17 August 2017

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Limited Liability Partnership-Registration and Tax Issues

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A “limited liability partnership (LLP)” is a partnership in which some or all partners have limited liability. It therefore exhibits both elements of partnerships and corporations and offers the duel advantage of combining the organizational flexibility of partnership firm with the feature of limited liability for its partners.

It has separate legal entity from its partners like a private limited company. It also has perpetual succession and a common seal unlikely traditional partnership firms.

In an LLP one partner is not responsible or liable for another partner's misconduct or negligence but unlike the corporate shareholders, the partners have the right to manage the business directly.

The “Limited Liability Partnership Act, 2008 (the Act)” has come into the force from 31st March 2009 after getting assent of President on 7th January 2009. It is a well-timed and welcome initiative taken by the govt. to accentuate corporate growth, reform and regulation through synergized knowledge management.
It is based on three broad principles:

1. Limited Liability
2. Corporate personality
3. Partnership flexibility

Process to Start LLP


• Acquire Designated Partners Identification Number (DPIN):

All designated partners of the proposed LLP shall obtain “Designated Partner Identification Number (DPIN)” by filing an application individually online in Form -7. The DPIN is similar to the Director Identification Number (DIN) required under the Companies Act.

• Acquire Digital Signature Certificate(DSC):

Designated partner of LLP/proposed LLP, whose signatures are to be affixed on the e-forms has to obtain class 2 or class 3 Digital Signature Certificate (DSC) from any authorized certifying agency, details of which are available on the home page of the LLP portal under the tab “Certifying Authorities”.

• Reservation of name:

Any designated partner in the proposed LLP may submit Form-1 by Appending digital signatures and submit the e-form. 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.

• Incorporation of LLP:

Once the name is reserved by the Registrar, Form-2 “Incorporation Document and Statement” is required to be filled electronically. Pay the prescribed registration fee as per the slab given in Annexure A of the LLP Rules, 2009, based on the total monetary value of contribution of partners in the proposed LLP shall be paid online.
Statement in the e-form is to be digitally signed by a person named in the incorporation document as a designated partner having permanent DPIN and also to be digitally signed by an advocate/company secretary/chartered accountant/cost accountant in practice and engaged in the formation of LLP.

On submission of complete documents the Registrar after satisfying himself about compliance with relevant provisions of the LLP Act will register the LLP, maximum within 14 days of filing of Form-2 and will issue a certificate of incorporation in Form-16.

• Filing of LLP agreement (Form-3) and Partners’ details (Form-4).

Form 3 (Information with regard to LLP agreement and changes, if any made therein) and Form-4 (Notice of Appointment of Partner/Designate Partner, his consent etc.) may be filed with the prescribed fee simultaneously at the time of filing Form-2 or within 30 days of the date of incorporation or within 30 days of such subsequent changes.

Tax treatment for LLP under 'Income Tax Act , (IT Act)'

• LLP to be treated at par with general partnership for IT ACT

The Union Budget 2009 announced on July 6, 2009 has laid down the roadmap for the taxation of the LLPs in India. The new provisions introduced in relation to the taxation of LLP do not treat the LLP as a transparent entity but treat the same at par with the general partnerships under the Indian Partnership Act, 1932. Accordingly, the profits and losses of the LLP would not pass through in the hands of the partners but would be assessable in the hands of the LLP; however, in accordance with the Rule 24 of the LLP rule, the accounts of LLP shall be audited by the Chartered Accountant in practice.

• Amendments in IT Act

Section of 44AD of the IT Act, which provides for an option of the income of the general partnerships to be taxed at a presumptive rate of 8%, has been specifically excluded from the provisions.

A new section 167C has been introduced in the IT Act, which makes every partner of a LLP jointly and severally liable for the taxes to be paid by the LLP for the period during which he was a partner, unless the non-recovery of taxes cannot be attributed to gross neglect, misfeasance or breach of duty on his part. The aforesaid is irrespective of any contrary provision in the Act. Although this section appears to be in conflict with the scheme of the Act, which does not make the partners personally liable for the liabilities of the firm, it seems to be in line with existing provisions of section 179 of the IT Act, which cast a similar liability on the Directors of a private company in liquidation.

• Some other tax issues

LLP would not be liable to Dividend Distribution Tax and Minimum Alternate Tax (MAT).  Also, if the LLP is a non-resident under the IT Act (its control management is wholly situated outside India), it would continue to be taxed at 30% plus applicable cess. 
The conversion of partnership firms into LLP would have no tax implication if the rights and obligation of the partners remain the same after conversion and if there is no transfer of any assets/liability after conversion.

Conclusion

All the aforesaid factors make LLP an attractive mode of business so far as the tax cost is concerned. However, LLP, which is a hybrid structure between a company and a firm.  However, further clarification and suitable amendments to the Act are desired to remove the cloud of uncertainty in relation to conversion of general partnerships and companies into LLP.


Vandana Goel, FCA, M Com is a Management and Corporate Tax Consultant and can be reached at This e-mail address is being protected from spambots. You need JavaScript enabled to view it

 

 

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