“The Black Swan asymmetry allows you to be confident about what is wrong, not about what you believe is right”

– Nassim Nicholas Taleb, The Black Swan: The Impact of the Highly Improbable


Limited Liability Partnership (the ‘LLP’) is a supple form of business entity combining the advantages of a corporate entity and a general partnership firm. The LLP is a corporate entity with perpetual succession but at the same time it does not demands a large number of compliance as is required by the companies and also irons out certain tax inefficiencies of corporate structure. Given the operational and structural flexibility, it may make sense for the firm or private/unlisted company to migrate themselves into the new LLP structure. Various penal and other provisions which were otherwise applicable only to companies are made applicable to LLPs too. Recently this list has been expanded.

Conversion to LLP

The Limited Liability Partnership Act 2008 (the ‘LLP Act’) provides for the conversion of general partnership firm, private limited & unlisted public company only. The act does not prescribe any procedure for conversion of sole proprietary concerns and trusts into LLP. Further HUF can also not be converted into LLP. Provisions of section 58(4) are very significant. It being a notwithstanding clause has an overriding effect on various laws for the time being in force. As per the said clause, all the property assets and

liabilities of the firm/company converted into LLP get vested in the LLP without any further act/deed and the erstwhile firm/company stands dissolved. However, the migration of existing entities to the LLP may give rise to a host of tax (including stamp duty), and regulatory issues.

Applicability of Law

Companies Act 2013 applies to the Companies and Limited Liability Partnership Act 2008 applies to LLP. LLP requires lesser compliance as compared to the Company. However, recently compliances for the LLPs have been increased. Recently various sections of the Companies Act have also been extended to the LLPs with the variation. These are as under:

  • S. 90 Register of significant beneficial owners in a company: Every person and company need to comply with the provisions to provide details of the significant beneficial owners. Now, this would apply to the LLPs too.
  • S. 164 Disqualifications for Appointment of Director: Companies Act prescribes situations where any per would become disqualified to act as director eg. Non- filing of annual returns etc. These provisions relating to the disqualification have been made applicable to the Designated Partners of the LLP
  • Section 165 Number of Directorships: Companies Act lays restrictions on the number of directorships that can be held by any person. This restriction has been extended to designated partners and any person cannot be a designated partner in not more than 20 LLPs.
  • Section 206 (5) Power to Call for Information, Inspect Books and Conduct Inquiries: The Central Government may if it is satisfied that circumstances so warrant, direct inspection of books and papers of a limited liability partnership by an inspector appointed by it for the purpose. This section is made applicable to the LLPs too
  • Section 207 (3) Conduct of Inspection and Inquiry: The Registrar or inspector making an inspection or inquiry shall have all the powers as are vested in a civil court under the Code of Civil Procedure, 1908, while trying a suit in respect of the specified matters. These powers shall be extended while conducting inspection and inquiry of the LLP
  • Section 252 Appeal to Tribunal: Any person aggrieved by an order of the Registrar, notifying a company as dissolved under section 248, may file an appeal to the Tribunal within three years from the date of the order of the Registrar. These provision has been extended to LLPs too.
  • Section 439 Offences to be non-cognizable: Every offence under the Companies is deemed to be non-cognizable within the meaning of the said Code. This now applies to the LLPs too.

Management vis-à-vis ownership

In the case of the Company, management and ownership can be separate. Directors may not be shareholders. However same is not possible under LLP. Assignment of profit to be

received by the partner can be possible but the right to manage the affairs of LLP cannot be assigned. Hence in the case of LLP ownership and management lies with the partners only.

Rate of Tax

The rate of tax applicable to the LLP is 30% plus applicable Surcharge and Cess. However, the company can be taxed at a lower rate of 15%/22%/25%/30% plus Surcharge & Cess. The LLP can be inefficient based on the rate of tax especially when profits are reemployed in the business year after year.

Tax on dividend

Any dividend received by the shareholders is taxed at the normal rates of taxes in their hands. Hence in the case of company tax paid profits which is declared as dividend is again taxed in the hands of shareholders. There are certain exemptions to avoid double taxes on the same dividend which is again distributed. However, any distribution of profits by the LLP to the partners is not subject to tax in the hands of partners.

