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Introduction

A limited liability partnership (LLP) is a partnership in which some or all partners (depending on the jurisdiction) have limited liabilities. It therefore exhibits elements of partnerships and corporations. In an LLP, one partner is not responsible or liable for another partner's misconduct or negligence. This is an important difference from the traditional unlimited partnership under the Partnership Act 1890, in which each partner has joint and several liabilities. In an LLP, some partners have a form of limited liability similar to that of the shareholders of a corporation. In some countries, an LLP must also have at least one "general partner" with unlimited liability. Unlike corporate shareholders, the partners have the right to manage the business directly. In contrast, corporate shareholders have to elect a board of directors under the laws of various state charters. The board organizes itself (also under the laws of the various state charters) and hires corporate officers who then have as "corporate" individuals the legal responsibility to manage the corporation in the corporation's best interest. An LLP also contains a different level of tax liability from that of a corporation. Limited liability partnerships are distinct from limited partnerships in some countries, which may allow all LLP partners to have limited liability, while a limited partnership may require at least one unlimited partner and allow others to assume the role of a passive and limited liability investor. As a result, in these countries, the LLP is more suited for businesses in which all investors wish to take an active role in management. There is considerable confusion between LLPs as constituted in the U.S. and that introduced in the UK in 2001 and adopted elsewhere.

International Presence
China
In China, the LLP is known as a Special general partnership. The organizational form is restricted to knowledge-based professions and technical service industries. The structure shields co-partners from liabilities due to the willful misconduct or gross negligence of one partner or a group of partners.

United Kingdom
In the United Kingdom LLPs are governed by the Limited Liability Partnerships Act 2000 (in Great Britain) and the Limited Liability Partnerships Act (Northern Ireland) 2002 in Northern Ireland. A UK limited liability partnership is a corporate body - that is to say, it has a continuing legal existence independent of its members, as compared to a Partnership which may (in England and Wales, does not) have a legal existence dependent upon its membership. A UK LLP's members have a collective ("Joint") responsibility, to the extent that they may agree in an "LLP agreement", but no individual ("several") responsibility for each other's actions. As with a limited company or a corporation, members in an LLP cannot, in the absence of fraud or wrongful trading, lose more than they invest.

In relation to tax, however, a UK LLP is similar to a partnership, namely, it is tax-transparent, and that is to say it pays no UK corporation tax or capital gains tax. Instead, LLP income and/or gains are distributed gross to partners as self-employed persons, rather than as PAYE employees. It is a unique entity in its synthesis of collective and individual rights and responsibilities and its flexibility there is in fact no requirement for the LLP agreement even to be in writing because simple partnership-based regulations apply by way of default provisions. It has to date been closely replicated by Japan see above and by the financial centres of Dubai and Qatar. It is perhaps closest in nature to a limited liability company in the United States of America although it may be distinguished from that entity by the fact that the LLC, while having a legal existence independent of its members is not technically a corporate body because its legal existence is time limited and therefore not "continuing." The LLP structure is commonly used by accountants, as a company may not act as auditor to another company. LLPs are also becoming more common among firms in the legal profession such as solicitors and patent attorneys that by law are prohibited from incorporating as companies.

United States
In the United States, each individual state has its own law governing their formation. Limited liability partnerships emerged in the early 1990s: while only two states allowed LLPs in 1992, over forty had adopted LLP statutes by the time LLPs were added to the Uniform Partnership Act in 1996. The limited liability partnership was formed in the aftermath of the collapse of real estate and energy prices in Texas in the 1980s. This collapse led to a large wave of bank and savings and loan failures. Because the amounts recoverable from the banks were small, efforts were made to recover assets from the lawyers and accountants that had advised the banks in the early 1980s. The reason was that partners in law and accounting firms were subject to the possibility of huge claims which would bankrupt them personally, and the first LLP laws were passed to shield innocent members of these partnerships from liability. Although found in many business fields, the LLP is an especially popular form of organization among professionals, particularly lawyers, accountants, and architects. In some U.S. states, namely California, New York, Oregon, and Nevada, LLPs can only be formed for such professional uses. Formation of an LLP typically requires filing certificates with the county and state offices. Although specific rules vary from state to state, all states have passed variations of the Revised Uniform Partnership Act. The liability of the partners varies from state to state. Section 306(c) of the Revised Uniform Partnership Act (1997)(RUPA) (a standard statute adopted by a majority of the states) grants LLPs a form of limited liability similar to that of a corporation: An obligation of a partnership incurred while the partnership is a limited liability partnership, whether arising in contract, tort, or otherwise, is solely the obligation of the partnership. A

