by m sathya kumarm. sathya kumar - sirc of icai · pdf file‘limited liability...

‘Limited Liability Partnership’

By

M Sathya KumarM. Sathya KumarChartered Accountant

October 1, 2014

Why the concept came to In

Drawbacks in other forms of bu

Company

separation of ownership and manage

too many procedural requirements

return on profit cannot be mutually dreturn on profit cannot be mutually d

Partnership Firm

l d l b lunlimited liability

joint and several liability of partners

no perpetual succession

no separate legal existence (i.e. the f

Restriction on the number of partner

ndia?

usiness

ement

determined by shareholdersdetermined by shareholders

firm cannot sue or be sued upon)

rs

Why the concept came to In

Other Problems

Law does not permit incorporatedsecretaries, chartered accountants, la

Till date, the SME sector largely woproprietorship structures, wherein thcase may be are personally liable forcase may be, are personally liable for

Need for a flexible framework fodetailed legal and procedural requireg p q

ndia?

d companies to practice as companyawyers or related professionals.

rks through the regular partnership orhe partners and sole proprietor, as ther all liabilities of the business vehicler all liabilities of the business vehicle.

r small businesses without imposingements intended for large companies.g p

Evolution in India

Expert Committees (Naresh Chandra & JJ Irani) and Concept

Paper by MCA in 2006

LLP Bill 2008 Lok Sabha in 2008 and Prassent in JanPaper by MCA in 2006 assent in Jan

Press NoRBI Guidelines in Governmenin LLP in M

RBI Guidelines in March 2014

LLP combines limited liability of a com

passed by December resident’s nuary 2009

LLP Act 2008 notified on 31 March 2009 and Rules on 1 April 2009nuary 2009

Discussion Paper ote by on FDI in LLP in September 2010

nt for FDI May 2011

mpany and flexibility of a partnership

International Presence

AustraliaFFranceGulf CountriesItalySingaporeUnited KingdomUnited State of AmericaUnited State of AmericaIn some countries, with minor modificat

“Indian LLP structure is broadly bas“Indian LLP structure is broadly basStructuStructu

tion, the structure is known as LLC

sed on UK LLP and Singapore LLPsed on UK LLP and Singapore LLPure”ure”

Notified Dates

Rajya Sabha ‐ 24th October, 2008

Lok Sabha ‐ 13th December, 2008

President of India ‐ 7th January, 2009

Official Gazette 9th January 2009Official Gazette ‐ 9th January, 2009

LLP Act – Effective date 1st April, 2009

LLP Rules – Effective date 1st April, 2009

Various amendments made from time to

9

o time

LLP – As a Concept

LLP – As a concept

Partnership Firm

LLPFirm

An LLP is a business structure which cCompany and a Pa

CompanyP

7

combines the advantages of both a artnership firm.


Company

• Perpetual succession

• Body corporate

• Separate legal entity

• No cap on number of members

• Limited liability

• Registration with the Registrar of C iCompanies

LLP

Partnership Firm

• Internal governance structure based on mutual agreement

• Transferability of interest

• Personal liability in case of wrongful acts or omissionwrongful acts or omission

• Flexibility of adjusting profit share vis a vis capital

t ib ticontribution

PFeatures common with a firm

8


Compliance under

Income‐tax ActTax neutral conversion

Designated partners

Exemption from

LLP ActConversion cond

FIPB l

FEMAFIPB approval

ECB restric

r various laws

tm DDT

itions

tions

Governance

By Limited Liabilities Partnership Act 20

By Limited Liabilities Partnership Rules 2

By Registrar of Companies

By LLP Agreement between PartnersBy LLP Agreement between Partners

08

2008 as amended from time to time

Chartered Accountant’s Ro

Conducting feasibility study and evaluatstructuring options

Incorporation services

Compliance with regulations

Implementation assistanceImplementation assistance

Tax and regulatory services

le in LLP

ting

Opportunities of structurin

LLP Act provides for Conversion of:

Firm into an LLP;

Private company into an LLP; and

Unlisted public company into an LLP

Compromise/ arrangement of LLP

Between LLP and its creditors

Between LLP and its partners

Amalgamation/ Reconstruction of LLP

Winding up and dissolution of LLP

Setting up place of business of a foreign LL

ng

LP

Characteristics of LLP

Key features of an LLP

Body Corporate formed under the LLP Act - administered byRegistrar of Companies (‘ROC’)

Perpetual succession

Separate legal entity - can hold property / sue in its own name

Liability of Partner limited to the capital contribution (except incase of fraud / wrongful acts)

LLP can prepare financial statements on cash or accrual basis

Provisions prescribed for conversion of Company / Firm into Provisions prescribed for conversion of Company / Firm intoLLP

Governs the mutual rights and duties of Partners

LLP Agreement and contribution Governs the mutual rights and duties of Partners

Provisions of LLP Act to govern matters not covered in LLPAgreement

Mode of capital contribution governed by LLP Agreement –monetary or non monetary

Monetary value of contribution as per internationallyaccepted practice to be certified by a CA, Cost Accountantor approved valuer

N li i i b f P

Partners

No limit on maximum number of Partners

Partner can be an individual or a LLP / Company(Indian / Foreign)

Partner is an agent of the LLP but not of othergPartners

Profit sharing ratio amongst Partners may bedifferent from their Capital contributions

Interest in LLP can be assigned / transferred by a Interest in LLP can be assigned / transferred by aPartner

Designated Partners (‘DP’)

Minimum 2 DPs; at least one to be resident inIndia

Body corporate can be a DP, to appointindividual as nominee to act as a DP - Foreignindividual as nominee to act as a DP - ForeignDirect Investment (‘FDI’) restriction

DP responsible for compliance obligations andfilings under the LLP Act

1313

Activities

Can carry on any business or profession

Cannot carry out any non‐profit activitie

Cannot carry out business of lending, finactivities). No specific restriction in LLP Apermit these activitiespermit these activities.

