CONTENTS LIMITED LIABILITY PARTNERSHIP- AN OPTION LLP 1/11/2012

Transcription

1 LIMITED LIABILITY PARTNERSHIP- AN OPTION By, CA Vishnu Moorthi, VISHNU DAYA & CO CONTENTS Introduction and Meaning History LLP in India Incorporation Designated Partners Books of Accounts and Audit Advantages and Disadvantages 1

2 CONTENTS (CONTINUED) Comparison of LLP with Firm Conversion of Firm to LLP Comparison of LLP with Company Conversion of Company to LLP Taxation FDI and LLP CA Firms and LLP Circular No. 10 Conclusion INTRODUCTION Limited Liability Partnership is a new Corporate form that combines the advantages of a limited liability of a company and flexible and tax friendly feature of a partnership firm. 2

3 HISTORY OF LLP LLP had its origin in Italy. LLP structure is already prevalent in countries such as the UK, the USA, Australia, Singapore and in various Gulf countries. The LLP Act in India heavily leaned on UK LLP Act, 2000 and Singapore LLP Act, LLP-FEATURES It is a body corporate, with a distinct legal entity separate from that of its partners. It has a perpetual succession and a common seal. It is an alternate corporate business form that gives the benefits of limited liability of a Company and the flexibility of a partnership. It is a hybrid between a Company and a partnership. 3

4 LLP IN INDIA The Parliament of India passed Limited Liability Partnership Act in 2008 and assent given by the President. The Act came into force on April 1 st The LLP is also governed by the Limited Liability Partnership Rules, So far over 7,000 LLPs have been registered in India with around 50% coming from Western region, 25% from Southern region, 22% from Northern region and balance from Eastern region. (Karnataka 945) INCORPORATION OF LLP Acquire and register DIN & Digital Signature for designated partners. DPIN (Designated Partner Identification Number) has been merged with Director Identification Number (DIN) and hence, if you have one of them, you can use it for the other. Check Name Availability of the LLP LLP Agreement to be formulated. There is full flexibility about the agreement, whereby, any understanding between the partners can be incorporated in the agreement itself. Thus, legalizing some of the aspects in a shareholding agreement can be overcome if the business is structured as a LLP. LLP agreement is a contractual agreement between the partners. In the absence of any specific clause in the LLP agreement, provisions in First schedule would apply. Upload Form 1, Form 2, Form 3, Form 4 Obtain Registration Certificate 4

5 FORMS TO BE FILED FOR INCORPORATION As per the LLP Rules 2009, the following forms have to be filed for incorporation: Form 1 Name Availability Form 2 Incorporation Document Form 3 LLP Agreement Form 4 Appointment/Cessation of a Partner DESIGNATED PARTNERS To incorporate LLP minimum 2 Designated Partners who are individuals are required. If all the partners are corporates, their nominees can act as designated partners. One of the Designated Partners should be Resident in India (stay of 182 days or more in the immediate preceding one year). Particulars of every partner shall be filed with the Registrar within thirty days of his appointment. Designated Partners are liable to penalties imposed on the LLP for any contravention of the specified provisions. 5

6 BOOKS OF ACCOUNTS Section 34 contains provisions regarding maintenance of books of accounts. LLP has to prepare a Statement of Account and Solvency for the financial year within 6 months from the end of the financial year. Form 8 Statement of Account and Solvency to be filed within 30 days from the end of six months of the financial year to which the statement of account pertains. Failure to file can entail a penalty of Rs.25K to Rs. 5 lakhs and additional penalty on the designated partner from Rs.10K to Rs.1 lakh. Form 11 Annual Return of LLP shall be filed within 60 days of closure of financial year. Fine for non filing is minimum R.25, to Rs.5 lakhs. This is very harsh. AUDIT The accounts are to be audited in accordance with the rules prescribed. Rule 24(8) exempt the LLP from the audit of its accounts if its turnover does not exceed, in any financial year, INR 40 lakhs or its contribution does not exceed INR 25 lakh. LLP have to appoint auditors within 30 days before the end of the financial year. 6

7 ADVANTAGES OF LLP Limited liability of partners. Bankers can continue to take the personal guarantee like in the case of a company and make the liability of partners extended to their loan. Taxed like a partnership firm No dividend tax and withdrawal of profit is flexible Flexibility of transfer of funds to the partners- deemed dividend concept is not applicable. Legal entity/ status or recognition. Low cost of formation Less requirements as to maintenance of statutory records. Only designated partners are liable for statutory compliances under the LLP Act. Easy to dissolve or wind up. ADVANTAGES OF LLP The capital contribution ratio (ownership ratio) can be different from the profit sharing ratio. This gives the biggest advantage where persons with special skills can be recognised without any investment and can be accommodated with share of profit. 7