partner is not personally liable, directly or indirectly, by way of contribution or otherwise, for such an obligation solely by reason of being or so acting as a partner. However, a sizable minority of states only extend such protection against negligence claims, meaning that partners in an LLP can be personally liable for contract and intentional tort claims brought against the LLP. While Tennessee and West Virginia have otherwise adopted RUPA, their respective adoptions of Section 306 depart from the uniform language, and only a partial liability shield is provided. As in a partnership or limited liability company (LLC), the profits of an LLP are allocated among the partners for tax purposes, avoiding the problem of "double taxation" often found in corporations. Some US states have combined the LP and LLP forms to create limited liability limited partnerships.

LLP in India
In India, The Limited Liability Partnership Act, 2008 was published in the official Gazette of India on January 9, 2009 and has been notified with effect from 31 March 2009. The first LLP was incorporated in the first week of April 2009. Some sections relating to conversion of existing partnership firms and private as well as public unlisted companies into LLP have been brought into force on 31-5-2009 At present, there are about 10,000 LLPs formed and registered under the Limited Liability Partnership Act. Notified Dates Rajya Sabha - 24th October, 2008 Lok Sabha - 13th December, 2008 President of India - 7th January, 2009 Official Gazette - 9th January, 2009 LLP Act Effective date 1st April, 2009 LLP Rules Effective date 1st April, 2009 LLP act,2010 [amendment] LLP act,2012 [amendment]

Major Indian LLPs Delloite India LLP Ernst and Young India LLP PriceWaterHouseCooper LLP
KPMG LLP

Activities of LLP
Can carry on any business or profession Cannot carry out any non-profit activities. Cannot carry out business of lending, financing and investments (NBFC activities). No specific restriction in LLP Act, 2008, but ROC and RBI does not permit these activities.

Difference between Partnership and LLP


1 2 3 4 5 6 7 8 9 10 11

LLP Minimum partners 2 Maximum partners unlimited Alegalentity Registration is compulsory May have its own commonseal Name has to be approved by the registrar and must have LLP as suffix Agreement available for inspection Can hold property in its own name Foreign nationals can be partners Liability is limited. Partner is liable only to the extent of agreed contribution and not for any independent/ unauthorized act of other partners Relationship of Partner and LLP and partner inter-se depends upon terms of LLP agreement Provisions of Indian Partnership Act, 1932 not applicable

Partnership Minimum partners 2 partners 20 No talegalentity Registration is optional No concept of common seal Any name of its choice

Maximum

12

14

15 16 17

Deed not available for inspection Cannot hold property in its own name Foreign nationals cannot be partners Liability is unlimited. Partner is jointly and severally liable for all the acts of the firm and its other partners Partner can act as an agent of the firm as well as agent of the other partners Provisions of Indian Partnership Act, 1932 applicable Legal proceedings can be taken against a partnership firm irrespective whether it is Is a legal entity which can be sued as well as it registered or not. Only registered can sue the third party partnership firm can take legal recourse or defend legal proceedings. Operational structure has more flexibility Eg. change in terms of partnership, change in profit sharing ratio, remunerating the partners, Operational structure has less flexibility introduction and withdrawal of capital, dissolution of LLP etc. Minor can be admitted to the benefits of Minor cannot become partner partnership Statutory compliance easy Statutory compliance complex Approval by Partners only Approval by BODs/ Shareholders Accounts can be maintained either on cash or Accounts have to maintained on mercantile system mercantile system

LLP Act,2008

Overview
Salient features of an LLP An LLP is a body corporate and legal entity separate from its partners. It has perpetual succession. Being the separate legislation (i.e. LLP Act, 2008), the provisions of Indian Partnership Act, 1932 are not applicable to an LLP and it is regulated by the contractual agreement between the partners. Every Limited Liability Partnership shall use the words Limited Liability Partnership or its acronym LLP as the last words of its name. It contains elements of both a corporate structure as well as a partnership firm structure. Every LLP shall have at least two designated partners being individuals, at least one of them being resident in India and all the partners shall be the agent of the Limited Liability Partnership but not of other partners. LLP agreement is not mandatory but in the absence of LLP agreement, mutual rights and liabilities of partners shall be determined as provided under Schedule I to the LLP Act.

