who will pay the capital gains on transfer of assets of a partnership or a private limited company or an unlisted company, upon their conversion to an LLP.
MINIMUM INSURANCE REQUIREMENT
One issue that arose in proposing a bill for Limited Liability Partnerships was that paper thin LLPs should not be permitted as they could completely undermine the credibility of LLPs. At that point of time the Naresh Chandra committee had suggested that there should be provisions for Compulsory Insurance under the LLP Act. However, the proposal has totally disappeared.
FILING OF ACCOUNTS
Accounts of a firm are a private affair, except for disclosures which have to be made to the income tax authorities. Now as per the Act accounts would have to be filed with the Registrar. Question is would this be acceptable to the Indian legal firms, chartered accountants and other professionals?
FILING OF STATEMENT OF ACCOUNTS AND ANNUAL RETURNS
Under sec 34, statement of accounts is to be prepared within a period of six months from the end of the financial year. As per the LLP Rules, filing of the statements needs to be made within a period of one month thereafter. Under sec 35 of the Act, annual returns need to be filed within a period of sixty days of closure of the financial year. How is this possible? However, of perusal of the forms relating to such filings, annual returns seem to provide only for the details of the partners, the designated partners, their obligations to contribute and any penalties levied against them, and information of compounding of offences. So presently the time factor is reconcilable. However, with passage of time, when LLPs start their business, these timelines need to be harmonised. Furthermore, there is no definition clause to understand what these documents should comprise of and whether solvency is in the form of a certificate or a mere statement.
MEETINGS OF PARTNERS NOT MANDATORY
The First Schedule, inter alia, provides that any matter or issue relating to LLP should be decided by a resolution passed by the majority in number of the partners and for this each partner has one vote. However, this provision presupposes that the partners have to hold partner’s meetings at periodical intervals and the decision taken at such meeting are to be recorded. But there is no corresponding provision in the LLP Act. First Schedule applies only in the absence of any agreement between LLP and its partners. Thus the conclusion that can be drawn from such a provision is that only those who follow the First Schedule are required to old partners’ meetings, excluding those who have a LLP agreement. Such a reading of the provision creates two differential LLPs, though this was not intended.
ALL PARTNERS OF FIRM MUST BE PARTNERS OF LLPS
For conversion from firm into limited liability partnership, all the partners of the firm must be partner of limited liability partnership, no one else. Now, a question arises if the existing firm have partners other than Individual and body corporate (as defined in sec. 5 of LLP Act) and it apply for conversion, what would be the consequence as the provision of sec. 5 of LLP Act qualifies only individual and body corporate for partners while the provisions of clause 3 of Schedule Second of the LLP Act provide. Presently, the Companies Act 1956 allows person/(s) other than specified in Sec. 5 of LLP Act 2008 to be shareholder of the company, than keeping in view of the provision of clause 2(2)(b) of Schedule Third and clause 3(b) of Schedule fourth of LLP Act the situation is not different as in the case of firm.
RESTRICTION TO SUBSCRIBE
Sec.11 (1) of LLP Act provides that- “For a limited liability partnership to be incorporated,-
(a) two or more persons associated for carrying on a lawful business with a view to profit shall subscribe their names to an incorporation documents;” And provision of sec. 22 provides that-
“On incorporation of a limited liability partnership, the persons who subscribed their names to the incorporation document shall be its partners and any other person may become a partner of the limited liability partnership by and in accordance with the limited liability partnership agreement.”
The term used ‘persons’ in the above provisions not defined anywhere in the LLP Act 2008. However as per Income Tax Act 1961 the ‘person’ includes an individual, a HUF, a company, a firm, an association of persons or body of individuals (whether incorporated or not), a local authority and artificial juridical person. Therefore in common parlance any person may subscribe their name for incorporation of LLP. But Sec. 5 of LLP Act provides that -
“any Individual or body corporate may be a partner in limited liability partnership:”
Body corporate has been defined under sec.2(1)(d) of LLP Act as a company as defined in sec 3 of the Companies Act,1956 and includes-
· A limited liability partnership registered under this Act;
· A limited liability partnership incorporated outside India; and
· A company incorporated outside India
But does not include-
· a corporation sole;
· a co-operative society registered under any law for the time being in force; and
· any other body corporate (not being a company as defined in sec 3 of the Companies Act,1956 or a limited liability partnership as defined in this Act), which the Central Government may, by notification in the Official Gazette, specify in this behalf.
