Bombay Chartered Accountants Society

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1 Limited Liability Partnerships (LLP) Formation and Corporate Restructuring Bombay Chartered Accountants Society Suburban Study Circle Jointly with Direct Tax Study Circle July 5 th, 2014 CA Saroj V. Maniar & Associates LLP

2 LLP- Presentation Outline Overview of LLP Features LLP Act, 2008 & LLP Rules, 2009 Comparison with other legal forms Direct tax Provisions Conversion to LLP FEMA Provisions Debate 1

3 LLP What is LLP Hybrid of Corporate L L P Partnership LLP is - A corporate business vehicle - Combines and operates in flexible, innovative and efficient manner - Provides benefits of limited liability - Allows its members the flexibility for organizing their internal structure as a partnership. (Source MCA Website 2

4 LLP Significant Features Hybrid between a partnership firm and a company Is a body corporate to carry on any business Considered as Firm for taxation purposes Limits liability of partners to the extent of their contribution barring certain circumstances Various tax advantages as compared to a company 3

5 LLP Features Cont d Governed by LLP Act 2008 and LLP Rules 2009 Separate legal existence Perpetual succession Partners are agents of LLP and not of other partners 4

6 BUSINESS OF LLP Can carry on any business activity Practically, NBFC activity cannot be carried on, as RBI not granting approval to RoC 5

7 WHO CAN BE A PARTNER? Minimum two partners No limit on number of partners Individual and/or Body Corporate Company, LLP Non Resident, Foreign Company HUF, Trust, or Partnership Firm? Circular No. 13/2013 dated Karta, Trustee, Partner? Minor or its guardian? 6

8 LIABILITY OF PARTNERS Limited to the extent of capital contribution Not liable for the wrongful acts / omissions of other Partners Unlimited liability of Partners in case of fraud Any difference in liability of Partners and Designated Partners? Liability in case of income tax dues 7

9 DESIGNATED PARTNER (DP) Difference between Partner and Designated Partner Roles, Functions and Duties Minimum two DPs At least one should be resident individual Can body corporate be DP? Residential Status of DP Consent DPIN requirements 8

10 FIRST SCHEDULE TO LLP ACT All partners are entitled to share equally in the capital, profits and losses of the LLP. The LLP shall indemnify each partner in respect of payments made and personal liabilities incurred by him in the ordinary and proper conduct of the business of the LLP; or in or about anything necessarily done for the preservation of the business of property of the LLP. Every partner shall indemnify the LLP for any loss caused to it by his fraud in the conduct of the business of the LLP. Every partner may take part in the management of the LLP. No partner shall be entitled to remuneration for acting in the business or management of the LLP. 9

11 FIRST SCHEDULE TO LLP ACT..contd No person may be introduced as a partner without the consent of all the existing partners. No change can be made in the nature of business of the LLP without consent of all the partners. All issues shall be decided by a resolution passed by a majority in number of the partners, each partner shall have one vote. All decisions to be minuted within 30 days and maintained at the registered office Each partner shall render true accounts and full information of all things affecting the LLP to any partner or his legal representatives. 10

12 FIRST SCHEDULE TO LLP ACT..cont d If a partner carries on competing business without the consent of the LLP, all profits to be handed over to the LLP. Any benefit derived by partner without the consent of the LLP from any transaction or use of the property, name or any business connection of the LLP to be handed over. Majority of the partners cannot expel a partner unless by express agreement between the partners. All disputes between the partners arising out of the LLP agreement which cannot be resolved to be referred to arbitration. 11

13 CAPITAL CONTRIBUTION Should every partner contribute to the capital? Capital Contribution Ratio vis-à-vis Profit Sharing Ratio Contribution in the form of tangible, intangible, movable or immovable property or other benefits Valuation of property Rule 23 - Disclosure in the books of accounts Monetary value of contribution - whether necessarily market value? 12

14 CESSATION & ASSIGNMENT OF PARTNERSHIP INTEREST Voluntary retirement Compulsory cessation Death Dissolution of LLP Declared to be of unsound mind Adjudged as insolvent Right to transfer / assign rights in LLP Absolute Right cannot be restrained by LLP Agreement Partial rights or complete rights Continues as Partner vis-à-vis LLP 13