Advantages of forming an LLP LLP form is a form of business model which is organized and operates on the basis of an agreement. Liability of partners is limited to their agreed contribution in the LLP and no partner is liable on account of the independent or un-authorized actions of other partners, thus individual partners are protected from joint liability created by another partners wrongful business decisions or misconduct. LLP has more flexibility and lesser compliance requirements as compared to a company. Simple registration procedure, no requirement of minimum capital, no restrictions on maximum limit of partners. It is easy to become a partner or leave the LLP or otherwise. It is easier to transfer the ownership in accordance with the terms of the LLP Agreement. As a juristic legal person, an LLP can sue in its name and be sued by others. The partners are not liable to be sued for dues against the LLP. No restriction on limit of the remuneration to be paid to the partners like companies, but the remuneration must be authorized by the LLP agreement and it cannot exceed the limit prescribed under the agreement. The Act also provides for conversion of existing partnership firm, private limited Company and unlisted public Company into an LLP by registering the same with the Registrar of Companies (ROC). No exposure to personal assets of the partners except in case of fraud.

Disadvantages of forming an LLP Any act of the partner without the consent of other partners, can bind the LLP. Under some cases, liability may extend to personal assets of the partners. An LLP are not allowed to raise money from Public. Because of the hybrid form of the business, it is required to comply with various rules & regulations and legal formalities. It is very difficult to wind up the business in case of exigency as there are a lot of legal compliances under Limited Liability Partnership (Winding Up and Dissolution) Rules and it is very lengthy and expensive procedure.

Nature of LLP

Limited liability partnership is a body corporate formed and incorporated under this Act and is a legal entity separate from that of its partners. A LLP shall have perpetual succession. Any change in the partners of a LLP shall not affect the existence, rights or liabilities of the limited liability partnership.

Partners in LLP
Minimum two individuals as partners who will be identified as Designated Partners. There is no upper limit for number of partners. Individuals, Foreign nationals, Indian Companies, Foreign Companies, Foreign LLP and Foreign LLC can become partner. In a case where corporate bodies are only partners at least two corporate bodies will have to nominate two individuals as partners who will be identified as Designated Partners. One of Designated Partner should be resident in India meaning he should be residing in India for more than 182 days in any financial year. Government will issue guidelines for Foreign LLP and Foreign LLC to become partner in LLP. They will be governed by FEMA regulations. Minors cannot become partners of LLP. An individual shall not become a Designated partner unless he has given prior consent to act as such to LLP in the form and manner to be prescribed (Form 9) . LLP to file with registrar particulars of designated partners within 30 days of appointment (Form 10). Designated Partner can retire from LLP.

Liabilities of designated partners Designated Partners shall be responsible for doing all acts, matters and things required to be done by LLP for compliance of provisions of LLP Act: including filing of any Document ,Return, Statement and Report under this LLP Act or as per LLP Agreement.

Liable to all penalties imposed on the LLP for any contravention of those provisions. The Designated Partners are responsible for compliance of the statutory compliance of Limited Liability Partnership Act, 2008 and Limited Liability Partnership Rules, 2009. Every Designated Partner will have to obtain Designated Partners Identification Number (DPIN). Section 76 provides that if there is consent or connivance or neglect on the part of a partner or DP, he as well as LLP shall be liable for fine and prosecution. Not Liable for the wrongful Acts /Omissions of other Partners Not Liable for Obligation of LLP arising out of a contract. Unlimited Liability of Partners in case of Fraud.

Punishment in case of Contravention of LLP : If LLP contravenes provision of having at least 2 designated partners, LLP and its every partner shall be punishable with fine : Fine of Rs. 10,000/- which may extend to Rs. 5,00,000/-. If LLP contravenes contravenes the provisions provisions of filing consent consent of designated partners or provision of Section 8 or section 9: LLP and its every partner shall be punishable with fineof Rs. 10, 000/- which may extend to Rs. 1,00,000/-

Formation of LLP
Incorporation
For a limited liability partnership to be incorporated, Two or more persons associated for carrying on a lawful business with a view to profit shall subscribe their names to an incorporation document; The incorporation document shall be filed in such manner and with such fees, as may be prescribed with the Registrar of the State in which the registered office of the limited liability partnership is to be situated; and There shall be filed along with the incorporation document, a statement in the prescribed form, made by either an advocate, or a Company Secretary or a Chartered Accountant or a Cost Accountant, who is engaged in the formation of the limited liability partnership and by any one who subscribed his name to the incorporation document, that all the requirements of this Act and the rules made thereunder have been complied with, in respect of incorporation and matters precedent and incidental thereto.

Registration

Effect of registration. On registration, a limited liability partnership shall, by its name, be capable of suing and being sued. Acquiring, owning, holding and developing or disposing of property, whether movable or immovable, tangible or intangible. Having a common seal, if it decides to have one. Doing and suffering such other acts and things as bodies corporate may lawfully do and suffer.