“The primary intention of a LLP is thmirror that of the limited company buf p y

affairs it would be similar to

es.

nancing and investments (NBFCAct, 2008, but ROC and RBI does not

hat its external structure should ut in terms of conduct of internal f ftraditional partnership”

Company vis a vis LLP – Co

Basis Private Company(Companies Act, 2013

Corporate SocialResponsibility

• Constitution of CSR Committee apercent of the average net profpreceding 3 years mandatory for sp

Related Party Transaction • Prior approval of the share holderresolution at general meeting requito specified transaction by specifie

• The above restriction does nottransaction is at Arm’s Length Price.

Loan to director • Restricts advancing any loan/givproviding securities to any director oin which director is interested

omparative Study

3)LLP

nd spending of 2it of immediatelyecified companies

• No such provision and hence CSRspending not mandatory

r by way of specialired for entering in

• No such restriction in the case of LLP.

d companies

apply when the.

• A partner may transact business freely with the LLP.

ing guarantee or • No restriction for advancing anyr person (concern) loan/giving guarantee or providing

securities to any partner


Basis Private Company(Companies Act 2013)(Companies Act, 2013)

Inter‐corporate loans andinvestments

• Company cannot make investment throthan two layers of investment companies

P hibit C f• Prohibits Company fromloans/guarantee/securities or acquiringof other corporate up to a specified limit

Responsibility ofdirector/ partner

• The financial statements shall be attested‐ Chair person or at least two directors, CEO

director, CFO and Company Secretary.• Director responsibility statement to inclu• Director responsibility statement to inclu‐ System for compliance with all applicable

Applicable for all companies

omparative Study

LLP

ugh mores

i i

• No restriction for advancing any loan/ guaranteeor acquiring securities of any other bodycorporate.

givingsecuritiest

• However, LLP having FDI cannot borrow any loanfrom overseas.

d by:O if he is a

de

• The financial statements shall be attested by thedesignated partners

de :e laws‐


Basis Private Company(Companies Act 2013)(Companies Act, 2013)

Internal Audit • Applicable for specified companies

Cost Audit • Applicable for specified companies

Others • Maximum number of members re200;

• Mandatory to prepare books of acaccrual basis;

• Restricts number of directorshipRestricts number of directorshipperson to 20;

• Mandatory to hold at least 4 board m1 AGM every year; and

• More stringent condition for disquadirectors .

omparative Study

LLP

• Not Applicable

• Not Applicable

estricted to • No restriction on the number of partners;

Di ti t b k f tccounts on

help by a

• Discretion to prepare books of accounts onaccrual or cash basis;

• No restriction on number of firms in which aperson can become a partner;help by a

meeting and

person can become a partner;

• No such requirement to hold partners meetingor annual meeting; and

lification of• Less stringent condition for disqualification ofpartners.

Partnership Firm vis a vis L

Basis Partnership FirmsGo erning La P t hi A t 1932Governing Law Partnership Act, 1932

Registration Not Compulsory; but is preferr

Creation By partnership AgreementLegal Status Partners collectively known as

no separate legal statusSuccession Firm would cease to exist on

in partnership, unless otprovided in agreement

Ownership ofAssets

Partnership cannot own assename; assets must be in nPartners

Liability of Partners

Unlimited

Minor’s Position Minor can be admitted to benPartnership

LLP – Comparative Study

LLPLi it d Li bilit P t hi A t 2008Limited Liability Partnership Act, 2008

red Compulsory

By Laws ‘Firm’; LLP has separate legal status apart from

partnerschangeherwise

LLP would not be affected on change inpartnership (Perpetual Succession)

ts in itsame of

LLP can own assets in its own name

Limited

nefits of Law silent on position of Minors

Liability of LLP

An obligation of the LLP whether arissolely the obligation of the LLPsolely the obligation of the LLP

The liabilities of the LLP shall be met o

The LLP is liable if a partner of a LLP iswrongful act or omission on his partLLP or with its authorityLLP or with its authority

An act carried out by an LLP, or anyth li bilit f th LLP dpurpose, the liability of the LLP and pa

purpose shall be unlimited for all or athe LLPthe LLP

sing in contract, tort or otherwise, is

ut of the property of the LLP

s liable to any person as a result of ain the course of the business of the

y of its partners, for any fraudulentt h t d f f d l tartners who acted for any fraudulent

any of the debts or other liabilities of

Liability of partner

A partner is not personally liable, for ancontract or otherwise solely by reason ofcontract or otherwise solely by reason of

A partner is personally liable for his ownnot be personally liable for the wrongfulp y gthe LLP

A LLP is not bound by any act of its partnefact has no authority to act for the LLP inknows that he has no authority or does nof the LLPof the LLP

