In Pursuit of Knowledge

Limited Liability Partnership

Limited Liability Partnership Bill (LLP Act) providing for establishment of Limited Liability Partnerships (LLP) in our country was introduced in the Rajya Sabha by the Minister for Company Affairs on 18th December, 2006. With the growth of the Indian Economy, the role played by our entrepreneurs as well as our technical and professional manpower has been acknowledged world over. The need for a new corporate form, recognizing the concept of traditional partnership concept, with limited liability, was felt in order to enable professional expertise and entrepreneurial initiative to combine, organize and operate in flexible, innovative and efficient manner. Concept of LLP has been accepted in USA and other countries. The new Bill, when enacted, will provide for an alternative corporate business vehicle that provides the benefits of limited liability but allows its members the flexibility of organizing their internal structure as a partnership based on a mutually arrived agreement. This enactment will come into force on the date of notification to be issued by the Central Government after the Bill is passed by the Parliament. In this article some of the important provisions of the Bill are discussed.

2. Formation of LLP

2.1 Any two or more persons can form a LLP for the purpose of carrying on any business, profession, vocation or occupation. Even a limited company, a foreign company, a LLP, a foreign LLP or a non-resident can be a partner in LLP. Although there is no specific mention, a HUF represented by its Karta can be a partner of LLP. A Co-operative Society cannot be a partner of LLP. If the number of partners fall below two, the surviving partner will have to admit at least one more partner within 6 months. If he does not do so, his liability will become unlimited. Every LLP shall have at least two designated partners who are individuals. At least one of such designated partners shall be a resident individual. If all partners of LLP are corporate bodies, at least two partners shall nominate two individuals as their nominees who will be designated as designated partners.

2.2 Every LLP will have to get itself registered with the Registrar of Companies. For this purpose, the LLP will have to file an Incorporation Document with the Registrar of Companies (ROC) of the State in which its Registered Office is situated. Such Incorporation Document shall be in such form as may be prescribed and shall include the following particulars.

1. Name of LLP

2. Proposed business, profession, vocation or occupation of LLP

3. Address of the Registered Office

4. Names and addresses of each of the partners of LLP.

5. Names and addresses of each of the Designated Partners.

6. Such other information as may be prescribed.

2.3 The Incorporation Document will have to be signed by two or more partners of LLP. This Document will have to be filed with a statement in the prescribed form signed by an Advocate, a Chartered Accountant or a Company Secretary who is engaged in the formation of LLP and any one of the partners who has signed the Incorporation Document. This statement should state that all the requirements of LLP Act and Rules relating to incorporation of LLP have been complied with. It will be necessary for LLP to deposit the prescribed fees with the Incorporation Document. On completion of these formalities, the ROC has to register the document and issue a Registration Certificate within 14 days.

2.4 A LLP, upon incorporation, will be treated as a body corporate and will be considered as a legal entity separate from that of its partners. It shall have perpetual succession. Any change in the partners of LLP shall not affect the existence, rights or liabilities of LLP. Every LLP will have to use “LLP” as the last words of its name.

2.5 It will be possible for LLP to change its name or registered office, to admit new partners or delete the names of partners who have resigned, to make changes in the designated partners etc. For this purpose, LLP will have to execute supplementary deed and to file the prescribed particulars with ROC.

2.6 The procedure for obtaining the name of LLP is the same as for obtaining the name for a limited company. Application for this purpose is to be made to ROC and the prescribed fee is to be paid. The ROC has to ensure that the name selected by LLP is not identical or too nearly resembles to the name of any other partnership or LLP or a corporate body or a registered trade mark. It may be noted that this particular requirement will be difficult to comply with if the name of LLP is to be compared with the name of any other partnership firm all over the country. Firstly, there is no central database for names of partnership firms as the law relating to partnerships is administered by the State Governments. At present, there are several partnership firms with identical names. Therefore, it will be difficult to determine whether there is a partnership firm will identical name in the country.

2.7 Section 11 of the Companies Act provides that no company, association or partnership consisting of more than 20 persons shall be formed for the purpose of carrying on a business unless it is registered under the Companies Act or is formed in pursuance of some other Indian Law. For banking business, the above restriction applies with reference to 10 or more persons. It may be noted that the LLP Act is a Central legislation and, therefore, the restriction for number of partners will not apply for carrying on any business, profession, vocation or occupation if the partnership is registered as LLP. In other words, LLP with more than 20 persons can be formed by Chartered Accountants for carrying on profession as Management Consultants.