Interest on capital

Under the companies, no interest can be paid on capital. However, under LLP interest can be paid on the partners’ capital and the same is also tax- deductible when paid within prescribed limits.

Remuneration to directors and partners Remuneration to the directors can be paid within the limits prescribed under the Companies Act. Virtually limits are very high. LLP act does not restrict payment of remuneration to the partner. However, there are restrictions under the Income-tax Act allowance of such remuneration for tax purposes. In case remuneration is paid exceeding the limits prescribed under the income-tax act, such excess will not be considered tax-deductible.

Minor and HUF

Under the Companies Act minor as well as Hindu undivided families (HUF) can be the shareholder of the company. Similarly under the Indian Partnership Act, too minor can be admitted for the benefit in the firm and any family member can represent HUF in the firm. However HUF and minor cannot become the partner of LLP. Hence the case of conversion of the firm to LLP or company to LLP, restructuring partners or members is required to be undertaken. Such restructuring exercises may involve tax income- tax implications.

Conversion of proprietary entity

The Income-tax Act provides tax exemption for the conversion of the proprietary concern or entity into the company. Hence such conversion can lead to tax neutrality. However, no such exemption is available for conversion of the proprietary concern or entity into LLP. Hence such conversion may have tax inefficiencies.

Conversion and income tax issues

Section 47(xiiib) of the Income-tax Act prescribes certain conditions for the conversion of the company to LLP. In case these conditions have not complied, conversion to LLP may not be considered as tax neutral and any gains arising on conversion would be subject to the income tax especially u/s 50CA and 56(2)(x). These can be the biggest hurdle for conversion to the LLP. Looking at the conditioned mentioned u/s 47(xiiib) one may decipher that tax neutrality is envisaged only for the conversion of smaller companies into LLP i.e. companies with turnover up to 60 lacs, companies with gross assets up to 5 Crs. (netting of liabilities against the assets is not allowed) etc. Further, there are ambiguities as to how to fulfil these restrictions, whether they need to be compiled during the lifetime of LLP or only up to 5 years.

Classes of shareholder and partner

The Company can have equity shareholders or preference shareholders. Further, there can be variations in the rights of the equity shareholders. The company can also issue instruments which can be converted into equity, either compulsorily or optionally, in future. However, in the LLP there is no such wide flexibility. There cannot be different classes of partners. But voting rights of the partner can be structured to some extent i.e. each partner may have one vote each or they can vote to the extent of their share in profits.

Section 47(xiiib) of the Income-tax Act does not treat equity and preference shareholders differently. Hence conversion of the company having preference shareholders may be conveniently and easily possible. Before the conversion of the company restructuring of the preference share capital is required.

Grant of loans to shareholders, directors/partners

A private company can grant loans to directors and a public company can grant loans subject to fulfilment of compliance and conditions under the Companies Act. However, under income tax grant of loan to the directors/shareholders can lead to deemed dividends in case companies in which public is not substantially interested. There is neither any restriction in case of granting of a loan by the LLP under the LLP Act nor under the income tax act for treating such loan as deemed dividends. In the case of Aravali Polymers LLP v. JCIT [2014] 47 taxmann.com 335 (Kolkata – Trib.), it was held that granting of loans to the partners by the LLP can lead to violation of under proviso (f) of section 47(xiiib), upon conversion of the company to LLP.


The company can be listed on SME or the main board of the exchanges. However, LLP cannot be listed. In case LLP wants itself to get listed, it is required to be converted into a company before listing.

Business Restructuring of LLP

LLP Act also provides for the restructuring of the business. The term business restructuring comprises two words – business meaning any trade or commerce and the word restructuring meaning rearranging of affairs. Hence, the term business restructuring would come to mean a rearrangement of the affairs of the business. The term encompasses within itself a wide spectrum of activities involving the reorganization of the legal, ownership, operational or financial structure of a business entity.

Sections 60 – 62 of the LLP Act, 2008 provide for business restructuring transactions of LLP. These provisions are akin to sections 230 – 232 of the Companies Act, 2013 or section 391 – 394 of the Companies Act, 1956. The procedural aspects for the same have been dealt with in Rule 35 of the LLP Rules, 2009.