The doctrine of promissory estoppel wispoken or written or by conduct, represenspoken or written or by conduct, represento be represented to be a partner in an LL

obligation of the LLP, whether arising inbeing a partner of the LLPbeing a partner of the LLP

n wrongful act or omission, but he shallact or omission of any other partner ofy p

er in dealing with a party if the partner inn doing a particular act; and the personnot know or believe him to be a partner

ill apply to any person who by words,nts himself or knowingly permits himselfnts himself or knowingly permits himselfLP

Body of the Act

The Act is divided into 14 Chapters wit

Ch li iChapter 1 – Preliminary

Chapter 2 – Nature of limited liability partnership

Chapter 3 Incorporation of an LLPChapter 3 – Incorporation of an LLP

Chapter 4 – Partners and their relation

Chapter 5 – Extent and limitation of liability of LLPChapter 5 Extent and limitation of liability of LLP

Chapter 6 – Contributions

Chapter 7 – Financial disclosure

Chapter 8 – Assignment and transfer of partnershi

Chapter 9 – Investigation

Chapter 10 – Conversion into LLP

Chapter 11 – Foreign LLP

Chapter 12 – Compromise, arrangement or recons

th 81 Sections and 4 schedules

and partners and partners

ip rights

struction of limited liability partnership

Body of the Act

Chapter 13 – Winding up and dissolution

Chapter 14 – Miscellaneous provisions

Schedules

First Schedule – Mutual rights and duties of partagreement of such mattersagreement of such matters

Second schedule – Conversion of a Firm in to LL

Third schedule – Conversion of Private Limited CThird schedule Conversion of Private Limited C

Fourth Schedule – Conversion of unlisted Public

tners and LLP applicable in the absence of any

P

Company into LLPCompany into LLP

c Company into LLP

Key definitions

Body corporate’ is defined to mean a compand includes –

an LLP registered under the Act;

an LLP incorporated outside India; and

a company incorporated outside India,

but does not include –

a corporation sole;a corporation sole;

a co‐operative society; and

h b d ( b iany other body corporate (not being a coan LLP as defined in the Act), which the C

pany as defined in the Companies Act 2013

d fi d i h iompany as defined in the Companies ActorCentral Government may specify

Key definitions

‘Designated partner’ is defined to mean athe performance of all acts, matters and tLLP in respect of compliance of the provis

lti i d th LLP f tpenalties imposed on the LLP for any cont

‘LLP agreement’ is defined to mean any wf th LLP b t th LLP d itof the LLP or between the LLP and its p

rights and duties of the partners and their

‘Partner’ in relation to an LLP is defined‘Partner’ in relation to an LLP is definedpartner in the LLP in accordance with the L

n individual who shall be responsible forthings as are required to be done by thesions of the Act and shall be liable to all

ti f h i iravention of such provisions.

written agreement between the partnerst hi h d t i th t lpartners which determines the mutual

rights and duties in relation to that LLP.

d to mean any person who becomes ad to mean any person who becomes aLLP agreement.

Partners

Minimum two individuals as partners wPartners. There is no upper limit for num

Individuals, Foreign nationals, Indian CoIndividuals, Foreign nationals, Indian CoForeign LLP and Foreign LLC can become

I h t b diIn a case where corporate bodies are onbodies will have to nominate two individidentified as Designated Partners

Government issues guidelines for Foreigpartner in LLP They will be governed bypartner in LLP. They will be governed by

Minors cannot become partners of LLP

ho will be identified as Designated mber of partners

ompanies, Foreign Companies,ompanies, Foreign Companies,e partner.

l t t l t t tnly partners at least two corporate duals as partners who will be

gn LLP and Foreign LLC to become y FEMA regulationsy FEMA regulations.

Obligation of Designated Pa

Every LLP shall have atleast two individu

One of Designated Partner should be reresiding in India for more than 182 days

The Designated Partners are responsiblecompliance of Limited Liability Partnerscompliance of Limited Liability PartnersPartnership Rules, 2009.

Every designated partner will have to obIdentification Number (DPIN)’

Designated partner can retire from LLP

artner

uals as Designated Partners.

sident in India meaning he should be s in any financial year.

e for compliance of the statutoryhip Act 2008 and Limited Liabilityhip Act, 2008 and Limited Liability

btain ‘Designated Partner’s

.

Admission and Retirement

Any eligible entity can become partner oLLP is incorporated or at any time after

Any partner can retire from LLP at any tAny partner can retire from LLP at any tof LLP Agreement

LLP h t i f th R i t b t hLLP has to inform the Registrar about chpartners

of LLP at the time when the saidits incorporation.

ime subject to the terms and conditionime subject to the terms and condition

h i th iti f thhange in the composition of the

Transfer of Economic Inter

Any partner of a LLP can transfer and asperson subject to LLP agreement. Such apartner’s disassociation or dissolution a

The transferee or assignee shall not be emanagement or conduct of the LLP’s actb t f th LLPbe a partner of the LLP.

rest

ssign his full or part share to any third a transfer shall not by itself cause the nd winding up of LLP.

eligible to participate in the tivities. He will not be deemed to

First Schedule

The provisions of First Schedule are subjstipulated in the LLP agreement.

All the partners are entitled to share eqof LLPof LLP

LLP shall indemnify each partner in respincurred by him in the ordinary course o

Every partner can take part in the manaEvery partner can take part in the mana

No partner shall be entitled to remunerb i f LLPbusiness of LLP

ject to the terms and conditions

ually in the capital, profits and losses

pect of payments and personal liability of business of LLP

agement of LLPagement of LLP

ration for managing and conducting

First Schedule

No person may be introduced as a partnpartners.