15 ACCOUNTS AND AUDIT Accrual or Cash method of accounting Rule 24(1) and Rule 24(2) - Accounting Records Normal books of account Statement of account and solvency for a financial year to be filed within 6 months from the year end Statement of Assets and Liabilities Statement of income and expenditure Certification by Auditor Compulsory audit if turnover exceeds Rs. 40 lakhs or if total contribution exceeds Rs. 25 lakhs Auditors to be appointed by Designated Partners 14

16 MERGER Compromise / Arrangement LLP and its creditors LLP and its partners Consent Three-Fourths in value National Company Law Tribunal (NCLT) Reconstruction / Amalgamation Report from ROC 15

17 DISSOLUTION AND WINDING UP Limited Liability Partnership (Winding up and Dissolution) Rules 2012 Voluntary Winding Up Section 486 to 488 of Companies Act, 2013 apply Resolution Approval of creditors and notice Liquidator Compulsory Winding Up by NCLT Number of partners reduced below 2 for a period of more than 6 months LLP unable to pay its debts Default in filing Statement of Account & Solvency or Annual Return for 5 consecutive financial years 16

18 Comparison An overview Parameters Company LLP Partnership Firm Status 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. Not a separate legal entity. Can act only through its partners. Capital Profits Taking out capital/ Drawing Company limited by shares must have a minimum authorized and paid up share capital. Share capital has to be divided into shares May pay salaries and dividends from distributable profits. Not permitted generally, though companies may be able to purchase or redeem their own shares subject to provisions of the Act. No mandatory requirement for capital/contribution. This would be regulated through agreement among LLP Partners. LLP Agreement determines all such issues. Depends on the LLP Agreement No mandatory requirement for capital in the Act. Partnership Agreement is the basis for capital contribution/ withdrawal etc. Partnership Agreement determines all such issues. Depends on the Partnership Agreement 17

19 Comparison An overview Parameters Company LLP Partnership Firm Management Management through Board of directors. Private company to have at least two directors, public company to have at least three directors. Decision Making mechanism Majority rule prevails in directors meetings. In case of shareholders, there can be ordinary resolution (majority rule) or there can be special resolution (not less than 75% majority) At least two Designated Partners are must. One of Designated Partners must be resident in India. Subject to this requirement and subject to LLP Agreement, all partners would have equal powers. Companies may also become partners of LLP. LLP Agreement to decide decision taking mechanism. According to First Schedule, except for a few decisions on which unanimous approval of partners is required, majority rule would prevail. At least two partners are must as per Partnership Act, Maximum number of members restricted to 10 in case of banking firms and to 20 in case of other firms. Partnership Agreement decides decision making mechanism. In the absence of any agreement, provisions of the Partnership Act, 1932 are applicable 18

20 Comparison An overview Parameters Company LLP Partnership Firm Written Resolutions Disclosures Audit Taxation Registration as a Non for Profit Organisation Decisions are taken by way of written Resolutions Accounts to be filed with ROC. Annual Return and other timely disclosures required to be filed with ROC Mandatory for all companies Company taxable as a separate entity Possible for companies under sec 25 of the Companies Act Decisions taken to be recorded in accordance with First schedule Provisions similar to companies would be applicable for LLP. Though number/nature of disclosures is lesser/less stringent Exemptions for smaller LLPs are provided From tax angle, LLP is treated as Firm Not permitted No such requirement No requirement of filing of accounts Audit not provided under the Partnership Act. Partnership Firm is taxable as a separate entity. Not permitted 19

21 Comparison An overview Parameters Company LLP Partnership Firm Statutory Framework Liability of Members/ Partners Constitution Meetings Companies Act, 1956 LLP Act, 2008 Partnership Act, 1932 Limited to amounts unpaid on shares Memorandum of Association (MOA) and Articles of Association (AOA) are the basic documents under which a company would regulate its affairs. Filing of MOA and AOA and any change there in must with ROC. At least one Annual General Meeting(AGM) of members required. Board of directors to meet at least four times in a year Limited to amount of capital agreed to be contributed, according to LLP Agreement Agreement between Members recommended but not essential. In case of no agreement, default provisions as per schedule I to the Bill would be applicable No such requirement Liability is unlimited; jointly as well as severally Partnership Agreement between members recommended but not essential. Registration of a firm under the Partnership Act is optional No such requirement 20

