LLP & IT’S INCORPORATION IN INDIA- I
This article would through light on procedural aspect of LLP right from the incorporation to winding up.
INTRODUCTION
The concept of Limited Liability Partnership (LLP) in India is viewed as an alternative corporate business vehicle that provides the benefits of limited liability and also allows its members the flexibility of organizing their internal structure as a partnership based on a mutually arrived agreement. The revised Bill received the assent of the President of India on 7, January 2009.
LLP is a body corporate formed and incorporated under the LLP Act, which is a distinct legal entity separate from that of its partners. Introducing LLPs, as a new business structure 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 will also provide an aid to the growth of service sector in India. Further, the provisions of the Indian Partnership Act, 1932 shall not apply to a limited liability partnership.
SALIENT FEATURES
The salient features of the act are as follows:
1. LLP can be formed by any two or more person, associated for carrying on a lawful business, by subscribing their names to incorporation document.
2. The rights and duties of LLP and its partners shall be governed by an agreement between partners or between LLP and the partners.
3. The LLP will be a separate legal entity, liable of its assets, with liability of the partners being limited to their agreed contribution in the LLP.
4. Every LLP shall have at least two partners and shall also have at least two individuals as Designated Partners, of whom at least one shall be resident in India.
5. The LLP shall be under an obligation to maintain annual accounts reflecting true and fair view of its state of affairs.
6. A firm, private company or an unlisted company is allowed to convert itself into LLP.
7. The act provides for the winding up of LLP which may be either voluntary or by the tribunal.
8. The provisions of the Indian Partnership Act, 1932 not applicable on LLP.
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This article has been authored by CA. Rajat Mohan. He is an Associate Member of Institute of Chartered Accountants of India (A.C.A.) and also passed final examination of Company Secretary Course conducted by Institute of Company Secretaries of India. has written 4 book on direct as well indirect taxes. He is Deputy Convener for GST Research Study Group of NIRC of ICAI. He is a regular contributor of articles on tax matters, which are published on several online portals and in the columns of reputed tax journals and magazines. He conducts seminar/workshops for professionals and students on ‘GST’ and ‘Income Tax and Service tax’ respectively. He ca be reached :rajat.mohan@icai.org
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Incorporation of Limited Liability Partnership (LLP)
The procedure for incorporation of LLP is same as that of Incorporation of a Company, which as given below:
Registration of User
In order to access this site every user needs to be registered with this site by filling an online form
1. Register yourself on the website of LLP, i.e. www.11p.gov.in by clicking on “Register” tab on top right hand corner of the page.
2. Also upload your digital signature certificate.
Obtaining Designated Partner Identification Number
Every Designated partner of the proposed LLP shall obtain “Designated Partner Identification Number (DPIN), by filing Form – 7 online.
1. Individual Designated Partner shall Log in to their account by entering user name and password. After this, open Form 7 Form E-forms and fill the required information.
2. Submit the application form online after Paying filing fee of Rs. 100 online. Note the provisional DPIN generated by the system.
3. Take the print out of the application form, affix a latest passport size photograph and get it attested/certified for submission physically, along with documentary evidences (proof of identify and proof of residence).
4. Deliver the printed and signed application form, along with the prescribed documents by hand/courier/registered post to the Office of Registrar, Ministry of Corporate Affairs, 3rd Floor, “Paryavaran Bhawan”, CGO Complex, Lodhi Road, New Delhi – 110003.
Reserve name of proposed LLP
Name of Proposed LLP may be reserved by any Partner/Designated Partner by filing Form-1.
• Individual Designated Partner of Partner shall Log in to their account by entering user name and password. After this, open Form 1 from E-forms and fill in the details. Details of minimum two designated partners of the proposed LLP, one of them must be a resident of India, is required to be filled in the application for reservation of name. Only individuals or nominees on behalf of the bodies corporate as partners can act as designated partners.
• Select name of the proposed LLP (max. 6 choices can be indicated).
• Attach Digital signatures, pay the necessary fee online and submit the e-form on LLP Portal.
Incorporation of LLP
This is the last step of incorporating a LLP, where Form-2 is required to be filed with registrar along with necessary documents.
1. After the name is reserved by the Registrar, log on to the portal and fill up Form-2 “Incorporation Document and Statement”.
2. Pay the prescribed fee for registration as specified under ‘Annexure A’ of the LLP Rules, 2009.
3. Statement in the e-form is to be digitally signed by a person named in the incorporation document as a designated partner having permanent DPIM and also to be digitally signed by an advocate/company secretary/chartered accountant/cost accountant in practice and engaged in the formation of LLP.
4. Following documents are required to be filed along with Form-2:
- Copy of authorization where the partner is a limited liability partnership, or company, or a limited liability partnership incorporated outside India or a company incorporated outside India.
- Proof of address of registered office of limited liability partnership.
- Details in respect of names of partners / witnesses and their signatures.
- Any other document as specified in the form.
5. Registrar will register the LLP, within 14 days of filing of Form-2 and a certificate of incorporation will be issued to LLP in Form-16.
Filing of other information
Following documents are required to be filed within 30 Days of incorporation of LLP or these may also be filed simultaneously at the time of filing Form-2.
• Form 3 – Details of LLP agreement
• Form 4 – Notice of Appointment of Partner/Designate Partner.
In the next part awe will discuss about other issues like conversion of Private & Unlisted Public Company into LLP & winding up of LLP .
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.)