Keeping in view of the above provisions one should be careful that persons other those defined in sec. 5 of LLP Act shall not be eligible to subscribe their name for incorporation of LLP.
FOREIGN DIRECT INVESTMENT IN LLPS
The question is whether Foreign Direct Investment in LLPs is allowed in India? Under the provisions of FEM (Investment in Firm and Proprietary Concern in India) Regulations 2000, Non-Resident Indians and/or Persons of Indian Origin may, subject to the conditions stated therein, invest in firms and Proprietary Concerns in India. The Master Circular dated July 1, 2008 issued by the RBI confirms the above and additionally clarifies that persons resident outside India may also invest in Partnership firms and Proprietary Concerns in India subject to the prior approval of the RBI. It may be noted that the Foreign Exchange Management Act, 2000 does not define a “firm” and/or a “Partnership firm”, and therefore, one view could be that the aforesaid provisions would apply to an LLP as well. A view contrary to the above could also be taken based on the reasoning that the of the terms ‘firm’ and ‘partnership firm’ used in the aforesaid provisions refer only to a general partnership firm under the Partnership Act, 1932 and cannot be construed to mean and include an LLP. Necessary clarifications in this regard would clear all doubts.
Since the LLP I closer to a company than a traditional partnership, there is one limit to the application of the present corporate model of the country in that it is not possible to have a single-member LLP. Earlier in the Companies Act 1956 a minimum of two members were required for the formation of a company. However, since the new Companies Bill 2009 has introduced a unique and innovative concept, in keeping with the developments in other countries: that of the “one-person company,” one person LLP must also be allowed.
STAMP DUTY ON CONVERSION FROM A PARTNERSHIP FIRM/COMPANY INTO AN LLP
The LLP Act provides that a general Partnership firm or a Private Ltd. Co. or an unlisted Public Limited Company (as the case may be) may convert into an LLP by filing with the Registrar a statement signed by all the members of the Entity stating therein, the name and registration number of the Entity and the date on which it was registered/incorporated, in the form and manner prescribed under the Rules. The Incorporation Document is also required to be filed with the Registrar. On receipt of the aforesaid statement, the Registrar may, subject to satisfaction of the requirements under the LLP Act, issue a certificate of registration of conversion. The Act further provides that, on Conversion, all assets, interests, rights, privileges, liabilities, obligations relating to the converting Entity shall be transferred to and shall vest in the LLP without any further assurance, act or deed.
It appears from the above that no separate instrument or deed is required to be executed by the converting entity to give effect to the aforesaid transfer of assets etc and consequently no stamp duty should be levied in respect thereof. However, clarification regarding the same is needed for better interpretation.
STAMP DUTY PAYABLE ON EXECUTION OF THE LLP AGREEMENT
Article 47 of Schedule 1 to the Bombay Stamp Act, 1958, provides for levy of stamp duty on “an instrument of Partnership”. Pertinently, the Bombay Stamp Act does not define Partnership and therefore a question may arise as to whether the aforesaid provision could be made applicable to LLP Agreements also. Under the LLP Act, an LLP Agreement may be executed for the purposes of defining the mutual rights and obligations of the Partners of the LLP. In this respect an LLP Agreement is similar to an instrument of Partnership of a general Partnership firm. In the circumstances, the Courts may take the view that in the absence of any specific clarification in this regard, an LLP Agreement may be treated as an instrument of Partnership for the purposes of the Bombay Stamp Act. Thus, clarification in this regard is sought.
RESIDENCE OF LLP FOR TAX PURPOSES
In case an LLP is considered as a transparent entity for India tax purposes and if such entity carries on business in another country, the fact that such LLP is not a taxable entity (as only the partners are taxed in India) may bring challenges from treating the same as Resident in various tax treaties that India has entered into. To ensure availing of tax benefits in accordance with the tax treaties, the Indian Government should renegotiate some of these treaties to facilitate the mechanism of LLP being considered as resident even if the tax is paid by its Partners.
