Formation, Conversion & Changes in Limited Liability Partnership
This content delves into the statutory recognition, benefits, and features of Limited Liability Partnerships (LLP). It explains how LLP combines the advantages of limited liability companies and partnership firms, providing a flexible business structure for various enterprises. The article covers the liability, perpetual succession, and other key features of LLPs, making it a comprehensive resource for understanding LLP formation, conversion, and associated changes.
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Formation, Conversion & Changes in Limited Liability Partnership CS Makarand Lele Central Council Member of ICSI Partner MRM Associates, Company Secretaries, Pune
Preamble of the Act LLP, in simple terms, is an alternative corporate business form that gives the benefits of limited liability company and the flexibility of a partnership firm. It does not restrict the benefit of LLP structure to certain classes of professionals only and is available for use by any enterprise which fulfils the requirement of the Act.
Statutory Recognition LLP is a Body Corporate (section 2(1) (d)) LLP is a Legal Entity separate from its partners & have Perpetual Succession Any change in the partners of a limited liability partnership shall not affect the existing right or liabilities of the LLP Provisions of Indian Partnership Act, 1932 shall not apply to LLP(section 4)
Companies Act 2013 made LLP as most convenient vehicle Stringent compliances Difficulties in getting the approvals for vital business transactions Incapacity to do business transactions Private Company at Par with Public No lucrative exemptions available to do business Restrictions on number of members for companies.
Salient Features of LLP Liability Liability of the partner is limited to his agreed contribution. No partner is liable on account of the independent or un-authorized acts of other partners, thus allowing individual partners to be shielded from joint liability created by another partner s wrongful acts or misconduct. Every Partner, for the purpose of business of LLP, is the agent of LLP but not of other partner. Partners are liable personally to the extent of guarantees provided by them.
Salient Features of LLP Perpetual Succession & continuity Borrow/ Invest on its own name Initiate legal proceedings on its own name Simplified compliances & no mandatory requirement of statutory audit for certain LLP s Number of partners There is no upper limit for number of partners in LLP unlike a ordinary partnership firm where the maximum number of partners cannot exceed 100 nor like private limited company wherein can not exceed 200.
Salient Features of LLP Rights and duties of partners governed by the agreement subject to act Related Party Transactions: There is no restriction on entering into any contracts with related parties. Loans to related LLP is also not falling within the provisions of section 185 of Companies Act,2013 No mandatory meetings & their compliances. No restrictions on salaries, compensations, distribution of profit to Partners. (under LLP Act) No restrictions on withdrawal from capital account.
Allowable Business in LLP All profit making activities LLP can be a member of Stock Exchange LLP formed with other objectives may undertake group Investment activity. Provided it limits to a 50% criteria of RBI. LLP can undertake profession - CA, CS, CWA, Architect etc. For CS both Attestation & Non Attestation Services are permitted CP holder can be a DP & can have share in profit.
Tax Aspects LLP s is treated as Partnership Firms for the purpose of Income Tax There is no surcharge on income tax of LLP. Minimum Alternative Tax (MAT) (Sec. 115JB) : The provisions are not applicable to LLP. Alternate Minimum Tax (AMT) (Sec.115JC to Sec.115JF): With effect from A.Y. 2011-12, LLPs are required to pay Alternate Minimum Tax (AMT) @ 18.5% on their Book Profit Dividend Distribution Tax Sec 115O : NO dual taxation on distribution of its profits as DDT is not applicable Deemed Dividend [Section 2(22) (e)]: Any loan given by LLP to its partners out of its accumulated Profits/ Reserves is not liable to be taxed as Deemed Dividend unlike in the case of closely held companies. As per Finance Bill , 2015 LLP s will be taxed @ 30%.
Eligibility of LLP under Income Tax S 184 The LLP is evidenced by an instrument i.e. there needs to be a written LLP Agreement. The individual shares of the partners are required to be clearly specified in the deed. A certified copy of LLP Agreement must accompany the first return of income of the LLP Changes in the constitution of the LLP or in the profit sharing ratio are required be informed to IT by filing a certified copy of the revised LLP Agreement along with the IT return. Agreement should specify the continuation of LLP Business. There should not be any failure on the part of the LLP while attending to notices given by the Income Tax Officer for completion of the assessment of the LLP.
Income Tax - Available Deductions Interest paid to partners, provided such interest is authorized by the LLP Agreement. Any salary, bonus, commission, or remuneration (by whatever name called) to a partner will be allowed as a deduction if it is paid to a working partner who is an individual. The remuneration paid to such working partner must be authorized by the LLP Agreement and the amount of remuneration must not exceed the limits under IT act. In case of non compliance of section 184 no deduction towards interest and remuneration is allowed.