All matters shall be decided by a resolutAll matters shall be decided by a resolutthe partners and for the this purpose ea

Every decision taken by LLP shall be recotaking such decision.

If any partner carries on any business ofLLP he must account for an pay over to b ibusiness.

Majority of the partners cannot expel anj y p p

ner without the consent of the existing

tion passed by a majority in number oftion passed by a majority in number of ach partner shall have one vote.

orded in minutes within 30 days of

f the same nature and competes with LLP all profits made by him in this

ny partner.y p

First Schedule

All disputes inter‐se of partners shall be Arbitration and Conciliation Act 1996Arbitration and Conciliation Act, 1996.

If any partner derives any benefit withoutransaction concerning the LLP or any usother business connection of LLP then h

resolved as per the provisions of

ut the consent of LLP from any se by him of the property, name ore shall account for the same to LLP.

Formation of LLP

Deciding the partners &

Designated partnersObtaining DP

Filing Incorporationdocuments Name Avail

Obtaining Certificate ofIncorporation

Drafting of LLP

Obtaining Digital SignatureIN/DIN

ability Registration on LLP Portal

Agreement

Agreement

Partners can execute LLP agreement whthe LLP conducts its activitiesthe LLP conducts its activities.

This agreement can set out the mutual rand the relationship of LLP and its partn

If the partners decide not to execute LLPIf the partners decide not to execute LLPand obligations of the partners shall be athe Limited Liability Partnership Act, 200

ich will set out terms upon which

rights and duties of the partners ers and partners inter‐se.

P agreement then the mutual rightsP agreement then the mutual rights as provided under First Schedule to 08.

Tax Issues to be addressed

The following are excerpts of the LLPCorporate Affairs:

An LLP shall be under obligation to maand fair view of its state of affairs Sinand fair view of its state of affairs. Sinare addressed in the Income Tax Act,be addressed in that Act.

Provisions have been made in the Acamalgamations etc.

While enabling provisions in respect ohave been made in the Act, detailed pr

id d b f l d th A tprovided by way of rules under the Act

– MCA Circular

P press release by the Ministry of

intain annual accounts reflecting truence tax matters of all entities in Indiance tax matters of all entities in India1961, the taxation of LLPs shall also

t for corporate actions like mergers,

f winding up and dissolutions of LLPsrovisions in this regard would bett.

Taxation of LLP

The LLP Act does not specify anything

Taxed as a Pass through entity reCommittee Report and the Conceptgoverned by a taxation regime that tthan taxing the LLP itself, i.e., the LLPsas the firm under tax laws”

on taxation

ecommended by the Naresh Chandrat Paper on LLP: “The LLPs should betaxes the partners as individuals, rathers should be treated in the same manner

Taxation of LLP

The Finance Bill (No.2), 2009 has amendLLP The status of LLP is equal to the firmLLP. The status of LLP is equal to the firm

The status of a partner of LLP is equal to

The taxable income of LLP will be subjec

Surcharge is payable by LLP. Cess as app

Interest and remuneration payable to pa40(b) will be allowed as deduction while

The distribution of income by LLP is not tax. LLP is not subjected to double taxati

ded the definition of firm to include mm.

o the partner of a firm.

cted to tax at the MMR being 30%.

licable is payable

artners, subject to provisions of Section e computing the taxable income of LLP.

subjected to dividend distribution ion.

Taxation of LLP

In the hands of the partner the amount exempt u/s 10(2A) of Income Tax Act 19exempt u/s 10(2A) of Income Tax Act, 19

Interest and remuneration received by tsubjected to tax under the head “Incom

Any company which is a partner in a LLPAny company which is a partner in a LLPof profit receivable from LLP.

LLP is generally not liable to pay MAT. Ceadjusted total income u/s 115 JC which iAdjusted total income include total incoAdjusted total income include total incoclaimed u/s VIA and Section 10AA.

AMT i bl @ 20 96% dj t d tAMT is payable @ 20.96% on adjusted to

received from LLP as share of profit is 961961.

the partners of LLP will be e from Business or Profession

P is not liable to pay MAT on the shareP is not liable to pay MAT on the share

ertain LLPs are liable to pay AMT on its is introduced from AY 2012 – 2013. me as increased by the deductionme as increased by the deduction

t l iotal income

Taxation of LLP

LLP will be entitled to AMT credit u/s 11upto 10th Assessment yearupto 10th Assessment year

One of the Designated Partner has to sigunavoidable circumstances, Designated Income then any of the other partners m

Each partner of LLP is Jointly and severa

5JD which can be carried forward

gn the return of income. If due to Partner cannot sign the return of may sign the return

lly liable for tax due of LLP.

Disadvantages of being tax

May not qualify for tax holiday/incentivcompany

E.g. Section 80IA

C t i d d ti i ti b iCertain deductions in computing busine“company” taxpayer. E.g.

