Submitted by
1. Introduction
6. Conclusion
7. Suggestions
Chap.1- Introduction
Concept:-
A limited liability partnership is a partnership in which some or all the partners have
limited liability. It is a mixture of both- partnerships and corporations. Unlike a limited
partnership one partner is not responsible for the acts of other partners. The concept
of Limited liability partnership concept was introduced in order to adopt a corporate
form, which combines the organizational flexibility and tax status of partnership with
advantage of limited liability for its partners. Thus this Act came into being. This Act
of parliament received Presidential assent on 7th January 2009 and was named as
the Limited Liability Partnership Act 2008 (Act no.6 of 2009). This is an Act to make
provisions for the formation and regulation of limited liability partnerships and for
matters in connection thereto and incidental therewith. It extends to the whole of
India.
J.J.Irani Committee-
I) In view of the potential growth of the service sector, requirement and providing
facility to the small enterprises to participate in joint venture and agreements that
enable them to access technology and bring together business synergies and to
face the increasing global competition enabled through WTO, etc. ,the formation of
limited liability partnerships should be encouraged.
II) It would be a suitable vehicle for partnerships 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.
III) we recommend that a separate Act be brought about to facilitate limited liability
partnerships. The concept need not be addressed in Companies Act.”
Thus, this concept was introduced concept was introduced in order to adopt a
corporate form. It is a combination of organizational flexibility and tax status of
partnership with advantage of limited liability for its partners. Introducing the LLPs
would fill the gap between business firms such as sole proprietorship and
partnership, which are generally unregulated and Limited Liability Companies, which
are governed by the Companies Act, 1956. It is a body corporate formed and
incorporated under the LLP Act, which is a distinct legal entity separate from that of
its partners. It has perpetual succession. The word "Body Corporate" is defined in
the Bill to include LLPs registered under the LLP Act, LLPs incorporated outside
India, and Companies incorporated outside India. Any change in the partners
(incoming or outgoing) will not affect the existence, rights or liabilities of the LLP. The
Bill provides for entry of new partners in accordance with LLP agreement and exit of
existing partners both with due notice to the Registrar. The provisions of the Indian
partnership Act, 1932 has no application to LLPs.
Meaning:-
An LLP is a corporate vehicle that gives the benefit of limited liability. The internal
structure of the LLP is designed on the lines of traditional partnership. Since it is a
separate legal entity, thus in an LLP, as we know the liability of the members is
limited. Thus, the LLP itself would be liable to the full extent of its assets and not the
members or partners.
Being an alternative business structure, LLPs are expected to foster growth of the
service sector. The regime of the Limited Liability Partnership will provide a platform
to small and medium enterprises and professional firms of Companies Secretaries,
Chartered Accountants, Advocates, etc. to conduct the profession efficiently which
would in turn increase their global competitiveness.
The law of has many lacunae in it in their use today. A partnership is defined in the
law as the relation which subsists between persons carrying on a business with a
view of profit (s.1, Partnership Act, 1980). A very important feature of a partnership is
that they do not have ea legal personality of their own. Unlike in a company, where
the members (shareholders) of the company are to a large extent insulated from the
liabilities of a company, in a partnership, each partner is held responsible not just for
the liabilities caused by his own actions, but also for liabilities incurred by each and
every partner.
Moreover, the liability is not limited by his involvement in the business; his personal
assets are fully at risk against the partnership’s liabilities if such liabilities cannot be
covered by the assets held within the partnership, or where applicable, professional
indemnity insurance. The Indian Partnership Act, 1932 deals with the liability of
partners to persons dealing with them. A partner is 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 other partners, for all the acts of the firm done while he
is a partner.
Characteristics of a LLP-
1. Status- The LLP is a body corporate and a legal entity separate from its
partners. It is an artificial person being invisible, intangible having no body,
no mind and no soul. Any two or more persons, associated for carrying on
a lawful business with a profit motive, may by subscribing their names to
an incorporation document and filing the same with the Registrar, form an
LLP. It has a perpetual succession.
3. Incorporation- LLPs are body corporate and must be registered with the
Registrar of Companies. The LLP cannot have the same name as of
another LLP.