3. Relationship of partners

3.1 Upon Registration of LLP, the partners will have to enter into a partnership agreement in writing. This agreement will determine the mutual rights and duties of the partners and their rights and duties in relation to the LLP. Persons who have signed the Incorporation Document as partners along with other persons can execute this Partnership Agreement. Whenever there are changes in the terms and conditions of the partnership, LLP has to file the details of the change in the prescribed form with ROC and pay the prescribed fees for the same. If the partnership agreement is executed before registration of LLP, the partners will have to ratify this agreement after incorporation of LLP.

3.2 If the partners do not execute the partnership agreement, the relationship between the partners will be governed by the First Schedule to the LLP Act. This schedule provides that mutual rights and duties of partners of LLP shall be determined as under in the absence of a written agreement. Even if there is a written agreement, but there is no specific mention about any of the following matters, such matters will be governed by the following provisions.

1. All the partners of LLP are entitled to share equally in the capital, profits and losses of the LLP.
    

2. The LLP shall indemnify each partner in respect of payments made and liabilities incurred by him in relation to the business of LLP.
    

3. All partners may take part in the management of the LLP.
    

4. No partner shall be entitled to remuneration for acting in the business or management of the LLP.
    

5. No person may be introduced as a partner without the consent of all the existing partners.
    

6. Any matter or issue relating to the LLP shall be decided by resolution passed by a majority in number of the partners, and for this purpose, each partner shall have one vote. However, no change may be made in the nature of business of the LLP without the consent of all the partners.
    

7. Each partner shall render true accounts and full information of all things affecting the LLP to other partner or his legal representatives.
    

8. If a partner, without the consent of the LLP, carries on any business of the same nature as and competing with the LLP, he must account for and pay over to the LLP all profits made by him in that business.
    

9. Every partner shall account to the LLP for any benefit derived by him without the consent of the LLP from any transaction concerning the LLP or from any use by him of the property, name or any business connection of the LLP.
    

10. No partner can expel any partner unless a power to do so has been conferred by express agreement between the partners.

3.3 Any person may join the LLP as a partner if all partners agree to admit him as a partner. Similarly, a partner will cease to be a partner on his death, retirement or on winding up of the company or LLP which is a partner. For this purpose, the partners will have to execute a fresh partnership agreement recording the terms and conditions of the partnership with revised constitution. Intimation about admission of new partners or retirement of a partner will have to be given to the ROC in the prescribed form within 30 days.

3.4 The partnership agreement may provide for payment on interest on capital of partners or remuneration payable to the partners. Further, the agreement will have to provide the share of each partner in profits or losses of LLP. The conditions relating to payment of interest, remuneration or share in profits or losses can be changed by amendments in the partnership agreement.

3.5 The rights of a partner to share profits or losses of LLP are transferable either in whole or in part. Such transfer will not mean that the partner has ceased to be a partner or that the LLP is wound up. Such a transfer will not entitle the transferee or assignee to participate in the management or conduct of the activities of the LLP. Similarly, the transferee will not get right to any information relating to the transactions of LLP.

4. Limited liability of partners

4.1 A partner of LLP is not personally liable, directly or indirectly, for any debts or obligations of LLP. However, a partner will be personally liable for any liability arising from his own wrongful act or omission. If such liability arises due to wrongful act or omission of any partner, the other partners will not be personally liable for the same.

4.2 Unlike the provisions of Partnership Act, every partner of LLP is the agent of LLP but not of other partners. However, the LLP is not bound by any thing done by a partner in dealing with a third party, if the partner has no authority to act for LLP and the third party is aware of this fact. LLP is liable to meet with the debts or obligations arising during the course of its business, profession, vocation etc. out of the property of LLP.

4.3 Each partner of LLP will have to make a contribution to LLP in the tangible or intangible assets as may be determined by the partnership agreement. The liability of each partner will be limited to the extent of such contribution as specified in the partnership agreement.

4.4 As stated earlier, at least two partners (Individuals) have to be appointed as Designated Partners. Appointment of such partners will be governed by the partnership agreement. In the event of any vacancy due to death, retirement, or otherwise, LLP has to appoint another partner as a designated partner within 30 days. Particulars of designated partners or changes therein have to be filed with ROC. If LLP does not appoint at least two designated partners or if the number of designated partners fall below two, all partners shall be considered as designated partners.

4.5 The following will be obligations of designated partners.

1. They are responsible, on behalf of LLP, for compliance of the provisions of LLP Act, including filing of any document, return, statement etc. as required by the Act and the Rules.
    

2. They are liable for all penalties imposed on the LLP for any contravention of LLP Act and the Rules.
    

3. Every designated partner will have to sign the annual financial statements and annual solvency statement.
    

4. He will have to obtain a “Partner Identification Number“ (PIN) in the same manner as a Director of Company has to obtain Director Identification Number (DIN) under the Companies Act.

