Limited liability partnership as a form of business organization -

Relevance from a business perspective while comparing with a

company

The business environment becomes dynamic and calls for constant change and upgradation. In
order to remain significant, there is a need for a business structure that to attract business and
service sectors alike with lesser restrictions and government intervention. To resolve this, the
Limited Liability Partnership (LLP), a form of business entity introduced in 2008. LLP provides
almost all the benefits of a private limited company while eliminating the downsides of a
partnership firm.

The law defines LLP as,

“A corporate business vehicle that enables professional expertise and entrepreneurial

initiative to combine and operate in flexible, innovative and efficient manner, providing
benefits of limited liability while allowing its members the flexibility for organizing their
internal structure as a partnership.”

Rationale of the LLP Act

The basic purpose of the legislation is to provide for a new vehicle for the conduct of business
with the two objectives

1. Limiting the liability of the persons undertaking that business

2. Providing absolute flexibility in the manner of running the business and defining, managing
and regulating their relations between or among themselves.

1. How the particular legal concept impact business?

LLP act as a separate legal entity. No partner would be responsible for the independent or un-
authorized actions of other partners. It's protecting individual partners from joint liability created
by another partner’s wrongful business decisions or misconduct. Unlike a partnership firm, a
limited liability partnership can continue its existence even after the retirement, insanity,
insolvency or even death of one or more partners.
LLP has a lot of benefits like tax advantages, can accommodate an unlimited number of partners
and are eligible for being registered with the Ministry of Corporate Affairs (MCA). At the same
time, they have fewer compliances than private limited companies and less expensive to start and
maintain.

An LLP offers flexibility in profits sharing. That means, in a mutual agreement, the Profit Sharing
Ratio and the Loss Sharing Ratio may differ. The partners can generate a mutual agreement that
one or more partners would share profits only and will not have to share losses at all. In the absence
of the LLP agreement, First Schedule of the LLP Act specifies that all the partners are entitled to
an equal share in the capital, profits, and losses in the LLP.

As per Section 5 of the LLP Act, any individual, LLP, Foreign LLP, Company, Foreign LLP can
become the partners in an LLP. But any partnership firm, Sole corporation, Trade union, Minor
and HUF can’t become the partners of an LLP.

Changes in FDI policy announced with respect to LLP

• 100% FDI which comes under automatic route in LLP is allowed for businesses in
operation in sectors/activities where 100% FDI is allowed, through the automated route
and there are not any FDI-linked performance conditions.
• For the purpose of FDI, valuation from a Chartered Accountant is required in respect of
capital contribution to the LLP.
• Downstream Investment permissible - LLPs having foreign investment will be allowed to
form downstream investment in another company or LLP in sectors within
which 100% FDI is allowed which comes under the automated route and there are not
any FDI-linked performance conditions.
• Under the FDI Policy, with respect to LLP:

Ø Control shall mean the correct to appoint majority of the selected partners and
such selected partners having control over the policies of the LLP.
Ø LLP shall be thought of as closely-held by a resident Indian citizen if over 500th of
the investment within the LLP is contributed by the resident Indian citizen and/or
entities that are ultimately closely-held and controlled by resident
Indian citizens and such resident Indian citizens and entities have majority of the
profit share.

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 Ø For the aim of downstream investment by LLP, internal accruals can mean as
profits transferred to reserve account after payment of taxes.

Income Tax Aspects

Total Income Rate of Taxation

Upto Rs. 1 crore 30.90% (tax rate 30% plus education cess 3%
thereon)

Exceeding Rs. 1 crore 34.608% [(tax rate 30% plus surcharge 12%
thereon) plus education cess 3% thereon)]

Conversion of Existing Firms, Companies to LLP

Conversion of a firm, private limited company, unlisted public company to an LLP is governed by
the Second, Third and Fourth Schedule of the LLP Act respectively. Clause 3 of Schedule III &
IV states that a private company/ unlisted public company may convert itself to LLP if and only
if:

Ø There is no security interest in its assets subsisting or in force at the time of application;
and
Ø The partners of the LLP shall comprise only of the shareholders of the Company.