4. Number of partners- An LLP must have at least two partners and also
two individuals as Designated Partners, of whom at least one shall be a
resident of India. There is no maximum limit on the number of partners.
5. Limited liability- Every partner of a LLP acts as an agent of LLP but not
of the other partners. A partner is not liable for the acts of other partners
(like in the case of the Indian Partnership Act). A partner would not be
liable for the wrongful acts or omission of other partners. The LLP may be
held liable but the partners in their individual capacity cannot be held
liable.
of an LLP are to be duly audited. Any LLP which fails to comply with the
provisions of this section is punishable with fine which shall not be less
than 25 thousand rupees up to 5 lakh rupees.
A LLP can be easily formed because of lower cost of formation, lesser formalities,
easy to manage and run and also easy to wind-up and dissolve, no requirement of
minimum capital contributions, partners are not liable for the acts of the other
partners and most important no minimum tax. But, LLP cannot raise money from the
public.
The process for incorporating a LLP is pretty simple. The Registrar of Companies
(ROC) is the authority having jurisdiction over the incorporation. The steps required
are:
Encyclopaedia Britannica
Condition under which the loss that an owner (shareholder) of a business firm may
incur is limited to the amount of capital invested by him in the business and does not
extend to his personal assets. Acceptance of this principle by business enterprises
and governments was a vital factor in the development of large-scale industry,
because it enabled business concerns to mobilize large amounts of capital from a
wide variety of investors who were understandably unwilling to risk their entire
personal fortunes in their investments.
Some other definitions-
the liability of a firm's owners for no more than the capital they have invested
in the firm
wordnet.princeton.edu/perl/webwn
Entities limiting liability If a taxpayer holds his working interest through any of
the following entities, the entity is considered to limit his liability, and the
taxpayer's interest in the activity will not be exempt from the passive loss
rules
www.oilandgasinvestingglossary.com/glossary.asp
This limits the financial loss, which shareholders may bear in the event of the
winding up of a company, to the extent of their invested capital.
www.business2000.ie/resources/Glossary_L.html
What is unlimited liability?-
The liability of the owner of a business for all the obligations of the business. An
owner's personal assets can be seized if the business's assets are insufficient to
satisfy claims against it. The placement of personal assets at risk is a great
disadvantage of proprietorships and general partnerships. The ability to limit the
amount of liability to which an owner is subject is a major reason for the formation of
corporations and limited partnerships.
Some definitions-
Full liability for the debt and other obligations of a legal entity. The general
partners of a partnership have unlimited liability.
www.advfn.com
Business dictionary.com
Answers.com
In case of a partnership, limited means that the liability of a person or a partner is
limited. It is limited to a certain amount or certain extent. He cannot be made liable
for anything beyond that.
Now the LLPs have come into existence. The LLP concept is prevalent in India now
and is in practice. After the enforcement of the Limited Liability Partnership Act,
2008, the firms have started registering themselves under the Limited Liability
Partnership Act, 2008. Till now 10 firms have registered them under this Act.
Unlike Indian Partnership Act, 1932, the liability of the partners is limited only their
acts or share in the firm and nothing beyond that. One partner is not liable or
responsible for the acts of other partners. The person liable would be LLP and not
the partner. The liability of the partner is limited only to the amount of capital
contributed by him. Acts of one partner will not be binding on other partner. They will
be binding on LLP instead. The liability of LLP must be met out of property of LLP.
Thus no partner would be liable on account of independent or unauthorized action, of
other partners, thus allowing individual partners to be shielded from joint liability
created by other partners. The liability of partners and the LLP who are found to
have acted with the intent to defraud creditors or for any fraudulent purpose is
unlimited for all or any of the debts or other liabilities of LLP.
Ch-3 Limited liability partnership business in modern scenario
The existing partnership firm model was appropriate when all partnerships were
small and partners were of the same profession working closely with one another.
However, unlimited liability for partners became an increasing cause of concern due
to various reasons like-
(ii) The growth in the size of partnerships (in large firm not all partners will be
personally known to one another);
(iii) The increase in the specialization among partners and coming together of
different professions within a partnership;
(iv) The risk of a partner’s personal assets when a claim exceeds the sum of the
assets and the insurance cover of the firm.