5. Accounts and Audit

5.1 LLP has to maintain such books of account as may be prescribed. Such books may be maintained either on cash basis or accrual basis of accounting. The LLP has to prepare a Statement of Accounts and a Solvency Statement within a period of six months from the end of the financial year. These statements have to be signed by the Designated Partners of LLP. The accounts of LLP have to be audited in accordance with the rules as may be made under the LLP Act. The Central Government can exempt any class of LLP from this audit requirement. The statement of Accounts and Solvency Statement have to be filed with ROC in the prescribed form with the prescribed fees.

5.2 LLP has to file an annual return with ROC within 60 days of the end of the financial year in the prescribed form with the prescribed fees.

6. Conversion of Partnership Firm into LLP

An existing Partnership Firm (Firm) can be converted into LLP by following the procedure laid down in the second schedule to LLP Act. Broadly stated, this procedure is as under.

1. A firm may apply to convert to a LLP if and only if the partners of the LLP to which the firm is to be converted, comprise all the partners of the firm and no one else.
    

2. A firm may apply to convert to a LLP by filing with the ROC –

1. A statement by all of its partners in such form and accompanied by such fees as may be prescribed containing the following particulars, namely :-

1. the name and registration number of the firm; and

2. the date on which the firm was registered under the Indian Partnership Act, or any written law and

2. incorporation document and the statement by the advocate, C.A. etc. who is engaged in the formation of LLP.

3. On receiving the documents referred to in para (ii), the ROC shall register the documents and issue a certificate of registration. ROC will have to state the date from which LLP is registered.
    

4. On and from the date of registration specified in the certificate of registration –

1. LLP by the name specified in the certificate of registration will come into existence.
    

2. all moveable and immovable property vested in the firm, all assets, interests, rights, privileges, liabilities, obligations relating to the firm and the whole of the undertaking of the firm shall be transferred to an shall vest in the LLP without further assurance, act or deed; and
    

3. the firm shall be deemed to be dissolved and if earlier registered under the Indian Partnership Act, removed from the records maintained under that Act.

5. If any of the above properties is registered with any authority, the LLP shall, as soon as practicable after the date of registration, take all necessary steps as required by the relevant authority to notify the authority of the conversion and of the particulars of the LLP in such medium and form as the authority may specify.
    

6. All proceedings by or against the firm which are pending in any court or Tribunal or before any authority on the date of registration may be continued, completed, and enforced by or against the LLP.
    

7. Any conviction, ruling, order or judgment of any court, Tribunal or other authority in favour of or against the firm may be enforced by or against the LLP.
    

8. Every agreement to which the firm was a party immediately before the date of registration, whether or not of such nature that the rights and liabilities thereunder could be assigned, shall have effect as from that day as if —

1. the LLP were a party to such an agreement instead of the firm; and

2. for any reference to the firm, there were substituted in respect of anything to be done on or after the date of registration a reference to the LLP.

9. All deeds, contracts, schemes, bonds, agreements, applications, instruments and arrangements subsisting immediately before the date of registration relating to the firm or to which the firm is a party, shall continue in force on and after that date as if they relate to the LLP and shall be enforceable by or against the LLP as if the LLP were named therein or were a party thereto instead of the firm.
    

10. Every contract of employment shall continue to be in force on or after the date of registration as if the LLP were the employer thereunder instead of the firm.
     

11. Every appointment of the firm in any role or capacity which is in force immediately before the date of registration shall take effect and operate from that date as if the LLP were appointed.
     

12. Any authority or power conferred on the firm which is in force immediately before the date of registration shall take effect and operate from that date as if it were conferred on the LLP.
     

13. The provisions of paragraphs (iv) to (xii) shall not apply to any approval, permit or licence issued under written law to the firm which is in force immediately before the date of registration of the limited liability partnership.
     

14. Every partner of a firm that has converted to a LLP shall continue to be personally liable (jointly and severally with the LLP) for the liabilities and obligations of the firm which were incurred prior to the conversion or which arose from any contract entered into prior to the conversion.
     

15. If any such partner discharges any liability or obligation referred to above, he shall be entitled (subject to any agreement with the LLP to the contrary) to be fully indemnified by the LLP in respect of such liability or obligation.
     

16. LLP shall ensure that for a period of twelve months commencing not later than fourteen days after the date of registration, every official correspondence of the LLP bears the following:

1. a statement that it was, as from the date of registration, converted from a firm to a LLP; and

2. the name and registration number of the firm from which it was converted.

7. Conversion of a limited company into LLP

7.1 Section 55 of the LLP Act provides that a private limited company registered under the Companies Act can convert itself in a LLP. For this purpose, it has to follow the procedure stated in the Third Schedule to the LLP Act.