Weighted deduction for scientific researchWeighted deduction for scientific research

Deduction for preliminary/ pre‐operative expens

Certain presumptive tax provisions can p p pand do not apply to an LLP

E.gs Section 44BB, 44DA etc

Tax neutrality for merger /demerger, apto the reorganization

xed as a ‘firm’

ve provisions which are restricted to

fit il bl l tess profits are available only to a

ses

be invoked only by a foreign company y y g p y

pply only when companies are parties

Other Consequences of bein

Contribution of property by partner to LLPTreated as generating taxable capital gains

Value recorded in books of LLP deemed to b

Deduction for remuneration paid to “indivit l t ib ti b ton capital contribution by partnersSubject to limitations prescribed in the ITL

Taxation of LLP partnerSh f LLP fit t f t lShare of LLP profits exempt from tax, also n

Interest/ remuneration from LLP taxed as b

ng taxed as a ‘firm’

P {Section 45(3)}in the hands of the partner

be consideration

vidual” working partner and for interest

t bj t t MATnot subject to MAT

usiness income


Capital gains tax trigger in case of

Distribution of capital assets to par

Assignment of LLP Interest :‐ LLP Ing

Implications on receipt of shares of a p pscheduled value of shares {Sec 56(viia

Threshold for constituting Associated

10% or more interest in the LLP


rtner on dissolution of LLP {Section 45(4)}

nterest could be a “capital asset”p

closely held company with reference to y p ya)}

Enterprise (AE)


Alternate Minimum Tax (AMT)

As per Finance Act 2011, LLPs will be sAdjusted Total Income if the regular inAMTAMT.

Adjusted Total Income will be the totanormal provisions as increased by dednormal provisions as increased by ded

Chapter VI‐A; and

Section 10AA (deduction in respectSection 10AA (deduction in respect

Tax credit for AMT ‐ On the same lines


subject to AMT @ 19.05% of the ncome tax payable is lower than the

al income as computed under the ductions claimed under:ductions claimed under:

t of profits of SEZ units)t of profits of SEZ units)

s as we compute for MAT

Foreign LLP

As per Limited Liability Partnership Act, 2008 – Chap

The Central Government may make rules for provibusiness by foreign LLPs within India and carryin

i i i h h difiincorporating, with such modificat

Tax liability of a foreign LLP’s income in India, eitsubject to the tax treatment of such LLP in its cou

between India andbetween India and

pter XI

sions in relation to establishment of place of ng on their business therein by applying or i itions, as appear appropriate

her through a branch or a PE or otherwise, is untry of registration and also the DTAA, if any d such countryd such country

Foreign LLP

Means a LLP which is formed, registered or iestablishes a place of business in Indiaestablishes a place of business in India

Foreign LLP is required to file Form 25 for ap

If Foreign LLP has been incorporated in langucertified by a notary public of their respectiv

If translation has been made in India then suCA/CS/CWA/Advocate

Foreign LLP shall within 30 days of establishmwithin 30 days from its establishment

ncorporated outside India and which

proval of name

uage other than English then it has to be ve country in English Language

uch translation is required to e certified by

ment in India required to file form 27

LLP – FDI – Inbound Inves

Foreign Direct Investments (FDI) in India is su

Government has liberalized the policy and haranging from 26% to 100% under automatic rconditions provided the investee entity is anconditions, provided the investee entity is an

Status of LLP is that of corporate body, but Fpermittedpermitted.

On 17 April 2014, the GOI has announced F/No.1/2014 for FDI in LLP.

FDI will be allowed, through Government apsectors/activities where 100% FDI is allowedare no FDI linked performance conditions.(STownship activity).p y)

tments

ubject to FEMA Regulations.

as permitted Foreign Direct Investment route, subject to certain terms and n Indian companyn Indian company.

FDI in LLP under automatic route is not

DI policy and Guidelines vide Circular

pproval route only in LLP. FDI is permitted in d through the automatic route and there uch as for NBFC or for Development of


LP with FDI will not be allowed to operate in astate businessstate business.

n Indian company, having FDI will be permitteLP l if b th th d LLPLP only if both the company and LLP are operhrough the automatic route and there are no

LP with FDI will not be eligible to make any do

oreign capital participation in LLPs will be alloeceived by inward remittance, through normaccount of the persons concerned, maintained

tments

agricultural, plantation, print media or real

ed to make down stream investments in an ti i t h 100% FDI i ll drating in sectors where 100% FDI is allowed FDI linked performance conditions.

ownstream investments.

owed only by way of cash consideration al banking channels or by debit to NRE / FCNRd with an authorized dealer / authorized bank


oreign Institutional Investors (FIIs) and Foreigmake investments in LLPmake investments in LLP.

LPs are not permitted to avail External Comm

nly company registered in India under the prominate a designated partner in LLPs having

i d i drust can nominate designated partner.

LPs with FDI, can appoint the designated par) Person resident in India as per defined in Exand>i) Person residing in India as per provisions of) g p p

Management Act, 1999.

tments

gn Venture Capital Investors (FVCIs) can not

mercial Borrowing (ECB).

rovisions of the Companies Act, 1956 can FDI. No other entity such as Foreign LLP or

rtner who should be:xplanation to Section 7(1) of LLP Act, 2008

f Section 2(v)(1) of the Foreign Exchange ( )( ) g g


he designated partner of LLP with FDI wilhe conditions and also shall be responsiblpor their contravention, if any.

on ersion of compan ith FDI into LLPonversion of company with FDI into LLP, wtipulations are met and with prior approv

apital contribution only by way of cash co

ricing of partner’s interest in LLP as per Inricing of partner s interest in LLP as per In

nvestment by way of ‘profit share’ will falliarnings

LP to report to RBI, the details of receipt op , profit shares in prescribed form

tments

l be responsible for compliance with all e for all the penalties imposed on the LLPp p

ill be allo ed onl if the abo ewill be allowed only if the above val of FIBP/Government

ontributions

nternationally accepted pricing methodnternationally accepted pricing method

l under the category of reinvestment of

of consideration for capital contribution/ p /

LLP – FEMA Provisions – O

Indian Company can make Overseas Dire(JV)/wholly owned subsidy (WOS) abroadcertain conditions of carrying on busines

Partnership firms, are allowed to invest

The status of LLP is equal to partnership,investments under automatic route.