22 LLP Direct Tax Implications Firm includes LLP, Partner includes partner of LLP and Partnership includes LLP Income of LLP taxable at flat rate of 30% (plus 10% surcharge if total income exceeds Rs. 1 crore plus 3% education cess ) MAT u/s 115JB not applicable but Alternate Minimum Tax (AMT) u/s 115JC may apply. Rate of AMT 18.5% (plus 10% surcharge if total income exceeds Rs. 1 crore plus 3% education cess in all cases) of Adjusted Total Income ROI to be signed by DP. In the absence of DP, due to unavoidable reasons, any partner can sign ROI If tax due from LLP is not recoverable, jointly and several liability of partners of that year unless such partner proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of LLP Section 44AD (presumptive scheme of taxation) is not applicable 21

23 LLP - Tax Implications (Contd.) LTCG & STCG taxable Particulars Resident Partners - Remuneration & Interest paid by LLP to partners allowed (Remuneration - 90% of first Rs.300,000 of book profits or Rs. 150,000 whichever is higher and 60% of balance book profits) (Interest - the limit of 12% per annum would also apply to such interest) Share of profit received by partner exempt Non-Resident Partners - No specific exemption for such payment of remuneration and interest Remuneration and Interest received by partner taxable Retirement or Death of Partner -,losses proportionate to the share of the retired or deceased partner are not available for carry forward and set off Section Applicable Sec. 112 & sec. 111A Sec. 40(b) Sec. 10(2A) Sec. 195 and provisions of DTAA Sec. 28(v) Sec. 78(1) 22

24 Procedure for Conversion to LLP Conversion has been defined as being the transfer of the property, assets, interest, rights, privileges, liabilities, obligations, and the undertakings of the firm, private company or unlisted public company to the LLP in accordance with the respective Schedule. Conversion of Firm to LLP Statutory Sec. 55, Second Schedule All the firm partners to become partners in LLP & no one else. Subsequently, change is permissible Incorporation document to be filed with registrar. If satisfied, it will issue certificate of incorporation On registration, all assets and liabilities of the firm shall be transferred to and vest in the LLP Firm shall be dissolved and removed from the records maintained under the Partnership Act Proceedings pending in any court against the firm and all existing contracts of the firm continue by or against the LLP Every partner of firm shall continue to be personally liable for obligations of the firm incurred prior to the conversion 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 from the date of registration converted from a firm into an LLP name and registration of the firm from which it was converted. 23

25 Conversion to LLP Conversion of Company to LLP Statutory Sec. 56, Third Schedule (Conversion of Private Company) Sec. 57, Fourth Schedule (Conversion of Unlisted Public Company) All shareholders become partners & no one else. Restriction applicable until the incorporation of LLP. Incorporation document to be filed with registrar. If satisfied, it will issue certificate of incorporation No security interest subsisting in assets of the company at the time of making an application On registration, all assets and liabilities of the company shall be transferred to and vest in the LLP The company shall be deemed to be dissolved and removed from the records of the RoC Proceedings pending in any court and all existing contracts shall be enforceable by or against the LLP 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 from the date of registration converted from company into an LLP name and registration of the company from which it was converted. 24

26 Stamp Duty Implications Company having immovable property converted into LLP whether there is liability for payment of stamp duty? As per Section 58 of LLP Act, 2008, all the assets and liabilities vests into LLP. There is no transfer of assets and liabilities MCA FAQ: 25

27 Chartered Accountants in Practice vis a vis LLP Can form a new LLP or convert existing firm to LLP Section 226(3)(a) of the Companies Act, 1956 provides that a body corporate will not qualify for appointment as Auditor of a company LLP being a body corporate could not become the Auditor of a Company The Ministry of Corporate Affairs have issued clarification vide General Circular No. 30A/2011 on 26/05/2011 that LLP of Chartered Accountants will not be treated as body corporate for the limited purpose of Section 226(3)(a) of the Companies Act,