7.2 Section 56 of the LLP Act provides that an unlisted public company registered under the Companies Act can convert itself in a LLP. For this purpose, it has to follow the procedure stated in the Fourth Schedule to the LLP Act.

7.3 It may be noted that the procedure stated in Third and Fourth Schedule is more or less the same as provided for conversion of a partnership firm in to LLP. This procedure is discussed in para 6 above.

7.4 From the above discussion it will be noticed that a partnership firm, with unlimited liability of partners, can now be converted into limited liability LLP by following the above simplified procedure. Similarly, a private limited company or a closely held unlisted public company can be converted into a LLP by following this simplified procedure. Such companies, after such conversion, will not be required to comply with the provisions of the Companies Act.

8. Winding up of LLP

A LLP can be wound up by the National Company Law Tribunal (Tribunal) under the following circumstances.

1. If LLP decides that it be wound up by the Tribunal.
    

2. If the number of partners of LLP is reduced below two.
    

3. If the LLP is unable to pay its debts.
    

4. If the LLP has acted against the interests of the sovereignty and integrity of India, the security of the State or Public order.
    

5. If the LLP has made a default in filing with ROC the statement of Account and Solvency or annual return for any five consecutive financial years.
    

6. If the Tribunal is of the opinion that is just and equitable that the LLP be wound up.
   The Central Government is authorized to make Rules providing for the procedure for winding up and dissolution of any LLP.

9. Some procedural provisions

The LLP Act is divided into 14 Chapters. There are 73 sections. The ROC has been given powers to regulate the working of LLPs. For this purpose, certain documents are required to be filed with ROC and filing fees will have to be paid. Some of the important procedural provisions of the LLP Act are as under.

1. ROC has power to conduct inspection of documents.
    

2. ROC has power to call for information from LLP.
    

3. ROC can conduct investigation of the affairs of LLP. Detailed provisions are made in sections 42 to 53 of the LLP Act.
    

4. The Central Government has power to make Rules for provisions in relation to establishment of place of business by a Foreign LLP in India and for carrying on its business as LLP in India.
    

5. The Central Government can notify the provisions of Companies Act which may apply to any LLP.
    

6. The Central Government may make Rules for electronically filing of documents with ROC.
    

7. If there is delay in filing any statement or document with ROC, the same can be filed with default fee of Rs.500/- for every day of delay.
    

8. The procedure for reference of matters to the Tribunal as contained in the Companies Act will apply to LLP also.
    

9. LLP Act provides for levy of fine for defaults in filing information, documents, statement, annual return etc. with ROC. This fine can be between Rs.10,000/- and Rs.5,00,000/-.
    

10. If any LLP is not carrying on any business or its operations in accordance with LLP Act, the ROC has power under section 69 to strike off the name of such LLP from the Register.
     

11. The LLP Act also provides for prosecution of partners or designated partners for certain offences committed under the Act.
     

12. The Central Government has power to make Rules for carrying out the provisions of LLP Act.

10. To sum up

The concept of LLP is being recognized in our country after a long debate over the past some years. We should welcome it. LLP structure will enable small and medium size organizations and family partnerships to expand as they will be able to admit outsiders with capital or skill as partners. Since the financial liability will be limited, there will be no danger of promoter partners being saddled with the personal liability of outside partners. Further, there will be no danger of stoppage of business due to non-co-operative attitude of outside partners as LLP is a legal entity with perpetual succession. One advantage of this structure, in preference to a limited company, is that the partners will have flexibility in the matter of internal working and at the same time the liability will be limited and they will not have to comply with the complicated provisions of Companies Act. Any outsider cannot attach the personal property of the partners for debts due by LLP. He can only proceed against the LLP and recover his dues from the assets of LLP. It may be noted that most of the procedural provisions of LLP Act are to be governed by the Rules to be framed by the Central Government. In particular, the form of accounts, form of annual financial statements, solvency statement, auditor’s report etc., are to be prescribed by Rules. Let us hope that the Government will publish draft rules for public comments so that practical difficulties are pointed out before finalizing the rules. So far as matters relating to accounts and audit are concerned, let us hope that the government takes the Institute of Chartered Accountants of India into confidence before framing the Rules for this purpose.

LLP Act is silent regarding taxation of LLP. Since the basic structure is that of a partnership and the only difference is that the liability of partners is limited, it is possible that under the Income-tax Act LLP will be recognized as a ‘Firm’. In that case LLP will be taxed at the rate applicable to a ‘Firm’ and deduction for interest to partners and remuneration to partners will be allowed. The balance profit which is distributed to partners will be treated as exempt as in the case of a ‘Firm’. Since there is no distribution of dividend, there will be no dividend distribution tax. For this purpose, we will have to wait for enactment of LLP Act and, thereafter, for consequential amendment in the Income-tax Act.