LLP can make investments with prior appfar.

Outbound Investments

ect Investments in Joint Venture d upto 4 times its net worth subject to ss activities, under automatic route.

outside India under automatic route.

however LLP is not permitted to make

proval of RBI. No guidelines are framed so

Conversion : Partnership in

Existing Partnership Firm can be convertand business of existing partnership firmand business of existing partnership firm

The conversion of partnership into LLP wExplanatory Memorandum explaining th(No.2),2009 has clarified that conversion

All the existing partners must be the par

Relevant ProvisionsChapter X – Section 55 of LLP Act 2Second Schedule of the LLP Act, 20Second Schedule of the LLP Act, 20Rule 38 of LLP Rules, 2009

nto LLP

ted into LLP and all the assets, liabilities mwill vest into LLPm will vest into LLP

will not attract any tax liability. The he clauses of the Finance Bill n of firm into LLP will not attract any tax

rtners of LLP

008008008

Conversion : Company into

Existing Private and Public Limited Compconverted into LLP and all the assets liaconverted into LLP and all the assets, liaCompany will vest into LLP

If the Security interest subsists on the ascannot be converted into LLP. Company nature which is outstanding as on the danature which is outstanding as on the dainto LLP

o LLP

pany (except Listed Company) can be bilities and business of existingbilities and business of existing

ssets of the eligible company then it which has taken secured loan of any ate of conversion cannot be convertedate of conversion cannot be converted

Conversion : Company to L

All the existing shareholders must be th

Company which has repaid loans must ethe Companies Act 1956 is complete and

Relevant provisionsChapter X – Section 56 and 57 of LLPChapter X Section 56 and 57 of LLPThird and Fourth Schedule of the LLRule 39 and 40 of LLP Rules, 2009

LLP

he partners of LLP as per LLP Act, 2008

ensure that the necessary formality of d the charge is removed.

P Act 2008P Act 2008P Act 2008


Possible Queries

Possible to convert existing Companiesinto LLPs?

• Conversion permiss• Operational, tax and

Status of existing charge over assets? LLP Act mandates no calso involves ROC’s disc

Can new partners be introduced at thetime of conversion? No. Only Shareholders o

Can LLP be 100% foreign owned and non-individuals be partners?

Yes. LLPs can be 100%

Wh b D i t d P t (DP)? • At least 2 individualsWho can be a Designated Partner (DP)? At least 2 individuals• Indian Body corporate

Appointment of overseas body corporate / their nomAppointment of overseas body corporate / their nom

LLP

Our comments

sible under LLP Act, 2008 and FDI guidelines.d commercial aspects to be evaluated.

harge on assets of the Company at the time of conversion but the samecretion at the time of conversion application.

of the Company to be partners of LLP at the time of conversion

% foreign owned with overseas Body Corporate as partners.

to be DP – one Indian resident mandatedto be DP one Indian resident mandatedes may also nominate individuals as DP

minee as DP clarification awaited from FIPBminee as DP – clarification awaited from FIPB


Possible Queries

Timelines for getting conversionapproval from ROC?

No specific time limcase.

Should existing ECBs availed berepaid before conversion?

FDI Guidelines doeHence, Existing ECB

Distribution of accumulated profits postconversion?

Tax neutrality of conversioof 3 years.

Sh ld it l t ib ti b tShould capital contribution be - monetaryor non-monetary? LLP Agreement to decide

Will tax incentives continue post• MAT Credit of Company

Will tax incentives continue postconversion? • Continuation of 10AA

statutes.

Stamp duty implications and other operatio

LLP

Our comments

mit for approval prescribed – Depends on case to

s not permit LLP to avail ECB.Bs would need to be repaid prior to conversion

on will remain only if accumulated profits remain undistributed for a period

the same - However, in case of FDI, cash infusion mandated.

y cannot be availed by LLP

benefits, STPI incentives etc. need to be evaluated under respective

onal pros and cons to be evaluated

Conversion : Company into

► Conversion of private/ unlisted company into L

Company i.e. no capital gains on transfer of assets

Shareholders i.e. no capital gains on transfer of share

► Conditions for enjoying tax neutrality on conve► Conditions for enjoying tax neutrality on conve

Conversion is in accordance with section 56/ 57 of LL

All assets and liabilities of company to become that o

All shareholders to become partners in LLP with capitproportion of shareholding

Shareholders not to receive any consideration or benShareholders not to receive any consideration or benof share in profit and capital contribution in LLP

Aggregate of profit sharing ratio of shareholders of c

No direct/ indirect payment to any partner out of accyears post conversion date

Sales or gross receipts in business of company in any

o LLP

LLP will be tax neutral for:

es

ersion of company into LLP {section 47(xiiib)}:ersion of company into LLP {section 47(xiiib)}:

LP Act 2008

of LLP

tal contribution and profit sharing ratio in the

nefit directly/ indirectly in any form except by waynefit, directly/ indirectly, in any form except by way

ompany in LLP 50% for 5 yrs

cumulated profits of company for a period of 3

of 3 years < INR 60 lacs

Conversion: LLP into Comp

LLP can be converted into a company, ho2008 for such conversion2008, for such conversion

FAQ on LLP clarifies that enabling proviscompanies act 2013 for such conversion

pany

owever there is no provision under LLP

sions would be required to be made in .