Name. Every limited liability partnership shall have either the words limited liability partnership or the acronym LLP as the last words of its name. No limited liability partnership shall be registered by a name which, in the opinion of the Central Government is undesirable; or identical or too nearly resembles to that of any other partnership firm or limited liability partnership or body corporate or a registered trade mark, or a trade mark

which is subject of an application for registration, of any other person under the Trade Marks Act, 1999 (47 of 1999). Penalty for improper use of words limited liability partnership or LLP. If any person or persons carry on business under any name or title of which the words Limited Liability Partnership or LLP or any contraction or imitation thereof is or are the last word or words, that person or each of those persons shall, unless duly incorporated as limited liability partnership, be punishable with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees.

Agreement
LLP Agreement essentially governs relations between the partners and internal management of LLP. Partners can execute LLP agreement which will set out terms upon which the LLP conducts its activities. This agreement can set out the mutual rights and duties of the partners and the relationship of LLP and its partners and partners inter-se. If the partners decide not to execute LLP agreement then the mutual rights and obligations of the partners shall be as provided under First Schedule to the Limited Liability Partnership Act, 2008. Taxation The Finance Bill (No.2), 2009 has amended the definition of firm to include LLP. The status of LLP is equal to the firm. The status of a partner of LLP is equal to the partner of a firm. The taxable income of LLP will be subjected to tax at the maximum marginal rate being 30%. No surcharge is payable by LLP. Cess as applicable is payable. Interest and Remuneration payable to partners, subject to provisions of Section 40(b) will be allowed as deduction while computing the taxable income of LLP. The distribution of income by LLP is not subjected to dividend distribution tax. LLP is not subjected to double taxation. In the hands of the partner the amount received from LLP as share of profit is exempt u/s 10(2A) of Income Tax Act, 1961. Interest and remuneration received by the partners of LLP will be subjected to tax under the head Income from Business or Profession. Any company which is a partner in a LLP is not liable to pay MAT on the share of profit receivable from LLP. LLP is generally not liable to pay MAT. Certain LLPs are liable to pay MAT on its adjusted total income u/s 115 JC which is introduced from A.Y. 2012-13. Adjusted total income include total income as increased by the deduction claimed u/s VIA and Section 10AA.

MAT is payable @ 18.5% on adjusted total income. LLP will be entitled to MAT credit u/s 115JD which can be carried forward upto to 10th Assessment year. In case of retirement or dissolution of LLP, provisions of S.45(4) of the Income Tax Act, 1961 may be applicable. One of the Designated Partner has to sign the return of income. If due to unavoidable circumstances, Designated Partner can not sign the return of income then any of the other partners may sign the return. Each partner of LLP is jointly and severally liable for tax due of LLP. Under Section 188A of Income-tax Act,1961, in case of a partnership firm, the partners are jointly and severally liable for tax payable by the firm. Section 167C of Income-tax Act,1961 will apply to the partners of LLP and if the partner of LLP proves that non recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the LLP then he will not be personally liable.

Conversion of a partnership firm into LLP:


Key requirements:
On conversion, all the partners of the partnership firm shall become partners of the LLP in the same which their capital accounts stood in the books of the company on the date of the conversion. Minimum 2 designated partners. Up to date filing of the income tax returns. The partners receive consideration only by way of allotment of shares in LLP. Consent of all the unsecured creditors for the proposed conversion. Atleast 1 of the designated partners shall be an Indian resident. DSC (Digital Signature Certificate) for two of the designated partners. DPIN (Designated Partner Identification Number) for all the partners. There is no concept of share capital, but there has to be some sort of contribution from each partner. The partners and designated partners can be same person.

Steps for conversion:


STEP-1: acquiring DPIN (Designated Partner Identification Number) Every designated partner would be required to obtain a DESIGNATED PARTNERS IDENTIFICATION NUMBER (DPIN) on the lines similar to Directors Identification Number (DIN) required in case of directors of companies. Making an application for DPIN Receipt of provisional DPIN. Certification/ attestation of directors personal details. Certification to be sent to MCA cell for approval.