8 DISADVANTAGES OF LLP Low public perception. Lack of financial secrecy as data is available on the website. LLP s P & L a/c will be available for public inspection unlike that of a private limited company. Thus, the financial results of a LLP cannot be confidential. LLP cannot raise funds from Public There is no separate provision of creation of charge like in the case of a company. Any act of the partner without the other may bind the LLP It appears that a minor cannot be admitted as a partner of LLP unlike in the case of a firm where the minor can be admitted to the benefits of a partnership. No separation of Management from owners COMPARISON OF LLP WITH FIRM DESCRIPTIONS LLP FIRM Legal Entity Separate Legal Entity Not a separate legal entity Liability of members Limited liability Unlimted liability Capital Contribution Asper LLP Agreement May extend up to their personal assets Transfer of ownership rights Governed by LLP Agreement Not transferable Reputation Enjoys higher reputation Depends upon credit worthiness and goodwill of partners Maximum Members Unlimited 10 in case of banking business and 20 in case of others Registration Under LLP Act 2008 Optional Formation Cost More Negligible MAT Isapplicable Not Applicable 8

9 CONVERSION OF FIRM TO LLP (SECOND SCHEDULE) KEY BENEFITS: Automatic Transfer No Stamp Duty Continuation of Brand Value Carry Forward and Set Off of Losses and Unabsorbed Depreciation protected No capital gains so long as the same partners continue. No time limit is specified. CONVERSION OF FIRM TO LLP No specific provision is found under section 47. In terms of Explanatory Memorandum attached to the Finance Act, 2009, it is clarified that since a partnership firm is equated to a LLP, the conversion of a firm to LLP will not entail any special tax liability if the rights and obligations of all the partners continue as such. This is quite dangerous as the tax Authorities can find fault with the conversion. However, if this is upheld, then, there is no condition regarding subsequent ownership pattern that it has to continue. 9

10 CONVERSION OF PVT LTD COMPANY OR AN UNLISTED COMPANY TO A LLP- CONDITIONS Sec 47 (xiiib)- All the assets and liabilities of the company should be transferred to LLP; All the shareholders of the company should have their capital contribution and profit sharing ratio in the same ratio as per their shareholding in the company on the date of conversion; Shareholders should not get any benefit from the LLP other than by way of share of profit; Aggregate of the profit sharing ratio of the shareholders should not be less than 50% for the next five years; CONVERSION OF PVT LTD COMPANY OR AN UNLISTED COMPANY TO A LLP- CONDITIONS Total sales, turnover or gross receipts in the business of the company in any of the three previous years preceding the previous year in which the conversion takes place does not exceed Rs.60 lakhs. This restriction has impacted a bit as only small companies can be converted to LLP. Accumulated profit of the company should not be allowed to be drawn by the partner for a period of three years from the date of conversion. 10

11 COMPARISON OF LLP INTO COMPANY DESCRIPTION LLP COMPANY Minimum Members 2 2 in case of Private Company & 7 in case of Public Company Maximum Members Unlimited 50 in case of Private Company & Unlimited in case of Public Company Ownership of Organization Lies with partners LLP Lies with Members Ownership of Property Lies with LLP Lies with Company Formation by Foreign Nationals Foreign nationals alone cannot form LLP Foreign nationals alone can form a Company Capital Contribution No minimum requirement INR 1 Lakh for Private Company and INR 5 Lakh for Public Company. Flexibility More Flexible Not Flexible CONVERSION OF COMPANY TO LLP (III & IV SCHEDULE) KEY BENEFITS: Flexibility to define terms & conditions. Minimal Government Intervention. Minimal Cost of Conversion. No requirement of holding any meeting. Limited Liability as in case of Companies. No Capital Gain Tax if the transfer is in accordance with the provisions of section 47(xiiib) of Income Tax Act, The conversion should be in accordance with the provisions of Section 56 or 57 of the Limited Liability Partnership Act, Carry Forward and Set Off Losses and Unabsorbed Depreciation is protected. 11

12 TAXATION OF LLP The Finance Act, 2009 accorded LLPs the same tax treatment as a Partnership Firm. The provisions of MAT are however applicable. This may not have much practical relevance as the tax holidays are going away. Section 10(2A) exempts the share of income from LLP in the hands of partner. Dividend Distribution Tax is not applicable on distribution of profits by a LLP. LLP TAXATION Interest on loan by the partners- 12% Salary to the partners- as per Section 40b Book profit limit On the first Rs.3,00,000 of the book-profit or in case of a loss On the balance of the book-profit Remuneration allowed Rs.1,50,000 or at the rate of 90 percent of the bookprofit, whichever is more; At the rate of 60 percent Loan by the LLP to the partners- no deemed dividend; 12