Chartered Accountant in Pr

Practicing CA can form a new LLP or con

Section 2(2) of the Chartered Accountanpractice

A member can practice in partnership wpracticepractice

The word ‘partnership’ is not defined un1949

ractice - LLP

vert existing Partnership firm in LLP

nts Act, 1949 defines a member in

with other Chartered Accountant in

nder the Chartered Accountants Act


GOI – Ministry of Corporate Affairs have4/4/2011 l if i th t d t h4/4/2011 clarifying that word partnershother partners of LLP are individuals

GOI – Ministry of Corporate Affairs have30/1/2012 notifying the effective date foAccountants ( Amendments) Act 2011 TAccountants ( Amendments) Act 2011. T

ractice - LLP

e issued Circular No. 10/2011 dated i i S ti 2(2) ill i l d LLP hip in Section 2(2) will include LLP where

e issued Notification No. S.O.190(E) dated or amendments made by the Chartered The effective date is 1/2/2012The effective date is 1/2/2012


The Companies Act 2013 provides thatappointment as Auditor of a Companyappointment as Auditor of a Company .have qualified to become the Auditor oAffairs have issued clarification vide26/05/2011 that LLP of Chartered Acccorporate for the limited purpose of S19561956.

For converting existing CA firm into LLP tChapter X – Section 55 of LLP Act 20Second Schedule of LLP Act, 2008Rule 38 of LLP Rules,2009Rule 38 of LLP Rules,2009

ractice - LLP

t a body corporate will not qualify forLLP being a body corporate would not. LLP being a body corporate would not

of a Company. The Ministry of Corporatee General circular No.30A/2011 oncountants will not be treated as bodyection 226(3)(a) of the Companies Act

the relevant provisions are008


The provisions of Chartered AccountantsRegulations 1988 and code of Ethics issRegulations 1988, and code of Ethics issthe partners of LLP jointly and severally

Issue not yet resolved is with ref. to Comis appointed as Statutory Auditors. This Cthe year Whether the appointment willthe year. Whether the appointment will vacancy and the new appointment will h

ractice - LLP

s Act 1949, Chartered Accountant ued by ICAI shall be applicable to allued by ICAI, shall be applicable to all

mpanies Act 2013. Eg. At AGM C.A. firm C.A. firm is converted in to LLP during be valid for LLP or there will be casualbe valid for LLP or there will be casual have to be made.

LLP – Cross Border Issues

► Permanent Establishment (PE) Issues► Would an interest in an LLP result in a PE for a

► As per OECD Model, a subsidiary gent I d d t l l titparent :‐ Independent legal entity ap

► Can a similar rationale apply to partic► LLP d d b d t d l► LLP regarded as a body corporate and a lega

► A subsidiary can be a PE of the Paren“agency” ruleagency rule► Varied interpretation by tax courts internatio

on factual and legal analysis

► Fixed place rule ‐ Requirement that phave “right of use” over the place of

► A l LLP h ld b d d► Agency rule ‐ LLP should be a depend

sa foreign partner?

erally does not constitute a PE of its hproach

cipation in LLP?l tit t f it tl entity separate from its partners

t either under the “fixed place” rule or

onally ‐ Subsidiary found to be PE of the Parent based

partner should carry on his business and business of the LLP

d t t f t t tit t PEdent agent of partner to constitute PE

LLP – Cross Border Issues

► Entity Classification Issues► Would an Indian LLP be recognized as a 'bo

countries?

► Who would be eligible for treaty benefits –g y

► India‐US tax treaty specifically providethe income of US LLP has been taxed ipartnerspartners

► ITAT Ruling: (Linklaters) Applicability o

UK partnership is eligible to claim Indip p gof the partnership firm are taxed in UKor in the hands of the partners directly

Event of taxation is decisive factor ratEvent of taxation is decisive factor rat

► Risk of double taxation on account of ccountries

ody corporate' or 'pass through' by other

– the entity or its members?y

es for tax treaty benefit to US LLPs to the extent in US either in its hands or in the hands of its

of treaty benefits to UK partnership

a‐UK tax treaty benefits as long as entire profits y g pK (whether in the hands of the partnership firm y)

her than modeher than mode

conflicts in classification between

DDT Planning

De

Parent ►

►

►

Hold Co Be►

India LLP Profit

►

►

►India LLP

Distribution

Co►

►

escription:Indian operations set up as LLPHold Co is partner in LLPLLP distributes profits to partners

nefits:No DDTNo DDTProfits exempt in the hands of Hold CoCan also be combined with “conversion planning” where feasibleplanning , where feasible

oncernsFDI restrictions need to be consideredTax implications in Hold Co’s jurisdiction

MAT Planning – New Busin

India Co Des►

WOS of India Co

►

►

WOS of India Co

5 %

Ben►

India LLP

95 %

►

Undertaking eligible for investment linked

deduction u/s 35AD

►

►

ness

scriptionIndia Co invests in India LLPIndia Co invests in India LLPIndia LLP sets up an eligible undertaking eligible for deduction under Sec 35AD

nefitsProfits earned by LLP eligible for investment linked deductionAMT not applicable to LLP in respect of tax benefit arising due to investment linked i tiincentiveDistribution by LLP tax exempt and not subject to MAT for India Co, its WOSBenefit also available for exempt income of LLP under Section 10(38)