STEP-2: application for name availability. Every limited liability partnership shall Ave either the words limited liability partnership or the acronym LLP as the last word of its name. Application for the name availability is also made. STEP-3: documentations required. An LLP agreement should be made. Form-17 : an application for the conversion has to be made. Form-2: statement by the promoter. Form-3: contains information on LLP agreement. Form-4 & 9: notice of consent and details of designated partners. A subscription sheet signed by promoters. A copy of stamped LLP agreement. Proof of address of registered office. STEP-4: registration & acquiring Certification of Incorporation. LPs shall be registered with the Registrar of Companies (ROC) (appointed under the Companies Act, 1956) after following the provisions specified in LLP Act. Every LLP shall have a registered office. An incorporation document subscribed by at least two partners shall have to be filed with the Registrar in a prescribed form. Contents of LLP agreement, as may be prescribed, shall also be required to be filed with the Registrar. Online. Payment of required fees. All the documents have to be submitted with the ROC (Registrar of Companies) The changes prescribed by ROC have to be made in the LLP agreement and other documentations.

Conversion of Private Company to LLP


1. Obtain designated partner identification number (DPIN) for the designated partners and DIN. 2. The application for allotment of DPIN shall be made online in (E-Form 7) (Procedure for getting DPIN) 3. In case some of the shareholders being directors already posses the DIN and those persons are appointed as designated partners of the new LLP, that DSC can also be used for new LLP. 4. The name with which LLP is to be incorporated is to be decided. 5. The registrar will approve the name applied for provided the name is not either undesirable in the opinion of the Central Government or that is identical with or that which too nearly resembles to the name of any existing partnership firm or a LLP or a body corporate or a trade mark registered or pending registration under the Trade Marks Act, 1999.

6. Application shall be made in (E-Form 1) for the availability of the proposed name with the Registrar 7. Applicable fees has to be paid by of credit card. 8. Application for conversion has to be made in (E-Form 18) with the following attachments : Statement of shareholders (may be attached in a tabular form) Incorporation Document & Statement in Form 2 filed electronically. Statement of Assets and Liabilities of the company duly certified as true and correct by the Chartered Accountant in practice. List of all the creditors along with their consent to the conversion (may be given in the form of a tabular statement). Approval of the governing council (In case of professional private limited companies) NOC from Income Tax authorities. Approval from any other body/authority as may be required. Particulars of pending proceedings from any court/Tribunal etc. Rejection letter of Registrar of any earlier application for conversion. Particulars of convictions, rulings, orders, judgement of Courts in favour or against the private limited company which are subsisting. Other optional attachments as may be required.

9. In case the registrar is satisfied that the application is in order and that it complies such regulations, procedures as may be applicable he will register the conversion. 10. Registrar will issue the certificate of registration on conversion of the private limited company into LLP in Form 19 of the LLP Rules & Forms 2008. 11. On issue of certificate of registration the new LLP thus formed shall within 15 days from the date of registration inform the concerned Registrar of Companies with whom the erstwhile private limited company was registered under Companies Act, 1956 about such conversion in Form 14 of the LLP Rules & Forms 2008. 12. Form 14 must be accompanied by the following attachments : Copy of Certificate of Incorporation of LLP formed. Copy of incorporation document submitted in Form 2 (with the Registrar of Firms) Other optional attachments as may be required.

13. The limited liability partnership 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 limited liability partnership bears the following, namely: A statement that it was, as from the date of registration, converted from a company into a limited liability partnership; and The name and registration number of the company from which it was converted.

14. Any limited liability partnership which contravenes the above mentioned provisions shall be punishable with fine which shall not be less than ten thousand rupees but which may extend to one lakh rupees and with a further fine which shall not be less than fifty rupees but which may extend to five hundred rupees for every day after the first day after which the default continues.

TAXATION OF LIMITED LIABILITY PARTNERSHIP


Since the taxation related matters in India are provided under Tax Laws, the taxation of LLPs was not provided in the LLP Act. The Finance Bill, 2009 has made provisions in this regard, pursuant to which the taxation scheme of LLPs has been proposed to be introduced in the Income Tax Act. It has been proposed to tax LLPs on the lines similar to general partnerships under Indian Partnership Act, 1932, i.e. taxation in the hands of the entity and exemption from tax in the hands of its partners. The Finance Bill, 2009 has accorded a limited liability partnership and a general partnership the same tax treatment. Consequent changes in the Income-tax Act, 1961 like, (i) the word partner to include within its meaning a partner of a limited liability partnership, (ii) the word firm to include within its meaning a limited liability partnership and (iii) the word partnership to include within its meaning a limited liability partnership as these terms have been defined in the Limited Liability Partnership Act, 2008 have also been proposed in the Finance Bill, 2009. It has also been proposed in the Finance Bill, 2009 that the designated partner shall sign the income tax return of an LLP, or, where, for any unavoidable reason such designated partner is not able to sign the return or where there is no designated partner as such, any partner shall sign the return. The Finance Bill has also proposed that in case of liquidation of an LLP, every partner will be jointly and severally liable for payment of tax unless he proves that non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part. The Bill further provides that as an LLP and a general partnership is being treated as equivalent (except for recovery purposes) in the Income-tax Act, the conversion from a general partnership firm to an LLP will have no tax implications if the rights and obligations of the partners remain the same after conversion and if there is no transfer of any asset or liability after conversion. The Finance Bill, 2009 also provides that if there is a violation of these conditions, the provisions of section 45 of Income-tax Act shall apply. The Finance Bill, 2009 has further proposed to make the amendments effective from the 1st day of April 2010 i.e. assessment year 2010-11.