Audit under section 44AB of IT act Tax Audit u/s 44AB would be applicable if Total Sales, Turnover or Gross Receipts exceed Rs.100 Lakhs with effect from A.Y. 2013-14.
It can be formed as new LLP It can takeover proprietary concern after formation
Formation of New LLP Understanding of : the specific requirements of the parties nature of business likely to be carried out principle terms & conditions between the partners decision making process contribution ratio profit sharing ratio admission, cessation, expulsion of partners dispute resolution mechanism veto powers
Formation of New LLP Decide about the partner and Designated Partner: Minimum 2 Partners are required (Individual or body corporate) (Sec. 5) Minimum 2 Designated Partners who are individuals and at least one of them should be resident in India. (section 7(1)) Ensure that all the Designated Partners have DIN reflecting residential status. Otherwise file DIR 6 first. Ensure that any one Designated partners has DSC Decide the place Registered Office of LLP Decide partner contribution that may consist of any tangible, intangible, movable or immovable property or other benefits to LLP (Section 32 (1))
Sr. no. LLP Form No. Purpose of form Time Limit 1 LLP Form No. 1 Application for reservation of name 2 LLP Form No. 2 For Incorporation of a LLP File within 3 months from the date intimation of Name approval by ROC 3 ROC will issue Certificate of Incorporation in LLP Form No. 16. Certificate shall be conclusive evidence. 4 LLP Form No. 3 For information regarding LLP agreement Within 30 days from the date of incorporation 5 Execution of LLP Agreement May be : 1. After name approval but before formation OR After formation 2.
LLP Form No. 1 Key Points Name of the applicant- whether nominee of body corporate or individual. Nominee should also be individual. It can be anyone. Description of proposed business activity (Prefilled in LLP Form No. 2 subsequently) Proposed monetary value of partner's contribution Name Justification, whether name based on regd. Trade Mark etc In case of body corporate is a partner attach copy of signed resolution: Making Investment in LLP( check compliance of 186 in case of Company)- specify amount and %. Appointing nominee for it. NOC for the name Approving Draft LLP Agreement
LLP Form No. 2 Key Points Address of RO Description of proposed business activity (Prefilled from LLP Form No. 1) NIC 2004 list to be used. Details of Partners & Designated Partners- Name , address, nationality gets prefilled, occupation, form of contributions- manually filled In case of body corporate is a partner attach copy of signed resolution.
LLP Form No. 2 Key Points Mandatory Attachments- Proof of RO, Subscriber s sheet Where name includes specified sectors such as banking, insurance, VC, MF, stock exchange, Advocate, CA, CS, CWA, etc, a copy of the in-principle approval of the regulatory authority or council is required to be attached. Addendum required in case no. of partners exceeds 200. (LLP Form No. 4 - details of the partners as an addendum) Certification by professional stating all requirements of Act & rules in respect of incorporation complied.
LLP Form No. 3 Key Points Date of Agreement-To be filled manually from LLP agreement. Date of Ratification, if agreement is done prior to incorporation (also attach relevant declaration/ confirmation about ratification) Business objectives & Obligation to contribute gets PREFILLED from LLP Form No. 2. Mutual rights & duties of the partners , duration of LLP, admission cessation of partners, dispute resolution etc. Mandatory Attachments: LLP Agreement
LLP Agreement LLP agreement is very CRUCIAL constitutional document governing relationship between LLP & its partners & interse among the partners. Matters provided in Schedule I of LLP Act if LLP agreement is silent on any matter, then standard provisions provided here will prevail. Draft LLP agreement to suit LLP Form No. 3- It is highly advisable to draft LLP Agreement in same sequence as far as possible, so that filling LLP Form No. 3 and its checking by ROC would be easy. LLP agreement & all supplements & amendments to be filed with ROC in LLP Form No. 3 within 30 days along with signed copy.
LLP Agreement It can be executed after name availability before formation i.e. filing of LLP Form No. 2 - LLP can t be a party. OR It can be done after registration within 30 days - so as to make LLP itself as one party to make provisions of LLP agreement binding on it. Stamp duty on LLP agreement is to be paid as per relevant state stamp act for Partnership entry based on capital contribution slabs. (Entry 47 of schedule I of Bombay stamp act, 1958.)
Essentials of LLP Agreement Name of LLP, Partners, Designated Partners, business activity, procedure for alteration of above, duration of LLP, definitions, registered office. Term and Conditions for functioning of LLP, Partners contribution, profit sharing ratio, voting pattern, drawings by partners, loans from/ to Partners, property of LLP. Provisions for Partners and Designated Partners of LLP like admission, cessation, removal, vacations, expulsion, rights, duties, liabilities and responsibilities of Partners.