Deemed Dividend Mitigatio

Indian Hold Co

India LLP1 India LLP2 India LLP 3India LLP1 India LLP2 India LLP 3

LoanLoan

on

Description

► Indian holding company with multiple Indian operating entities

► Indian operating entities set up as LLPs

► Excess cash in one operating entity and need for cash in another

► Inter‐LLP loan

Benefits

► Inter‐LLP not considered as deemed dividend

► Tax efficient movement of cash within i i ioperating entities

Statutory Compliances

Under the LLP Act 2008, every LLP has todetails of the name and address of the pdetails of the name and address of the pactivities, contribution received and othetime to time.

Under LLP Act, 2008 LLP has to file oncesolvency declarationsolvency declaration.

The statement of accounts are to be prepCompanies Act, 2013. The solvency declaparticulars of the charges created, modifyear.year.

o file annual return giving the complete artners designated partners businessartners, designated partners, business er information as may be specified from

in a year a statement of account and

pared as per Schedule III of the aration gives the details of the fied or satisfied during the financial

Audit of Accounts

Accounts of LLP have to be audited annu20082008.

LLP carrying on business or profession anRs.40 lakhs is not required to get its accoLLP where partners contribution does noget its accounts audited under LLP Act 2get its accounts audited under LLP Act, 2satisfied the audit of accounts is compuls

LLP carrying on business and having grosRs.100 lakhs or more and LLP carrying onof Rs.25 lakhs or more is required to getof Rs.25 lakhs or more is required to get tax Act,1961.

ually as per the provisions of LLP Act,

nd whose turnover does not exceed ounts audited under LLP Act, 2008 or ot exceed Rs.25 lakhs is not required to 2008 If either of the conditions are2008. If either of the conditions are sory.

ss turnover, receipts or sales exceeding n profession and having gross receipts accounts audited u/s 44AB of Income‐accounts audited u/s 44AB of Income

Amalgamation / Reconstruc

Amalgamation/Reconstruction of LLP is pmade to the Competent Courtmade to the Competent Court.

Under Amalgamation/Merger the assetstransferred to another LLP.

Under Demerger part assets and liabilitieUnder Demerger part assets and liabilitieanother LLP.

ction of LLP

possible and an application has to be

and liabilities of one LLP can be

es of one LLP can be transferred toes of one LLP can be transferred to

Dissolution of LLP

As per the terms of LLP agreement, LLP can b

The net assets of the LLP can be distributed specified under LLP agreement.

The return of capital in the hands of partnerany tax liability.

The distribution of share of profit upto date attract any tax liability.

be dissolved by executing dissolution deed.

amongst the partners in a manner

rs till the date of dissolution will not attract

of dissolution by LLP to partners will not

Winding up of LLP

Voluntary

ConditionsConditions

If the LLP deIf no. of partf b

Where the Partners of LLP Where the Partners of LLP hemselves mutually decides

If LLP is unabIf LLP has acIndia, securiTribunal is o

themselves mutually decides

Tribunal is oOn declaraticarrying bus

Compulsory

By Tribunal

ecides that it to be dissolved by Tribunaltners falls below 2 for more than 6 monthsbl bble to pay its debts.cted against interest of the sovereignty and integrity of ity of state or Public order.f opinion that it is just and equitablef opinion that it is just and equitable.ion of LLP as defunct (Suomoto by LLP or if it is not siness for 1 year or more).

List of Forms & their uses

Form Particulars

Form DIN 1 Application for allotment of Direc

Form DIN 4 Intimation of change in particular

Form 1 Application for reservation or cha

Form 2 Incorporation document and subsp

Form 2A Details in respect of designated p

Form 3 Information with regard to limitedForm 3 Information with regard to limitedmade therein

Form 4 Notice of appointment, cessationdesignated partner or partner andesignated partner or partner. an

Form 4A Notice of appointment, cessation

Form 5 Notice for change of name

ctor Identification Number

rs of Director to be given to the Central Government

ange of name

scriber’s statement

partners and partners of Limited Liability Partnership

d liability partnership agreement and changes if anyd liability partnership agreement and changes, if any,

, change in name/ address/designation of a nd consent to become a partner/designated partnernd consent to become a partner/designated partner

, change in particulars of a partners

List of Forms & their uses

Form Particulars

Form 8 Statement of Account & Solvency

Form 11 Annual Return of Limited Liability

Form 12 Form for intimating other addressForm 12 Form for intimating other address

Form 15 Notice for change of place of regis

Form 17 Application and statement for con(LLP)(LLP)

Form 18 Application and Statement for concompany into limited liability part

Form 22 Notice of intimation of Order of CoRegistrar

Form 23 Application for direction to Limitedhthe Registrar

Form 24 Application to the Registrar for str

Form 25 Application for reservation/ renew(FLLP) or Foreign Company

Partnership (LLP)

for service of documents for service of documents

stered office

nversion of a firm into Limited Liability Partnership

nversion of a private company/ unlisted public nership (LLP)

ourt/ Tribunal/CLB/ Central Government to the

d Liability Partnership (LLP) to change its name to

riking off name

wal of name by a Foreign Limited Liability Partnership

by m sathya kumarm. sathya kumar - sirc of icai · pdf file‘limited liability...

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