28 Chartered Accountants in Practice vis a vis LLP (Contd.) Statutory Compliances Section 55 of LLP Act, 2008 Second Schedule of LLP Act, 2008 Provisions of Chartered Accountants Act, 1949 Chartered Accountant Regulations, 1988 Code of Ethics issued by ICAI Circular 09/2013 of MCA If a CA Firm, being an auditor in a company under Companies Act, 1956 is converted into LLP, the LLP is deemed to be the auditor. Auditee company to take note of change in status 27

29 CONVERSION OF FIRM TO LLP TAX IMPLICATIONS Continues to remain a partnership firm Explanatory Memorandum to Finance (No.2) Bill 2009: As an LLP and a general partnership is being treated as equivalent (except for recovery purposes) in the 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. If there is a violation of these conditions, the provisions of section 45 shall apply. Also automatic vesting by Operation of Law 28

30 LLP - Tax Implications (Conversion of Company to LLP) Section 47(xiiib) Capital gains exempt on transfer of capital assets, intangible assets, shares on conversion of company to LLP subject to following conditions: All assets & liabilities of company are taken over by LLP All shareholders of company become partners of LLP and their CCR & PSR in LLP are in same proportion as their shareholding in company Shareholders of company do not receive any consideration on conversion other than share in Profit & Capital Contribution in LLP Aggregate of PSR of Shareholders of company, in LLP should not fall below 50% for 5 consecutive years from conversion date Total sales, Turnover or Gross Receipts of company should not have exceeded Rs. 60 lakhs in any of 3 years preceding year of conversion Partners are not paid any amount from accumulated profits of company for 3 years from conversion date If any of above conditions are not satisfied subsequently, such conversion shall be chargeable to tax in hands of LLP in year of non-compliance 29

31 LLP - Tax Implications (Conversion of Company to LLP - Contd.) Particulars B/f losses and depreciation of the predecessor company - deemed to be current year losses and depreciation of LLP Condition Shareholders of the company need to hold 50% PSR in LLP for 5 years from date of succession MAT credit available in hands of company not allowed to LLP Depreciation to be apportioned between Company and LLP in the ratio of no. of days for which assets were used Expenditure on voluntary retirement incurred by Company to be amortized in hands of LLP Section Applicable Sec. 72A Sec. 115JAA Sec. 32 Sec. 35DDA COA of asset to LLP = COA to company + COI by company and LLP Sec. 49(1) Holding period of company to be considered to determine nature of CG Sec. 2(42A) 30

32 Aravali Polymers LLP vs. JCIT (ITAT Kolkata) Aravali Polymers LLP was formed on conversion of the company into LLP Post conversion but in the same year, the assessee gave interest free loans to its partners in the profit sharing ratio partially out of the accumulated profits standing in the accounts of the company on the date of conversion the assessee sold the shares held in a listed company which vested with it upon conversion and earned capital gains. As per one of the conditions mentioned in Section 47(xiiib) (specific provision which exempts capital gains arising to a company and its shareholders, on account of conversion of company into LLP pursuant to provisions of LLP) no amount to be paid, either directly or indirectly, to any partner out of the balance of accumulated profit standing in the company s accounts on the date of conversion for a period of three years from the date of conversion Tribunal's ruling: The grant of interest-free loan to partners in the profit-sharing ratio partially out of accumulated profits existing on the date of conversion resulted in breach of one of the exemption conditions 31

33 Aravali Polymers LLP vs. JCIT (ITAT Kolkata) Tribunal's ruling (contd.): the breach took place in the same year as conversion by virtue of which the exemption was never available to the assessee AO computed capital gains by adopting the market value of the shares on the date of conversion as per section 47A(4). Sec. 47A(4) applies to a case where the exemption u/s 47(xiiib) is available and the conditions laid down in the proviso are not complied with. However, the AY under consideration is the same in which conversion took place and conditions were violated. Under sec. 45, the market value of the asset transferred cannot be deemed to be the consideration. Capital gains cannot be computed on the basis of market value of assets on the date of conversion but should be computed on the basis of actual value at which assets are transferred The Tribunal gave a direction to the Tax Authority to compute capital gains by adopting the figure at which assets of predecessor company were actually acquired 32