Essentials of LLP Agreement Restriction on powers of partners. Matters requiring consent of all partners/designated partners. Forbidden acts Transfer or assignment of share in LLP Management of LLP including meetings etc. Miscellaneous Provisions Deed of Adherence as Schedule to admit new partner.
Special points for LLP Agreement Understand the specific requirement of proposed business Provide simplified decision making processes Non compete Veto Power- the agreement may provide for veto power for one or more partners. Can be useful if some partners intend to control decision making process. List of items can be provided. Executive/ Managing Committee- in the case of large number of partners, it would be advisable to form a committee of senior partners to handle management.
Decision Making Mechanism Decision making mechanism can be framed through LLP Agreement. Routine matters can be left to Designated Partners. Important matters (as specified in LLP agreement) can be dealt with the prior consent of all partners or majority of it. Provision for written consent or approval through meeting is to be done. Admission or retirement of partners can be done with unanimous consent. Provision for annual meeting would be useful.
Compliances after registration Execute LLP Agreement, file LLP Form No. 3, if not done at time of incorporation Obtain PAN, registrations under other Acts Open Bank Account Print letterheads with LLPIN Prepare rubber stamps Prepare Common Seal of the LLP, if it decides to have one (Section 14(c)) Obtain all required registrations, licenses and permissions Maintain necessary registers if specified by LLP agreement Maintain proper books of accounts (mandatory requirement)
Routine compliances LLP shall maintain books of accounts on cash or accrual basis and according to double entry system of accounting.(Rule 24(2)) Audit of books of accounts of the LLP is not mandatory if the turnover does not exceed Rs 40 lacs in any FY or contribution does not exceed Rs 25 Lakhs (Rule 24(8)) An LLP has to close its financial year on 31stMarch every year. All the Books of accounts, other documents and annual forms shall be preserved at its registered office for 8 years from the date on which they are made
Routine compliances Statement of Account and Solvency Declaration Every LLP shall prepare Statement of Account and Solvency declaration within 6 months from the end of the financial year and file the same with ROC in LLP Form No. 8 within 30 days of expiry of 6 months from the end of the financial year i.e. by 30thOctober every year. Annual return Every LLP shall file an annual return to the Registrar in LLP Form No. 11 within 60 days of completion of its Financial Year i.e. by 30thMay every year Filing of Income Tax Returns Every LLP is required to file their returns with the Income Tax Department as per time schedule prescribed Returns to be filed under all other applicable laws
FEMA Regulations for LLP As per press note 1(2011 Series) issued by Ministry of Commerce and Industry, department of industrial policy and promotion dated 20 May 2011, FDI is allowed, through the Government approval route, in those sectors/ activities where 100% FDI is allowed, through the automatic route and there are no FDI - linked performance related conditions. LLPs with FDI will not be allowed to operate in prohibited sectors (agricultural/ plantation activity, print media or real estate business.) LLPs with FDI will not be eligible to make any downstream investments.
FEMA Regulations for LLP Overseas Direct Investments (ODI) by LLP is not permitted. External Commercial borrowings (ECBs) by LLP is not permitted. Foreign Institutional Investors (Flls) and Foreign Venture Capital Investors (FVCIs) were not be permitted to invest in LLPs. Investment by cash Consideration Foreign Capital participation in the LLPs is allowed only by way of cash consideration, received by inward remittance, through normal banking channels, or by debit to NRE/ FCNR account of the person concerned, maintained with an authorized dealer.
Conversion of a Partnership Firm into LLP
Process Partners of registered firm may with unanimous approval decide to convert their firm into an LLP by following a process provided in Second Schedule of the LLP Act. Cut off date balance sheet is to be drawn. They have to apply for name & need to follow the process of formation of LLP. In addition to formation process, it has to submit LLP Form No. 17 providing all details & copy of partnership deed, Consent letters by partners, Statement of Assets and Liabilities of the firm duly certified as true and correct by the Chartered Accountant in practice, Copy of acknowledgement of latest IT return, NOC from the secured creditors. Registrar will then issue certificate of registration of conversion In LLP Form No. 19 After registration of conversions it is expected to file LLP Form No. 14 , however same is not available for filing online.
Key issues Condition of non existence of security interest in the assets is not specified After conversions, necessary intimation to be given to registrar of firms, so as to remove the name of the firms from its record. New PAN is required to be applied
LLP Form No. 17 Key Issues Principle address of the firm Whether the firm is registered or not, date of agreement Choose yes or no : Whether all the partners have consented for conversion? Whether all the partners of the LLP are partners of LLP ? Whether up to date Income-tax return is filed? Date Whether any proceeding is pending in any Court/ Tribunal/ any other Authority? Whether any earlier application for conversion into LLP was refused by the Registrar? Whether any conviction, ruling, order, judgment of any Court, Tribunal or other authority in favour of or against the company is subsisting? Whether there are any secured creditors ?- Obtain NOC? Whether clearance from any other authority/ body required?
