Limited Liability Partnership – An Overview – III
(..cont.)
How LLP would be taxed?
The aspect of tax treatment of LLP is not clear. The bill tabled in Rajyasabha on 15th Dec. 2006 states that a LLP will be treated as a firm as defined under Income Tax Act 1961. This means that a LLP shall be liable to tax on profits after charging interest on capital and salary to partners. However, Naresh Chandra Committee and the concept paper on LLP, which was released by Ministry of Corporate Affairs in Nov. 2005, had clearly advocated tax transparency for LLP’s. This means that only LLP partners will be taxed and not the LLP itself. This committee, as per clause no.5 of the First Schedule has suggested that no remuneration or salary will be paid to LLP’s partners. There would only be sharing of profits and the partners would be taxed as per the tax rates prescribed by the government. Concept paper on LLP also advocates the deeming provisions which mean that the every activity carried on by LLP with a view of profit earning shall be deemed to be carried on by its partners. The property of LLP shall be deemed to be the property of its partners in their capital contribution ratio. Any dealing by LLP will be treated as by partners and will be subject to capital gains tax on the sale of any assets. Contribution made by partners irrespective of its nature i.e. tangible (money) or intangible assets (goodwill) should be disclosed in the books of accounts. There is an ambiguity in the Bill relating to the methodology of valuation of assets as well as the provisions of taxation of LLP. There is also uncertainty regarding the stamp duty in the event of amalgamation or merger. If their will be stamp duty then at what rates it will be levied and are there any concessional rates provided by the government?
What is the difference between LLC and LLP?
|
Particulars |
Limited Liability Company(LLC) |
Limited Liability Partnership(LLP) |
|
Governance |
The Companies Act, 1956 |
The LLP Bill, 2006 |
|
Name |
Suffix Limited/ Private Limited |
Suffix LLP or Limited Liability Partnership. |
|
Minimum members/ partners |
Private LLC: Min. 2 members & Max. 50 members as per sec 3 of Companies Act, 1956 |
Minimum 2 and no limit for maximum number. |
|
Designated partners/ Directors |
Two persons. Citizenship not necessarily be Indian. |
Two partners. One must be Indian citizen. |
|
Identification Number |
DIN (Director Ident. No.) |
PIN (Personal Ident. No.) |
|
Management |
Board of Directors (BOD) |
Designated Partners |
|
Liability |
Liability of Shareholders is limited to the extent of total amount due on shares subscribed |
Liability of a Partner limited to the extent of his capital contribution or agreed to be contributed as per LLP agreement |
|
Common seal |
Yes |
Yes |
How to convert an existing entity into LLP?
The LLP Bill provides flexibility of conversion of existing entities into LLP as under:
§ Clause 54 of schedule II deals with the provisions of converting existing professional firms or business firms to LLP.
§ Clause 55 of schedule III shall apply at the time of conversion of a private limited company to a LLP.
§ Clause 55 of schedule IV shall apply at the time of conversion of an unlisted public company to a LLP.
Epilogue
This kind of business organization has been structured keeping in mind the present day needs of business. It is the form of business entity which assigns limited liability to the partners. No doubt that the bill will benefit the businessmen as well as professionals. Introduction of LLP in India will open the avenues for professionals where the services rendered will be of global standards. It will lead to more productivity and will definitely help in the overall growth of economy as well.