34 LLP FEMA Provisions FDI in LLP with prior approval of FIPB permitted in 2011 without corresponding amendments in FEMA. Amendments have now been made to incorporate changes in FDI in LLP vide Circular No. 123 dated April 16, 2014 Definition Eligible Investor Eligibility of LLP for accepting FI Amendments A person resident/ incorporated outside India other than citizen/ entity of Pakistan and Bangladesh and SEBI registered FII, FVCI, QFI, RFPI Activities where 100% FDI is allowed under automatic route would be eligible to receive FDI (eg. Housing and Real Estate, Films etc.) Activities where 100% FDI under automatic route available but are subject to FDI-linked performance conditions would not be allowed Government approval required in all cases 33

35 LLP FEMA Provisions Definition Eligible Investment Pricing Guidelines Amendments Contribution to capital of LLP must be in cash only Investment by way of profit share will fall under category of reinvestment of earnings FDI in LLP, in any form, would have to be more than or equal to fair price as worked out with any valuation internally accepted. Valuation needs to be supported by CA certificate In case of transfer of capital contribution/ profit share from: From R to NR: Consideration should be more than/ equal to Fair Price valuation From NR to R: Consideration should be less than/ equal to Fair Price valuation Reporting Particulars Time Limit Form Disinvestment/ Transfer of Capital Contribution or Profit Share between R and NR or vice versa Within 60 days from date of receipt of funds FDI-LLP (II) 34

36 LLP FEMA Provisions Definition Reporting to RBI Amendments Particulars Time Limit Form Details of receipt of consideration for capital contribution/ profit shares along with following documents: Valuation certificate Copies of FIRC KYC report on NR investor LLP s which have received FI between 20 May 2010 till date of issuance of notification Within 30 days of date of receipt Within 30 or 60 days from date of issuance of notification Form FDI-LLP(I) In the above applicable forms 35

37 LLP FEMA Provisions (Contd.) Definition Downstream Investment Other Conditions Amendments An Indian company, having FI can make downstream investment in LLP only if company as well as LLP are operating in sectors where 100% FDI is permitted under automatic route LLP with FDI is not eligible to make any downstream investments in any entity in India The DP in an LLP with FDI can be a nominee of a body corporate i.e. only a company if the body corporate is registered in India No other body like a LLP or trust can be a DP DP is responsible for all conditions and penalties imposed Conversion of company with FDI to LLP is allowed only if all conditions except mode of payment is satisfied LLPs` is not permitted to avail ECB 36

38 LLP FEMA Provisions (Contd.) Circular 131/2014 Regulation 2 of Foreign Exchange Management (Transfer or Issue of Any Foreign Security) (Amendment) Regulations, 2004 has been amended and accordingly the definition of "Indian Party" now includes an LLP also. Accordingly, LLP can make direct investment in a Joint Venture or Wholly Owned Subsidiary outside India. The total financial commitment of the Indian party in Joint Ventures/Wholly Owned Subsidiaries shall not exceed 100% of the net worth of the Indian Party as on the date of the last audited balance sheet 37

39 Debate! Can a Minor become a partner/ designated partner? Can a Non resident become a designated partner? Should remuneration to partner from LLP be considered for Tax Audit Limits? Is a new PAN required in case a firm / company gets converted to LLP? 38

40 Debate! Stamp Duty on agreement of conversion? Stamp Duty on immovable property? Should every partner contribute to the capital? Should preference shareholding be considered for satisfying the criteria of proportion of shareholding? Can a partner get share of profit without any/ minimum contribution to capital? 39

41 Debate! Can multiple firms convert into 1 firm? Can the property of partnership firm be transferred to name of LLP on conversion? Do Companies have to still hold AGM for year ending 31 st March, when they converted to LLP in April? Would the same Power of Authority in the name of CA Firm be valid for CA LLP? 40

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