Tax Aspect Conversion of a Partnership Firm to an LLP will have no tax implications if the rights & obligations of partners remain the same after conversion and; there is no transfer of any Asset or Liability after conversion. If the above conditions are violated, the provision of Capital gains specified in section 45 of IT act will apply.
Key issues Only Private Limited & Unlisted Public Companies can be converted into LLP. No security interest Charge in the register / Secured Loan in the Books/ Position at bankers end for shift the charge on assets in favor of LLP Decision of cut off date, preparation of cut off date audited Financial statements. Not older than 30 days. ALL the shareholders to become partners and no one else.
Process Application for name & need to follow the process of formation of LLP In addition to formation process: LLP Form No. 18 i. e. application to ROC for conversion is required to be filed along with Form No.2. Intimation to ROC in LLP Form No. 14.
LLP Form No. 1 Key Issues Application for name to be made for just addition of words LLP in the existing Name of the Company by deleting word private limited Board resolution required to be attached Description of proposed business activity- same as per Main Object of MOA. Details of Designated Partners - can be non director
LLP Form 2 Key Issues Details of Designated Partners Point No. 9(j) Form of contribution - Conversion of shares and share in profits. i.e. sum total of paid up capital and free reserves to be filled up Point No. 13 Total Monetary value of contribution: Total should match with the amounts specified above. Form of contribution and Total Monetary value of contribution gets prefilled in the LLP Form No. 3 i.e. the same is also required to be reflected in the LLP agreement and initial contribution from partners. Attachments: Proof of RO, Subscriber's sheet, details of company(s)/ LLP(s) in which partner/ designated partner is a director/partner
LLP Form No. 18 Application for conversion Key Points Choose yes or no : Whether all the shareholders have consented for conversion? Whether all the partners of the LLP are shareholders ? Whether any security interest in the assets is subsisting or in force? Whether up to date Income-tax return is filed? Date Whether any prosecution initiated against or show cause notice for alleged offences under the Companies Act, 1956? Whether any proceeding is pending in any Court/ Tribunal/ any other Authority? Whether any earlier application for conversion into LLP was refused by the Registrar? Whether any conviction, ruling, order, judgment of any Court, Tribunal or other authority in favor of or against the company is subsisting. Whether there are any secured creditors ?- Obtain NOC? Whether up to date documents including balance sheet and annual returns Companies Act, 1956 have been filed? Whether clearance from any other authority/body required?
LLP Form No. 18 Application for conversion Key Points No forms pending for payment or processing at MCA No open charges in Charge Index At least 1 balance sheet and annual return submitted since formation, Company with share capital can only be converted Section 25/ 8 company can NOT be converted. Attachments to form: EGM resolution Copy of acknowledgement of IT return NOC from secured creditors NOC from the body/authorities( If applicable) Statement of assets & liabilities duly certified true & correct by the auditor. Statement of shareholders stating compliance of all provisions of LLP Act & rules, annual filing completed etc.
LLP Form No. 3 Key Issues OBLIGATION TO CONTRIBUTE- gets prefilled from LLP Form No.2 Deemed Dividend & DDT issue In order to finalize the required contribution pattern for LLP, necessary amendments to be made in Company s cut off balance sheet before conversion. Shareholding pattern Revaluation of Assets Issue of Bonus Shares Buy back of shares Payment of Dividend
LLP Form No. 14 Key Issues Intimation to ROC in respect of conversion No fees just acknowledgment is received Particulars of Company gets prefilled in Part B , CIN to be entered Particulars of LLP gets prefilled in Part C, LLPIN to be entered. Attachment is certificate of registration issued on conversion.
Tax Aspect Finance Act, 2010 has provided that any transfer of capital assets, intangible assets by a private company or unlisted public company to LLP on its conversion into LLP would not be taxable on fulfillment of following conditions specified in Sec. 47(xiii a). Conversion is in accordance with provisions of Sec. 56/57 of LLP Act, 2008, The total sale, turnover or gross receipts in business of the company does not exceeds Rs 60.00 lacs in any of the 3 preceding previous years. All the assets & liabilities are transferred to LLP, All the shareholders of the company become partner of the LLP in same proportion as their shareholding in the company,
No consideration other than share in profit and capital contribution in the LLP arises to partners The erstwhile shareholders of the company continue to be entitled to receive at least 50% of the profits of the LLP for a period of 5 years from the date of conversion, No amount is paid, either directly or indirectly, to any partner out of the accumulated profits of the company for a period of 3 years from the date of conversion