Thus, a need was felt for a type of partnership entity in which each partner is
responsible only for his or her own liabilities. It would make partners more
accountable to their clients or customers and ensures that all the partners can
engage in their business without the concern of having their personal assets at risk,
unless there is specific case of negligence or wrongdoing.
The limited liability partnership is a separate legal entity without unlimited capacity so
that an LLP can do anything that a natural person could do. It has the ability to enter
into contracts and hold property, and all will continue in existence inspite of any
change n membership. The LLPs existence as a separate legal entity makes it more
closely akin to the company than to partnership. Unlike sole traders and partners of
ordinary partnerships, the LLP itself, and not the individual members , is responsible
for any debts that it runs up, unless individual members have personally guaranteed
a loan to the business. LLPs are required to produce and publish financial accounts
similar to those of a similar sized limited company and must submit accounts and an
annual return to the Registrar of Companies each year. This requirement is so far
more demanding than that for normal partnerships and specific accounting rules may
lead to profits different from those of a normal partnership.
The LLP structure would appeal to some, most notably the professions, in that it
meets their need for limited liability while offering the possibility of retaining internally
the ethos of partnerships.
The LLP structure is also attractive for some venture capitalists because of the ability
of members to participate in management without the risk of losing limited liability,
the absence of capital maintenance rules.
Distinctions-
Traditional partnership-
1. Unlimited personal liability of each partner for dues of the partnership firm.
Personal property of each partner also liable.
11. All partners are liable for statutory compliances under the Partnership Act.
12. Partner cannot enter into business of the firm, though he can give a loan to
the business of the firm
13. Every partner of the firm is an agent of the firm and also of other partners
he can bind the partnership firm as well as other partner by his acts.
14. Filing of accounts, statement of solvency and annual return not required.
15. Partnership can be ‘at will’ i.e. any partner can resign or dissolve firm.
11. Only designated partners are liable for statutory compliances as are required
under LLP Act (not necessarily in respect of other Acts).
12. Partner of a LLP can enter into business with LLP. He can also give loans to
LLP.
13. Every partner of an LLP is an agent of LLP but not of other partners. Thus, he
can bind LLP by his acts but not other partners. However, LLP Agreement can
restrict powers of individual partner.
14. Filing of accounts, statement of solvency and annual return not required.
15. Individual partner can resign but cannot dissolve the LLP.
17. Filing of return of retirement of partner with ROC is required, but no provision
for public notice of retirement of a partner.
Similarities-
Traditional partnership-
2. Liability of a person for ‘holding out’ i.e. represents himself as partner, though
he is not.
3. Partner of the firm entitled to remuneration only if partnership agreement so
provides.
4. New partner can be introduced only with the consent of all existing partners.
7. Partner liable to firm for any personal profits made by him by use of property,
name of business connection of firm.
4. New partner can be introduced only with consent of all existing partners,
unless LLP Agreement provides otherwise.
7. Partner liable to LLP for any personal profits made by him by use of property,
name or business connection of LLP.
The LLP concept emerged in USA in the early nineties when only two states in 1992
allowed LLP kind of formation. Over forty states adopted LLP legislation by the time
LLP’s were added to the unified Partnership Act in 1996. Each individual state in
USA now has its own LLP. The LLP’s have been admired amongst professionals
especially advocates, architects and accountants. In UK, there are three forms of
partnership n practice. The first and the oldest form called as ordinary partnership,
governed by the partnership Act, 1890. There is also limited partnership, which is
governed and registered under the Limited Partnership Act of 1907. In this type of
partnership, one or more parties may limit their liability to the amount of capital he
has contributed. But, even in such a partnership, at-least one partner’s liability is
unlimited. The third category is a Limited Liability Partnership (LLP), which is a body
corporate having perpetual succession and limited liability. Such kind of formation is
governed by Limited Liability Partnership Act, 2000, the Limited Liability Partnerships
Regulations, 2001, and the Limited Liability Partnerships (Scotland) Regulations,
2001.
LLP kind of formation has also gained popularity in countries like, Australia,
Singapore, Japan, and China. It has recently been used in India by the Limited
Liability Partnership Act of 2008.