13 LLP TAXATION Interest and salary earned by the partners of LLP- Nature of Income in the hands of the partners? Treated as a business income, though, conceptually, this should have been different. Use of assets of the partners by the firmdifference between a partnership firm and a LLP- The partner of LLP would have to offer Income from House Property. LLP TAXATION Services by the partner to the LLP Vs firm- like job work charges Liability of a partner of LLP for the arrears of tax by the LLP- Section 167C? Under this section, it is provided that if a Limited Liability Partnership is dissolved, then the partners are jointly and severally liable for the same, unless he proves that non recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part. This is like section 179 of the IT Act where a director of a private limited company would be personally liable for the tax liabilities of the company upon liquidation. 13

14 CA FIRMS TO LLPS LLP has limited liability and no limit on maximum members. Previously firms were not converting themselves to LLPs as Body Corporate were not allowed for being appointed as auditors To overcome this constraint, MCA vide General Circular No. 10 of 2011 dated 04/04/2011 has given clarification regarding the word Partnership. Awaiting for the ICAI guidelines Impact of Multidisciplinary Firm concept has to be also seen. DRIVERS OF DECISION REGARDING THE VEHICLE Drivers Firm LLP Company Tax advantages Yes Yes No-DTT Multi Investors No Yes Yes Borrowing Less preferred Less preferred Yes Flexibility Yes Yes Limitations Inter group services Sharing of profit differently from ownership No Yes Yes No yes No Limitation on number of owners Yes No Pvt ltd- 50 Transfer of funds Yes Yes No Easy exit Yes Yes Less options 14

15 CIRCULAR NO. 10 This circular states- The word Partnership wherever occurring in the Chartered Accountants Act, 1949, the Cost and Works Accountants Act, 1959 and the Company Secretaries Act, 1980 shall mutatis mutandis be construed as including those Limited Liability Partnerships (LLPs) where all the other partners are natural persons (individuals) and that the word partner shall also be construed accordingly. Though the amendments are brought in the Chartered Accountants Regulations, the existing Companies Act 1956 requires an amendment. LAND CONTRIBUTION TO THE FIRM AND LLP If a capital asset including immovable property is contributed to the firm, no separate stamp duty is required to be paid. This benefit is not available when an immovable property is contributed to the LLP; Section 45 (3) if a capital asset is contributed, the amount credited to the capital account of the partner would be considered as the consideration for the transfer of capital asset; Rule 23 of LLP Rules provides that an asset contributed to the LLP should be valued by a CA or Cost Accountant or an approved Valuer. Thus, the flexibility available in the case of a firm is not available in the case of a LLP. In the case of a firm, it is possible to value based on the indexed cost. 15

16 JOINT VENTURES LLP offers a best solution for a Joint Venture arrangement where two or more parties propose to work together in a single project; Road projects; infrastructure projects where two or more parties join together and bid for a work- LLP can be the best vehicle. Currently, JVs face several challenges like treatment by the department as an Association of Person, difficulty in convincing the tax authorities for registration etc and forming a LLP addresses the entire issue; Even usage of services from the group is permitted by a LLP. FDI THROUGH FIRM NRIs and Persons of Indian Origin are permitted to establish partnership firms on non repatriation basis; Repatriation of profit is always permitted as it is a current account transaction; Repatriation of capital is permissible under the USD One Million Scheme 16

17 FDI THROUGH LLP A foreign company or foreign LLP may apply in Form 25 and reserve their name for a period of three years which can again be renewed; Govt has amended the FDI Policy formally permitting FDI in LLPs; FDI in LLP is permitted in the open sectors only. If in any sector certain conditions are attached, LLP is not permitted- like FDI in real estate sector is not permitted; FDI THROUGH LLP Only capital contribution in cash is permitted; ECB by LLP is not permitted; FIIs and FVCs will not be permitted to invest in a LLP; An Indian company having FDI will be permitted to make downstream investment in LLP only if the company and the LLP operate in the same sector; LLPs with FDI will not be allowed to make any downstream investments; 17

18 CONCLUSION In a nutshell, the LLP form would enable entrepreneurs, professionals and enterprises providing various services to become commercially efficient suitable to their requirements. If suitable amendment is made regarding the availability of financial statements for public access, LLP can be the best vehicle to choose. 18