Following are the type of restructuring

transactions provided for in the LLP Act, 2008 –

  • Compromise;
  • Arrangement, and
  • Reconstruction (including amalgamation)

It is to be noted that the LLP Act, 2008 has not provided for the definitions of the above terms and hence based on certain legal precedence under the Companies Act, 1956 these terms would mean –


A compromise has been described as an agreement terminating a dispute between parties as to the rights of one or both of them or modifying the undoubted rights of a party which he has difficulty in enforcing.1 The result is that there can be no compromise in absence of a dispute.


The word “arrangement” means something analogous in some sense to a compromise and embraces a far wider class of agreements including agreements which modify rights about which there is no dispute, and which can be enforced without difficulty. The term arrangement is in a much wider connotation than compromise and includes re-arrangement or readjustment of rights or liabilities2. The arrangement is something by which parties agree to do a certain thing notwithstanding the fact there was no dispute between the parties3. However, in any arrangement which can fairly be called a compromise, or considered analogous to a compromise there must be both give and take.4


It is the transformation of an existing company into a new company with the business, undertaking and the shareholders remaining substantially the same as that of the old company. A company may decide to undergo reconstruction for various reasons, such as, to extend its operations and reorganize the rights of its members or creditors, or amalgamate with one or more companies.

Amalgamation refers to the process where two or more companies are joined to form a third entity, or one is absorbed into or blended with another company5.


The Companies Act provides for the merger of the companies or joint-stock companies. The LLP Act provides for merger of the LLPs. However, NCLAT in the case of Real Image LLP

v. Qube Cinemas Private Limited has held that the merger of LLP into a Company is not possible. However, the LLP can follow the process for registration as a company under Section 366 of the Companies Act, 2013 and then seek a merger with an Indian company in a permitted manner.

Taxability on Business Restructuring The business restructuring transactions of LLP involve the transfer of capital assets from one entity to another and any gain arising as a result of such a transfer is subjected to tax u/s 45.

The Income-tax Act has however by virtue of section 47 provided for various business restructuring transactions that will not be regarded as transfers and will consequently not be taxed u/s 45 subject to compliance with the conditions specified u/s 47.

However, section 47 does not cover business restructuring transactions involving LLPs implying that any gain arising as a result of the transfer of a capital asset from one LLP to the other or to its members, will be taxed u/s 45.

Business Restructuring of LLP – The Tax Neutral Way

The taxability of capital gains in cases of amalgamation/demerger of LLP acts as a hindrance and leads to genuine hardships.

While the transfer of assets at cost/book value may help to avoid capital gains, it will attract the provisions of section 43CA and section 50C if the assets transferred include land or building whereby the stamp duty value of the land or building would be deemed to be as the full value of consideration thereby making the exercise of transferring individual assets at a cost to avoid any gains, a futile one. Even

transfer by way of slump sale at cost may not be possible after the introduction of valuation rules under the Income-tax Act.

Valuation in event of merger/demerger The valuation process plays a significant role in the merger process as it enables to decide upon the swap ratio of the partner’s share in the LLP and also to quantify the consideration payable to the retiring partner if any.

It may be noted that none of the applicable statutes expressly provide for any specific method for purpose of valuation of LLP in the event of a merger. Hence, the general valuation methodologies as employed in the valuation of other entities shall extend to an LLP as well.

LLP being an agile entity and providing provisions for the business restructuring in line with that of companies is certainly a forward- looking step. However, provisions without providing for tax benefits are like a body without a soul.


LLP was introduced as an agile business entity. However, over the period various provisions of the Companies Act have been extended to LLP leading to additional compliances. LLP is also subject to a higher tax rate as compared to a company. Unlike in the case of companies, there is no tax on the distribution of profits by the LLP. The company has higher flexibility in relation to management, raising capital etc. Companies also enjoy tax benefits during business restructuring. Conversion of company into LLP tax exemption is available only to the smaller companies. Considering provisions one needs to reevaluate the form of an entity whether LLP or Company considering the objectives, nature of business carried and future growth opportunities. In the end, I would like to quote Nassim Nicholas Taleb, The Black Swan: The Impact of the Highly Improbable “You need a story to displace a story.”

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