Income Tax of LLP:LLP incorporated in India will be assessed as if it is a partnership firm. Section 10(23) of Income Tax Act states that firm shall include LLP, partner shall include partner of LLP and partnership shall include LLP Share of profit of LLP at the hands of partners will be exempt [section 10(2A) of Income Tax Act]. LLPs incorporated outside India (foreign LLPs) shall be taxed as company.

Remuneration to Partners:
Remuneration paid to partners is deductible at the hands of LLP within limits prescribed under section 40(b) of Income Tax Act, if requirements of section 184 are satisfied. As per section 185 of Income Tax Act, if the requirements of section 184 are not satisfied, firm will be assessed as firm but shall not be eligible for deduction of remuneration or interest to partner. As per section 40(b) of Income Tax Act, maximum amount deductible in respect of remuneration to partner of LLP is as follows If book profit is negative or less than Rs.1,66,667 Rs.1,50,000. If book profit is Rs.1,66,667 or more On first three lakhs 90% and on balance 60%. The amount deductible from income of LLP will be the amount given above or amount actually debited to profit and loss account of LLP, whichever is lower. Remuneration paid/credited to partner will be allowable as deduction to LLP and it will be taxed at the hands of partner of LLP.

Conditions for allowing deduction of remuneration:


The conditions for allowing deduction of remuneration are as follows: Remuneration should be paid only to working partner. Remuneration must be authorised by the partnership deed and should be in accordance with terms of partnership deed. Remuneration should not pertain to period prior to partnership deed. Remuneration should not exceed the permissible limit. Book profit means the net profit as shown in the profit and loss account for the relevant previous year, computed in accordance with chapter IV-D of Income Tax Act, as increased by the aggregate amount remuneration paid or payable to all partners of the firm, if such amount has been deducted while computing net profit of LLP [Explanation 3 to section 40(b) of Income Tax Act]. Working partner means an individual who is actively engaged in conducting the affairs of the business or profession of the firm of which he is a partner [Explanation 4 to section 40(b) of Income Tax Act]. It should be noted that there is no requirement that he should provide full time for business of LLP. Thus, if a partner is engaged in establishing business policies of LLP, remuneration paid to him would be eligible even if does not participate in its implementation and other routine jobs.

Interest to Partners:Interest paid to partners is deductible at the hands of LLP within limits prescribed under section 40(b) of Income Tax Act if requirements of section 184 are satisfied. As per section 185 of Income Tax Act, if the requirements of section 184 are not satisfied, firm will be assessed as firm but shall not be eligible for deduction of remuneration or interest to partner. Interest paid/credited to partner will be allowable as deduction to LLP and it will be taxed at the hands of partner of LLP. The conditions for allowing deduction of interest are as follows: Payment of interest should be authorised by the partnership deed and should be in accordance with terms of partnership deed. Interest should not pertain to period prior to partnership agreement and (c) Interest should not exceed 12%.

Disallowance of interest and interest u/s 40A(2):As per section 40A(2) of Income Tax Act, any expenditure incurred by an assessee in respect of which payment has been made to specified persons (relative, director of company, partner of firm, person having substantial interest in business of assessee etc.), is liable to be disallowed in computing business profit to the extent such expenditure is considered to be excessive or unreasonable, having regard to the fair market value of goods or services or facilities etc. Thus, even if payment of remuneration or interest is allowable as per section 40(b) of Income Tax Act, it can be disallowed under section 40A (2) of Income Tax Act.

Signing Of Income Tax Return:


Income Tax return shall be signed by designated partner of LLP. If for unavoidable reasons, the designated partner is unable to sign and verify the return, or where there is no designated partner, any partner of LLP can sign and verify income tax return [section 140(cd) of Income Tax Act].

Income Tax Rate for LLP:


For the Assessment Year 2010-11 (Financial Year 2009-10), income of LLP will be taxable @ 30% plus 3% education cess (total 30.9%). There is no Dividend Distribution Tax (DDT).