IX. SUMMATION AND SUGGESTION
Based on the study above the researcher ha following suggestions to make -
Ø To protect the interest of persons who might have claims against an LLP, under UK laws, provisions exist for compulsory insurance policy for satisfaction of judgment and decrees against the LLP to a reasonable extent. Provisions on compulsory insurance should be incorporated in the LLP legislation in India as well.
Ø It would be necessary to align LLP legislation in tune with other economic legislation by making appropriate amendment or clarifications to Foreign Exchange Management Act (FEMA) and Foreign Direct Investment (FDI) guidelines.
Ø In UK, an LLP must be established and then the business and the assets of the existing partnership or company transferred. There is stamp duty relief on any property transferred within the first year of conversion. A stamp duty relaxation should be made available on conversion of existing partnerships/private and unlisted public companies to LLP in India (this would be in line with Part IX of the Companies Act, 1956).
Ø With regard to conversions to LLP, it has been suggested that the Income Tax Act would need to be amended to provide specific exemptions from Capital Gains Tax for gains arising on conversion - exemptions provided for in Sec 47 would need to be extended to cover such conversions as well.
Ø From an exchange control/ Foreign Direct Investment (FDI) perspective it needs to be clarified that LLPs would be "eligible entities" for receiving foreign investment under the automatic route.
Ø Consent of all the partners is required before a new partner is inducted. This unanimity could be impossible and difficult to secure, especially if the LLP is very large. The norm would be rule by democracy with the exception being unanimity for venturing into new business. Once again, it is possible that an LLP may be stopped in its tracks by an intransigent minority of one or two. Three-fourth majority for major decisions, including venturing into new businesses, should, therefore, be the norm.
Ø Though there should be a statutory and compulsory requirement to have atleast one Manager or general partner with unlimited liability, the liability of the LLP in no case should be extended to all partners. Further, it should be ensured that a LLP does not have a dummy for a manager. Hence, proper qualifications in terms of being a partner having sound financial and accounting knowledge should be specified in the Act especially since he is responsible for ensuring compliance with the significant provisions of the Act.
Ø LLPs having characteristics similar to private companies do not need to have free transferability of partners share. It should be left to the partnership agreement amongst the partners. The provisions of this sec and sec 37 should be made subject to the agreement among the partners in this regard.
Ø The LLP Act provides for establishment of foreign LLPs and permits them to carry on business activities in India. We hope that suitable changes will be made in the exchange control regulations to include foreign LLPs as an eligible organisational structure for investing into India.
To sum it up, the Indian Partnership Act, 1932 sets out special rules relating to the liability of partners to persons dealing with them. A partner acts as the agent of the firm and of other partners for the purpose of the business of the firm. Further, every partner is liable, jointly and severally, with all the other partners, for all acts of the firm done while he is a partner. The unlimited liability for partners in case of general partnerships has become an increasing cause for concern in the light of general increase in the incidence of litigation for professional negligence, the size of claims and the risk to a partner’s personal assets when a claim exceeds the sum of the assets of the partnership. The ‘unlimited liability’ of partners has been the chief reason why partnership firms of professionals, have not grown in size to successfully meet the challenges posed today by international competition, WTO, GATS.
Bearing in mind the needs of the buoyant Indian economy, and also to keep pace with international business standards, the Indian Parliament has in its wisdom seen fit to introduce the concept of a limited liability partnership in India. While the efforts of the Parliament, in first circulating the Concept Paper on LLP and then after examining the response of various sectors, finally introducing the LLP Bill, must be lauded; yet one must be circumspect in regard to certain other aspects, especially the drafting of the Bill itself, which as pointed out earlier, is inadequate in certain respects, and also the supplementary policy measures which have not yet been put in place to facilitate the smooth functioning of the LLP legislation, once it gets passed.
 Final & Fourth year students of Hidayatullah National Law University, Raipur ( Chhattisgarh)
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