LLP in USA
2. Name of LLP- Must carry the words ‘RLLP’ i.e. registered Limited Liability
Partnership or ‘LLP’ i.e. limited liability partnership in the end.
3. Body corporate & separate legal entity- No, it’s only a form of general
partnership to protect partners from unlimited liability.
7. Minimum Designated partner/member- The UPA does not provide for any
such designated partner, member or manager. It only provides that in case
partnership does not have an office in the state of incorporation, partners
need to appoint an agent who is individual and a resident of the state for
service of the process of formation of LLP.
17. Appeal in case of refusal to register- The secretary of the state may refuse
to register or revoke the registration later and in that case UPA does not
provide for any higher appeal.
19. Filing requirements- LLP shall file an annual report containing the
prescribed details in the office of the secretary of state.
21. Compulsory insurance policy- UPA provides for compulsory insurance and
different state legislations have provided for different minimum insurance
policy to cover liability of LLP like in Texas it’s $100,000 and in Delaware $
1,000,000.
22. Tax status of LLP- LLP will have a pass through status i.e. it pays no tax but
its partners do in relation to the income or gains they receive through the
LLP.
23. Consent Required for conversion of firm or company into LLP- UPA
does not require unanimous consent of all partners for conversion into LLP.
24. Winding up and Dissolution- UPA provides for both voluntary as well as
compulsory winding up by the Secretary of State.
25. Default provisions- UPA does not provide for any default rules in case of
absence of a partnership agreement.
LLP in UK-
11 Legislation - Formed under the LLP Act 2000 and LLP Regulations
2001.
11 Name of LLP- Must carry words ‘LLP’ or ‘llp’ in the end and in case
incorporated in Wales then can have the word ‘LLP’ or ‘llp’ or ‘PAC’ or ‘pac’
i.e. ‘partneriaeth atebolrwydd cyfyngedig’.
111 Filing requirements- LLP needs to file annually its annual accounts
i.e. balance sheet, profit and loss account, auditors report (subject to certain
exemptions for small and medium LLPs) with the ROC.
111 Compulsory insurance policy- LLP Act, 2000 has made provision for
a compulsory insurance policy for LLP to cover negligence, omission,
wrongful acts etc.
111 Tax status of LLP- LLP will have a pass through status i.e. it pays no
tax but its partners do in relation to the income or gains they receive through
the LLP.
111 Winding up and Dissolution- LLP Act, 2000, provides for both
voluntary as well as compulsory winding up by the High Court.
LLP in Singapore-
partners, the partner shall be personally liable for the obligations of LLP after
such said period of 2 years.
15. Contents of Incorporation document- (i) Name of the LLP, (ii) Address of
the registered office of the LLP,(iii) Names and addresses of partners and
local managers, (iv) General nature of the proposed business.
17. Appeal in case of refusal to register- If the registrar of the LLP refuses to
register ten higher appeal can be made to minister of ACRA within 30 days of
such refusal.
20. Appointment of Inspectors for investigation- The registrar of the LLP has
the power to appoint inspectors to investigate affairs of LLP.
22. Tax status of LLP- Not specified in the LLP Act, 2005.
23. Consent Required for conversion of firm or company into LLP- Consent
of all partners in case of a firm and consent of all shareholders in case of a
company is required for conversion into an LLP.
24. Winding up and Dissolution- LLP Act, 2005 provides for both voluntary as
well as compulsory winding up by the High Court.
LLP in Japan-
11 Legislation - LLP Act 2005 enacted on 6th May 2005 (enforced on 1st
August, 2005). LLP in Japanese language is known as ‘Yugen Sekinin Jigyo
Kumial.’
11 Name of LLP- Shall include in its name the phrase “Limited Liability
Partnership.”
111 Filing requirements- The partners shall, within two months from the
end of each business year, prepare balance sheet, profit and loss statement
of LLP which shall be open for inspection by creditors.
111 Tax status of LLP- LLP has a pass through status i.e. it pays no tax
but its partners do in relation to the income or gains they receive through the
LLP.
