WHAT IS PARTNERSHIP? AN INDIAN OVERVIEW
We live in globalised competitive world. Today’s business has not been one mans show as it was few years back. For any business to survive alliance is almost necessary. Alliance may be in any form like partnership, joint venture, mergers & acquisitions. This article would give a brief about partnership firm.
What is partnership?
In layman’s language its two or more persons coming together for common purpose. Sec. 4 of the Indian Partnership Act 1932 defines partnership as “it is the relation between persons who have agreed to share the profits of a business carried on by all or any one of them acting for all.” The persons who have entered into partnership with one another are called as partners & collectively known as firm. The firm has not a legal entity in India.
What are the essential elements of partnership?
1. Association of two or more persons.
There must be at least two or more persons to form a partnership. The partnership act is silent about the maximum numbers of partners in a firm. But the Indian Companies Act 1956 lays down that: (1) where the firm is carrying on banking business, the number of partners should not exceed 10, & (2) where the firm is carrying on any other business, the number of partners should not exceed 20. If the number of maximum partners exceeds these limits, the partnership becomes illegal association of persons.
2. Agreement between the persons.
As per sec.5 of Partnership Act, the relation of partnership arises from contract & not from status. The agreement of partnership may be expressed or implied.
3. Business.
Partnership can be formed only for the purpose of carrying on some business. Sec.2 (b) Partnership Act defines as it includes every trade, occupation or profession.
4. Sharing of Profits
The sharing of profits is only a prima facie evidence of the existence of partnership and this is not the conclusive test of it.
5. Business carried on by all or any one of them acting for all.
The mutual agency relationship amongst the partners is the cardinal principle which governs partnership. That means each partner is the agent of the firm as well as of the other partners.
Who can become the partners?
As per definition, “Partnership is an agreement.” Therefore all persons who are competent to contract can become partners. Sec.11 of the Indian Contract Act 1872 defines that “every person is competent to contract who is of the age of majority according to law to which he is subject and is of sound mind and is not disqualified from contracting by any law to which he is subject.”
Types of Partnership
Partnership can be classified:
A. Partnership at will (sec.7)
A partnership is called partnership at will when (a) the partnership is not for fixed period of the time and (b) when no provision is made as to when and how the partnership will come to an end. Partnership at will can be dissolved at any time when any partner chooses to do so after giving notice in writing to all other partners. The firm is then dissolved from the date mentioned in the notice as the date of dissolution and if no such date is mentioned then from the date of communication of the notice.
B. Partnership for fixed period
Where the partners agree to carry on its business for a definite term then the partnership is known as partnership for fixed period.
C. Particular Partnership
Particular partnership is a partnership formed for a particular adventure or undertaking. On completion of such undertaking or adventure the partnership is usually dissolved. But if all the partner mutually agrees to continue partnership then it becomes partnership at will.
You can also read my article on Limited Liability Partnership. My next few articles will be on how to get partnership firm registered in India? & Dissolution of partnership firm.
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.
Limited Liability Partnership – An Overview – II
(..cont.)
What are the key features of a LLP?
The key features of a LLP incorporated in India are as follows:
1. LLP is a body corporate. It is must for every LLP to get registered with the Registrar of Companies (ROC) similar to that of setting up of a company. Its name should be unique i.e. there should not be another LLP having similar name.
2. LLP is distinct from its members. The liability of members is limited to the extent of their contribution.
3. The LLP must have at least 2 members. Any legal person may be a member of a LLP. Each partner is the agent of the firm and not of the other partners. The LLP shall not be liable for the acts of a partner if the partner in fact does not have an authority to act on behalf of the LLP even if the third person knows or does not know this fact and believes that he is a partner of the LLP.
4. Management includes at least 2 members as ‘designated members’ out of whom one member should be resident in India. The designated members will have the statutory responsibility for complying with various departments. According to U.K. LLP Act (2000), there are some extra responsibilities on designated members. In particular they are responsible for:
§ Appointment of an auditor (if it is needed),
§ Signing the accounts on behalf of the members,
§ Delivering the accounts to the Registrar,
§ Notifying any changes in case of memberships, registered office address, or the name of limited liability partnership,
§ Preparing, signing and delivering to the registrar an annual return, and acting on behalf of limited liability partnership if it is wound up and dissolved.
The Designated members will be held liable for the penal action in the event of failure of compliance with their responsibilities. Unless otherwise specified to the ROC, all the members of LLP will be designated members.
5. The LLP has a complete flexibility in setting up its internal structure and management. The duties and responsibilities of partners towards the LLP and towards each other depend on the agreements between the partners and the agreement between LLP respectively subject to the provisions under proposed legislation.
6. Similar to that of Companies, LLP will have an obligation of maintaining annual accounts reflecting a true and fair view. A Statement of Accounts and Solvency shall be filed by every LLP with the ROC every year. The LLP should get its Book of Accounts audited, subject to any class of LLP’s being exempt from this requirement by the Central Government. There is a provision that the government will have powers to investigate the affairs of a LLP and for that purpose the government may appoint one or more competent persons as inspectors.
What are the Disclosure Requirements?
1. The Disclosure requirements of a LLP are similar to that of a Company. They are required to disclose the following :
§ The LLP shall maintain such proper book of accounts as may be prescribed relating to its affairs for each year of its existence at its Registered Office on double entry basis. The accounting method employed may be on cash basis or accrual basis.