Wealth Tax on LLP:Indian LLP will not be liable to wealth tax. Foreign LLP will be liable to wealth tax.

No Presumptive Taxation Scheme:LLP cannot avail presumptive taxation scheme under sections 44AC or 44AD of Income Tax Act.

Liability of Partner towards Liability of Income Tax of LLP:All partners of LLP are jointly and severally liable for income tax liability, but a partner can escape the liability if he proves that non-recovery cannot be attributed to any gross neglect, misfeasance or breach of any duty on his part [section 167C of Income Tax Act].

TAX ISSUES RELATING TO CONVERSION OF COMPANY INTO LLP:In order to access several benefits as opposed to company form of organization, the businessmen may desire to convert the existing private limited companies or unlisted companies into LLP.

Provisions of Relief: The Finance Act, 2010 has afforded some relief for the process of conversion. Section 56 and section 57 of the Limited Liability Partnership Act, 2008 allow conversion of a private company or an unlisted public company (hereafter referred as company) into an LLP. Under normal provisions of Income tax Act, conversion of a company into an LLP has definite tax implications. Transfer of assets on conversion

attracts levy of capital gains tax. Similarly, carry forward of losses, unabsorbed depreciation and certain other allowances is not available to the successor LLP. It is, now, provided that the transfer of assets on conversion of a company into an LLP in accordance with section 56 and section 57 of the Limited Liability Partnership Act, 2008 shall not be regarded as a transfer for the purposes of capital gains tax under section 45. Clause (xiiib) has been inserted in section 47 of the Act. However, in order to access and retain this benefit, it is necessary to fulfil and continue to observe certain conditions. (para1) Similarly, transfer of shares by any shareholders of company in the process of such a conversion will not be treated as transfer under the Income Tax Act, 1961 (the Act). However, conditions apply. (para2) Certain other benefits available to the company are continued to be made available to LLP e.g. depreciation, amortization of VRS expenses, etc. (para3)

These conditions, referred to herein above para 1, 2, 3, in points are as follows:1. All assets and liabilities of the company immediately before the conversion become the assets and liabilities of the LLP; 2. All the shareholders of the company immediately before the conversion become partners of the LLP in the same proportion as their shareholding in the company; 3. For conversion, shareholders of the company do not receive any consideration, directly or indirectly, other than share in profit and capital contribution in the LLPS; 4. The shareholders of the company continue to be entitled to receive at least 50 percent, in aggregate, of the profits of the LLP for a period of 5 years from the date of conversion; 5. The total sales, turnover or gross receipts in business of the company do not exceed sixty lakh rupees in any of the three preceding previous years; 6. For a period of three years from conversion, no amount is paid, directly or indirectly, to any partner out of balance of accumulated profit standing in the accounts of the company on the date of conversion. Where the conditions stipulated under section 47(xiiib) are not met, the benefit availed by the company shall be deemed to be the profits and gains of the successor LLP chargeable to tax for the year in which the aforesaid conditions have not been complied with [Section 47A(4)]. Fifth provision to section 32 provides for computation of depreciation allowance on conversion of private or unlisted public company into LLP. Like in the case of amalgamation and demerger of companies, in case of succession of a company into LLP, the total depreciation allowable to the predecessor company and successor LLP will not exceed the total depreciation that would have been allowed if no succession had taken place. It further provides that in case of such succession, the amount of depreciation shall be apportioned the predecessor and the successor in the ration of number of days for which assets were used by them. Section 43(6) of the Act defines written down value of assets for claim of depreciation. The cost of acquisition of capital assets for the successor LLP will be deemed to be the written down value for the predecessor company on the date of conversion.

Section 35DDA allows amortization of expenditure incurred for payment of compensation of voluntary retirement scheme (VRS) in five equal annual instalments from the year of compensation payment. On private company or unlisted public company is succeeded by a LLP fulfilling the conditions laid down in the provision to clause (xiiib) of section 47, amount of deduction under section 35DDA unamortized in the hands of the predecessor company shall be allowed to the successor LLP as would have been allowed to the company, had the conversion not taken place. No deduction will be available to the company during the year in which the company is being succeeded by an LLP and the same will be fully allowed to the LLP. Sub-section(6A) inserted in section 72A of the Act, enables carry forward and set off of business loss and unabsorbed depreciation by the successor LLP which fulfils the above mentioned conditions of section 47(xiiib) of the Act, Amendments are also made in subsection (7) of section72A to clause (a)accumulated loss and to clause (b)unabsorbed depreciation to enlarge meaning of these terms so as to include loss and depreciation of a private company or an unlisted public company, which has been converted into LLP. Breach of provisions of section 47(xiiib) result into confiscation of the carry forward of these allowances and its treatment as LLPs income to the extent set off is claimed in the year when the conditions are not complied. Credit in respect of tax paid by a company under section 115JB is allowed only to such company under section 115JAA. It is provided by sub-section (7) of section 115A that the tax credit under section 115JAA shall be allowed to the successor LLP. Interestingly, it appears that this benefit is available to any private company or an unlisted public company converted into LLP, whether conditions laid down under section 47(xiiib) have been complied with or not. These amendments are applicable from 1st April, 2011 and will, accordingly, apply in relation to the assessment year 2011-12 and subsequent years.