111 Winding up and Dissolution- The LLP statute in Japan provides that
an LLP shall be dissolved, if the achievements of its business purposes
becomes impossible, if there being only one remaining partner; expiration of
the duration of Partnership; with consent of all partners; on or happening of an
event which has been stipulated as the event of dissolution in the LLP
Agreement.
LLP in India-
2. Name of LLP- Must carry the words ‘Limited Liability Partnership’ or the
acronym ‘LLP’ as part of its name.
15. Contents of Incorporation document- (i) Name of the LLP, (ii) Address of
the Registered office of the LLP,(iii) Names and addresses of partners and
designated partners, (iv) Proposed business of LLP.
19. Filing requirements- LLP needs to file annually its accounts i.e. balance
sheet, profit and loss account, auditors report along with statement of
solvency with ROC.
22. Tax status of LLP- Not specified in the LLP Act, 2008, will be dealt with by
making amendments to the Income Tax Act, 1961.
23. Consent Required for conversion of firm or company into LLP- Consent
of all partners in case of a firm and consent of all shareholders in case of a
company is required for conversion into an LLP.
25. Default provisions- Same as LLP but UK but LLP Act, 2008 goes to a step
further and provides that in case of a dispute between two parties which can’t
be resolved shall be referred for arbitration under Arbitration and Concilation
Act, 1996.
Indian LLP Act is nothing but a reproduction of mainly the UK LLP law with some
features of Singapore LLP law. The Indian model of LLP resembles with the LLP of
UK in the following ways:
(a) It is a body corporate with distinct legal entity and perpetual succession;
(e) Minimum two partners/members are required for its formation and there is no
limit on maximum number of partners/members;
(f) Any person may become partner/member of LLP either by subscribing to the
Incorporation Document or by the agreement with the existing
partners/member;
(g) Mutual rights and duties of the partners/members are governed by the
agreement between the partner/members between the LLP and its
partners/members;
(h) The contents of LLP agreement, as may be prescribed, are to be filed with the
ROC;
(i) Each partner/member of LLP is an agent of LLP and therefore can act on its
behalf in all its business;.
Even though the original intention of UK Legislation was to restrict the use of LLPs to
professionals only like it was recommended by the second Naresh Chandra
Committee in India, but the LLP Act, 2000 of UK, as per section 1(3) makes them
available to every trade, or business like it is in India. LLP of UK may carry out
whatever trade or business it wishes, while USA limits it to professional services
only. Section 10 of the UK LLP Act lays down that a trade, profession or business
carried on by an LLP, with the view to profit, shall be treated as carried on in
partnership by its members and not by LLP itself.
Thus, any asset held by an LLP, or any tax chargeable on gains made shall be
treated as held by members/partners, or gains made by the members/partners, and
not by LLP itself. In other words, an LLP enjoys a pass-through status and is not
taxable as such; the taxation liability falls on the partners in their individual capacity.
In the USA, too, LPs enjoy a pass through status for the purpose of taxation. The
profits or losses of the LLP pass through the business and are reported on each
partner’s personal returns. The Singapore LLP Act, 2005 and the Indian LLP Act,
2008, are silent in this count. In USA, it differs from state to state in the degree of
liability protection.
Generally, LLP partners in USA do not bear personal liability for any partnership
obligations or liabilities of other partner’s misdeeds. The Texas LLP Statute does not
relieve a general partner from liability for partnership’s malpractice, contractual and
tort liabilities; the partners are insulated only from the vicarious responsibility for the
partnership’s malpractice-type liability. The Texas LLP Statute has served as a
model for many other LLP Statutes in the USA. In some states of USA, the LLP
regime is more liberal. Interestingly, the Delaware Law of USA provides for, and
permits, foreign limited liability partnerships. But, the LLP Statutes enacted in New
York, Colorado, etc, provide LLP partners full protection from vicarious liability.
CH 6- Conclusion
The aspect of tax treatment of LLPs remains an area of uncertainty, since LLP will
be treated as a firm as defined under the Income Tax Act 1961 for the purpose of
taxation. This show the way one to the following two implications:
1. That on the same basis as an ordinary partnership firm, the LLP will pay tax on its
profits after deduction of business expenditure, salaries and interest paid to the
partners. Partners will be liable to pay tax on salary and interest receipts, whereas
the share in profits is exempt; same as the current provisions of the income tax Act
1961related with Firm.