§ Every LLP shall, within a period of 6 months from the end of each financial year, prepare a Statement of Account and Solvency for the said financial year as at the last day of the said financial year. The partners of the LLP shall put their signatures on such statement evidencing their acceptance.
§ Every LLP shall file a Statement of Account and Solvency with the Registrar in the prescribed manner along with the requisite filing fee.
§ Every LLP shall get its accounts audited as per rules as may be prescribed. However, the Central Government may by notification exempt a class or classes of LLP from this requirement.
§ If an LLP fails to comply any of the aforesaid provisions then the LLP shall be punishable with not less than Rs. One Lakh which may extend to Rs. Five Lakh and the designated partners shall be punishable with fine not less than Rs.10000/- but which may extend to Rs.100000/-.
2. Disclosures by way of filing documents to Registrar are as follows:
§ To file Annual Return of a LLP with the Registrar within 60 days of closure of financial year in the prescribed manner along with the requisite fee.
§ To file a notice of change in the name of LLP registered with the Registrar in such form and manner as may be prescribed and accompanied with the fee.
§ To file the particulars of the designated partners and their consent to act as designated partner and the changes in the designated partners, within 30 days from the date of appointment in the prescribed form and manner.
§ To file a notice within 30 days from the date when a person becomes or ceases to be a partner.
§ To file a notice of any change in address of the registered office in such form and manner as may be prescribed and such change shall be effective only on filing of the notice.
§ To file a notice of any change in the name and address of a partner within 30 days of such change.(…cont.)
Limited Liability Partnership – An Overview – I
Introduction
Limited Liability Partnership commonly known as LLP is a concept which adopts corporate form. Thus it has an organizational flexibility of a company and a tax status of partnership with limited liability on its partners. LLP Bill was tabled in Rajyasabha on 15th December
2006 and is influenced by Limited Liability Partnership Act 2000 of UK. The LLP will help in bridging the gap between the partnership firms and corporate entities which are governed by Partnership Act, 1932 and the Companies Act, 1956. It will be a win-win situation for professionals as well as for users. It will help professionals of various fields in integrating
and providing various services under one roof and increase their global competitiveness. For e.g.: Chartered Accountants, Company Secretaries, Cost Accountants, Advocates, and Architect etc. may join their hands together to explore their respective expertise in order to achieve the ultimate goals.
What is an LLP?
In LLP all partners have a form of limited liability, similar to that of shareholders of a
company. However, the partners have right to manage the business directly and (in many areas) with a distinct advantage of nil tax liability as compared to partnership firm and a company. LLP is a body corporate (i.e. it acquires legal status of its own, separate and distinct from its members) formed and incorporated under LLP Act. The word ‘BodyCorporate’ as defined in the bill means a company referred in the Companies Act, 1956 and includes LLP- registered under LLP Act, LLP’s incorporated outside India and companies incorporated outside India. The LLP has a perpetual succession. Any change in the partners will not affect the existence, rights or liabilities of LLP.
What are the observations of IInd Naresh Chandra Committee and J.J. Irani Expert Committee?
In India the need for LLP legislation gained momentum when IInd Naresh Chandra Committee submitted its report on 23rd July 2005 and made the following observations. “In increasing litigious market environment, prospect of being a member of a partnership firmwith unlimited liability is, to say the least, risky and unattractitive. Indeed the chief reason why, the firms of professionals, such as lawyers and accountants have not grown in size to successfully meet the challenge of the international competition. This makes an LLP a most attractive vehicle for partnership among professionals such as lawyers and accountants.” The central government appointed, the J.J. Irani Expert Committee on Company Law in the year 2005. The committee recommended that the “Limited Liability Partnerships should be facilitated through a separate enactment. Companies Act need not prescribe limitations on the number of members of other kinds of organizations.”
LLP’s International experience!
Limited Liability Partnerships are very popular form of business organizations in United Kingdom, United States and Singapore. In early 1990’s Limited Partnerships emerged in United States. As the years passed, over forty states of America adopted the LLP statutes by the year 1996, the year when the Uniform Partnership Act (UPA) came in to existence.
In United Kingdom, Limited Liability Partnerships are governed by Limited Liability Partnership Act, 2000. The Act become a law on 1stApril 2001. Under U.K. law, the LLP is a “fiscal transparency”. It means that it is not subject to taxation. Only members are liable to pay taxes.
How the LLP can be incorporated?
1. LLP can be incorporated when two or more persons intend to join together for a lawful business with a motive of earning profit and subscribe their names to the incorporation documents. The incorporation document should be filled in a prescribed manner along with fees with the registrar whose jurisdiction its registered office is situated. The incorporation document should be accompanied with the statement in prescribed form made by an advocate, company secretary, or chartered accountant who is engaged in formation of LLP and one partner who has subscribed to the incorporation document. This statement states that all the requirement of the Act and the rules made there under have been complied with respect of incorporation.
2. The required for incorporation are as follows:
§ The incorporation document shall be in a form as may be prescribed.
§ The name of LLP which is to be incorporated.
§ The proposed business of LLP should be mentioned in the document.
§ The name & address of the registered office should be inserted in the document.
§ The name & address of each person who are partners. The names of the designated partners of LLP should also be given.
3. The certificate of incorporation will be the conclusive evidence that the LLP is incorporated by the name specified in the incorporation document.You can also read my article on LLP-II and on What is partnership? (…..cont.)