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Key Highlights of LLP

AMT is applicable only to those LLPs which claim tax holiday under
Alternate
section 10AA or chapter VIA of the Income-tax Act, 1961. Rate of
1 Minimum Tax
taxation for AMT:
(AMT)
• Where adjusted total income is less than Rs.1 crore - 19.055%
• Where adjusted total income exceeds Rs.1 crore - 21.3416%

DDT which is applicable in case of companies on dividends

Dividend distributed @ 20.36% is not applicable to LLPs. Further, in case of
2 Distribution Tax resident individuals/HUFs having dividend income in excess of
(DDT) Rs.10 lacs, tax @10% is chargeable with effect from financial year
2016-17.

ICDS is applicable to only those assesses who follow mercantile

Income
system of accounting. Unlike company which has to compulsorily
Computation and
3 follow the mercantile system of accounting, LLP can adopt either
Disclosure
cash or mercantile system of accounting. Accordingly, ICDS shall
Standards (ICDS)
not be applicable to LLP which follows cash system of accounting.

Foreign Direct FDI is now permissible in LLP in sectors/ activities where 100% FDI
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Investment (FDI) is allowed under automatic route.

Minimum governance and compliance requirements as compared to

5 Governance
a company. Board meetings and General meetings not required.

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Advantage of forming a LLP
• Liability of each partner is limited
• It has a low cost of formation and easy to form
• Not liable for the acts of each other
• less restrictions and compliance
• Partners are not liable to be sued for dues against LLP

Disadvantage of forming a LLP

• Cannot come out with IPO
• Cannot raise fund from public

2. As a business manager what is your opinion regarding the legal concept?

It is a kind of business entity, that permits individual partners to be restricted from joint
liability of partners in a partnership firm. At present, this LLP bill is in kind of mini firms
act. The Liability of the partners incurred within the traditional course of business is that of
LLP and it doesn't extend to the non-public assets of the partners. This is a good relief to the
professionals like Company Secretaries, CA, Accountants, Lawyers etc.

These professionals may form multi-disciplinary LLPs to fulfil the dynamic economic
setting. These professionals may additionally form multi-disciplinary LLPs to satisfy the
dynamic economic setting. The hybrid structure of LLP can help entrepreneurs, service
providers & professionals to organise and operate the business in an innovative and efficient
way for effectively competing in this global business world. The passing of LLP bill 2008
will certainly bring a noteworthy distinction within the existing law associated with company
laws in India.

If it is implemented properly, the LLP will provide a helpful new option for professional
partnerships which are anxious about their exposure to liability. In view of the expansion of
Indian industry in recent times, LLPs would further contribute to the growth of the service
industry and a large number of existing companies, public as well as private, are expected to
change to LLPs for accessing the benefits of LLP. The Government of India has created an

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 attempt to form a facilitating setting for entrepreneurs, service suppliers and professionals to
fulfil the world competition; but it has to be seen how far the change is useful.

3. Is a new law or amendment of existing law required from a business

perspective?

Ø Inability to have equity investment: Unlike a company, LLP does not have the concept
of equity or shareholding. Venture capital, Angel investors, HNIs and private equity funds
unable to invest in LLP as shareholders. Thus, most LLPs would have to depend on funding
from promoters and debt funding.
Ø Higher Income Tax Rate: The income tax rate for a company with a turnover of up to
Rs.250 crores is 25%. However, LLPs are taxed at a 30% rate irrespective of the turnover.
Ø Higher Penalty for Non-Compliance: Even if LLP does not have any activity, it is
required to file income tax return and MCA annual return each year. In case LLP fails to
file Form 8 or Form 11 (LLP Annual Filing), a penalty of Rs.100 per day perform is
applicable. These fines can escalate to Rs.5 lakhs for a single year.

Difficulties in Obtaining Bank Facilities: For LLP, the processing time for opening bank account
may take more than that of a Company. The reason for the prolonged process was due to non-
availability of the online portal for the banker to search for LLP information. Instead, they are
required to visit CCM’s counter for retrieval of information. LLP also face difficulties in getting
credit facilities such as loan as there is no requirement for statutory audit of LLP’s account. By
name, LLP has limited liability but in the practical, when the partners applying for a loan, then
they need to give collaterals. In effect, the partner(s) are liable for the loan amount. This is the rule
of RBI. But it should be included in the law for not making mandatory for the director to submit
their collaterals for application of the loan. Then only will get the full benefit of LLP for the
entrepreneurs, especially startups.