2. Another way that only the profits in the hands of the LLP partners will be taxed. A
L.L.P. will have Pass through Status (proposed by the Naresh Chandra Committee),
the partners will be liable to pay tax on share of LLP's profits received in their hands.
This also known as tax transparency.
Of the above two options the second option appears to be logical and acceptable.
In the UK and most European nations, the tax liability falls on individual partners. In
the US, a flexible system exists where partners decide whether they or the firm be
taxed. Flexibility needs to be built into LLPs taxation structures.
“Any income earned by LLPs must be accorded a pass-through status, that is,
partners must be directly taxed on any income distributed by the LLPs. This will be in
conjunction with the taxation laws for LLPs in UK,”
“A pass-through status will make taxation system easier and avoid the kind of
complications that exists currently in the partnership firms, where partners
remunerations are tax free up to a certain limit but the firms profits are taxed. Since
LLP is a new concept, the taxation structure should be such that more flexibility is
provided to partners in paying their taxes so that more people are encouraged to opt
for LLP.”
All over the world, Micro, Small and Medium Enterprises (MSMEs) and service
providers play an important role in trade, commerce, industry and services.
Considering their important role in economic development, governments, as a matter
of policy, nurture and develop these enterprises by suitable legal and regulatory
framework and financial assistance. There are micro f9inance and venture capital
funds with established record of success. In addition, there are stock markets like
NASDAQ, which perform a number of economic functions to promote and reward
entrepreneurship.
The LLP has its own weak and strong points. Some of the infirmities and measures
are enlisted hereunder-
1) First of all the burden on regulation of LLPs should not have been
dropped on the shoulders of the Registrar of Companies (ROCs) since
LLP is a different entity as compared to companies and requires a
different focus. There would be a large number of LLPs getting
registered and the sheer volume of regulation of these LLPs along with
the already heavy burden of regulating companies would be an
injustice to the enforcement of both the statutes. With the introduction
of electronic records and e-filling requirements the entire focus of
ROCs would be to supervise the implementation by conducting
inspections etc; and this can be done effectively if the functions of
regulating the LLPs and companies are separate.
4) Fourthly though the LLP Act recognizes the LLP as a separate entity
(on the same basis of a company) it shifts the burden of bearing the
penalties on the designated partners. Clause 9(2)(b) stipulates that “a
designated partner shall be liable to all the penalties imposed on the
LLP for any contravention.” Under the Companies Act, 1956 the
company being a separate legal entity is liable to pay the fine (apart
from the officers in default) from its own account. This logic needs to be
applied to LLPs also.
(i) The entire Companies Act is due for reform and this reform process
will include the implementation of the Naresh Chandra Committees
recommendations to the effect that the provisions governing Private
companies shall be further liberalized. This will certainly prove to be
a boon for the small enterprises, traders, etc. now since the LLP Act
is passed before the reform of the Companies Act, 1956, such small
enterprises will certainly want to convert into the LLP form.
Subsequently when the provisions relating to Pvt companies are
liberalized they would be in a state of avoidable confusion since
they would again prefer to opt for the Pvt company mode which
offers total exemption from any personal liability to the
shareholders. There would be a scurry of LLPs wanting to convert
themselves into pvt companies and this might send avoidable
alarming signals to the customers, creditors and other parties
dealing with LLPs;
(ii) The recommendations regarding mandatory insurance for LLPs
should have been applied. This is necessary to protect the interest
of persons who might have claims against an LLP. This is
necessary as such persons might not get any real relief, since there
will be no access to the assets of partners of the LLP except to the
extent of his/her liability in the LLP. This would deter the creation of
shell LLPs or asset-thin LLPs.
References:-
5. http://www.icai.org/resource_file/9996417-421.pdf
6.http://www.articlesbase.com/regulatory-compliance-articles/limited-liability-
partnership-act-in-india-1726643.html
7.http://www.llp.gov.in/aboutllp.htm
8. http://business.gov.in/starting_business/limited_liability.php