Winding up and Dissolution of LLP


Winding up is a process, where all the assets of the business are disposed off to meet the liabilities of the same and surplus any, is distributed among the owners. The LLP Act 2008 provides for following two modes for winding up the LLP i.e.: a. Voluntary winding upb. Compulsory winding up Voluntary Winding up: Under this, the partners may between themselves decide to stop and wound up the operations of the LLP. Compulsory winding up- A limited liability partnership may be compulsorily wound up by the Tribunal, 1. if the limited liability partnership decides that limited liability partnership be wound up by the Tribunal;

2. if, for a period of more than six months, the number of partners of the limited liability partnership is reduced below two; 3. if the limited liability partnership is unable to pay its debts; 4. if the limited liability partnership has acted against the interests of the sovereignty and integrity of India, the security of the State or public order; 5. if the limited liability partnership has made a default in filing with the Registrar the Statement of Account and Solvency or annual return for any five consecutive financial years; or 6. if the Tribunal is of the opinion that it is just and equitable that the limited liability partnership be wound up.

Dissolution
As per the terms of LLP agreement, LLP can be dissolved by executing dissolution deed. The net assets of the LLP can be distributed amongst the partners in a manner specified under LLP agreement. The return of capital in the hands of partners till the date of dissolution will not attract any tax liability. The distribution of share of profit upto date of dissolution by LLP to partners will not attract any tax liability. If LLP distributes any other amount over & above the original capital and share of profit for the year till dissolution then the tax issues may arise depending upon the nature of the distribution and the character of amount being received by each partner. Provisions of Section 45(4) and the ratio of decision in the case of A.L.A. Firm 189 ITR pg.285 (SC) is to be considered.

FDI in LLP
Foreign Direct Investments (FDI) in India is subject to FEMA Regulations. Government has liberalized the policy and has permitted Foreign Direct Investment ranging from 26% to 100% under automatic route, subject to certain terms and conditions, provided the investee entity is an Indian company. Status of LLP is that of corporate body, but FDI in LLP under automatic route is not permitted. In April 2012, the GOI has announced FDI policy and Guidelines for FDI in LLP :

Inbound
FDI will be allowed, through Government approval route only in LLP. FDI is permitted in sectors/activities where 100% FDI is allowed through the automatic route and there are no FDI linked performance conditions. (Such as for NBFC or for Development of Township activity). LLP with FDI will not be allowed to operate in agricultural, plantation, print media or real estate business.

An Indian company, having FDI will be permitted to make down stream investments in an LLP only if both the company and LLP are operating in sectors where 100% FDI is allowed through the automatic route and there are no FDI linked performance conditions. LLP with FDI will not be eligible to make any downstream investments. Foreign capital participation in LLPs will be allowed only by way of cash consideration received by inward remittance, through normal banking channels or by debit to NRE / FCNR account of the persons concerned, maintained with an authorized dealer / authorized bank. Foreign Institutional Investors (FIIs) and Foreign Venture Capital Investors (FVCIs) can not make investments in LLP. LLPs are not permitted to avail External Commercial Borrowing (ECB). Only company registered in India under the provisions of the Companies Act, 1956 can nominate a designated partner in LLPs having FDI. No other entity such as Foreign LLP or Trust can nominate designated partner. LLPs with FDI, can appoint the designated partner who should be: o Person resident in India as per defined in Explanation to Section 7(1) of LLP Act, 2008. and o Person residing in India as per provisions of Section 2(v)(1) of the Foreign Exchange Management Act, 1999

Outbound
Indian Company can make Overseas Direct Investments in Joint Venture (JV)/wholly owned subsidy (WOS) abroad upto 4 times its net worth subject to certain conditions of carrying on business activities, under automatic route. The status of LLP is equal to partnership, however LLP is not permitted to make investments under automatic route. LLP can make investments with prior approval of RBI. No guidelines are framed so far.