Who can go for LLP?

 

1. Service sector companies
2. Joint Venture entities
3. Real estate companies
4. All partnership firms with long term objective
5. Any existing SME Company

 

 

Till the introduction of the Limited Liability Partnership Act, 2008 (“LLP Act”), entrepreneurs’ running business on small / medium scale had only two options as form of organization i.e. Partnership Firm or Private Limited Company. Now, with the introduction of the LLP Act third option is open for small scale business. But, we will really have to check who can go for LLP. In order to address this question, we need to compare existing options available to entrepreneurs running business on small / medium scale basis. We also need to examine whether entrepreneurs running business on small / medium scale basis will opt for LLP.

 

Let us look at following comparison.

 
Sr.No
  
Particulars
  
Partnership
  
LLP
    
Company
  
Remark
 
 
1
 
Liability
 
Every Partner is liable jointly with all other partners and also severally for all acts of the firm done while he is a partner
 
iA liability of partner is limited to the extent of his contribution. A Partner is personally liable for his own wrongful act i.e. act which is not authorized by LLP or for fraud on his part.
 
 
Liability of shareholder is limited to the extent of his shareholding in the company.
 
Advantage to LLP and Company
  
 
2
 
Taxation
 
  • Income Tax (30% flat + 3% Education Cess)
  • No surcharge on Income Tax
  • Profits will be taxed in the hands of Partnership Firm and not in the hands of Partners. There is no double taxation.
  • Minimum Alternate tax will not be applicable
  • Remuneration to Partners will be taxed as “Income from Business or Profession”
 
  • LLPs will be treated at par with Partnership firm for the purpose of Income Tax (30% flat + 3% Education Cess)
  • No surcharge on Income Tax
  • Profits will be taxed in the hands of LLP and not in the hands of Partners. There is no double taxation.
  • Remuneration to Partners will be taxed as “Income from Business or Profession”
 
 
  • Effective Tax including education cess and surcharge is 33.99%
  • There is double taxation as Dividend Distribution Tax Applicable (17% approx).
  • Minimum alternate tax is applicable
  • Directors remuneration is taxable under the head “Salary”
 
Advantage to LLP and Partnership Firm
  
 
3
  
Perpetual Succession
 
It does not have perpetual succession as it depends on the will of the partner. Death of one partner dissolves partnership.
 
iiIt has perpetual succession. It means LLP has existence, no matter how many changes occur in membership.

Sub-section (2) of section 3 of LLP Act
 
 
It has perpetual succession. It means Company has existence, no matter how many changes occur in membership.
  
Advantage to LLP and Company
  
 
4
  
Investment
 
Partnership firm is not allowed to invest in shares of other Company in Firm’s name.
 
LLP can invest in shares of other Company its name.
 
 
Company can invest in shares of other Company in its name.
  
Advantage to LLP and Company
  
 
5
  
Legal Proceedings
 
Only registered Partnership firm can sue Third Party or it can be sued.
 
iiiLLP is a legal entity which can sue or can be sued.

Sub-section (1) of section 3 of LLP Act
 
 
Company is a legal entity which can sue or can be sued.
  
-
  
 
6
  
Bank Finance
 
Bankers do not have sufficient protection.
 
Bankers do not have sufficient protection.
 
 
Bankers enjoy sufficient protection and prefers Private Limited Company.iv

Provision of filing charge, restriction on withdrawal of capital, requirement of statutory audit, restriction on related party transactions etc. offers protection to banks etc

  
Advantage to Company
  
 
7
  
Compliances
 
There are minimum compliances required to be complied with under Partnership Act.
 
There are minimum compliance required to complied with under LLP Act
 
 
There are lot many compliances required to be complied with under Companies Act.
  
Advantage to LLP and Partnership Firm
  
 
8
  
Information available on Public Domain
 
Financial Statements i.e. Balance Sheet as at year end and profit and loss account for the year end is not required to be filed with Registrar of Firms. Hence this information is not available at public domain.
 
vStatement of Account and Solvency for the financial year is required to be filed with ROC within 30 days from the end of 6 months of each financial year. In addition viAnnual Return is required to be filed with ROC within 60 days from the end of Financial Year. And this information is available at Public Domain.

Sub-section (3) of section 34 and sub-rule (4) of rule 24 of the Limited Liability Partnership Rules, 2009

Sub-section (1) of section 35 and sub-rule (1) of rule 25 of the Limited Liability Partnership Rules, 2009
 
 
The Company is required to file its Financial Statements as at the financial year and for the financial year alongwith Auditors, directors report etc.. Plus there are many documents required to be filed with ROC. Majority of information is available at public Domain.
  
Advantage to Partnership Firm
  
 
19
 
Related Party transactions
 
There is no restriction for entering into contracts with related parties.
 
There is no restriction for entering into contracts with related parties.
 
 
There are restrictions for entering into contracts with Directors of the company or related parties.
 
Advantage to LLP and Partnership Firm
  
                       
 
  

 

If we look at the above comparison, Private Limited Company has an edge over LLP with respect to Bank Finance. Where business is largely dependent on Bank Finance then Private Limited Company is the best option for running small and medium scale business. But the compliance and cost of running the company is high as compared to LLP. Small scale businesses which can be carried on with own funding can think of converting into LLP.

All existing partnership firms can convert themselves into LLP. LLP has an advantage over partnership firm. [The only point of concern is financial information of LLP is available at public domain.] Maintenance cost is almost same for Partnership and LLP. The main advantages are (1) limited liability of partners; (2) LLP can invest in shares of other company in its own name; and (3) perpetual succession. These three advantages over Partnership Firm can induce entrepreneurs to convert into LLP or form LLP than forming traditional partnership firm.


Further, Association of Persons (“AOP”) or any other un-registered entity can also go for LLP due to above advantages.


Joint Venture Companies
In the recent judgmentvii , Bombay High Court has put a question mark on enforceability of restrictive provisions of shareholders agreement in the Company form of organization. There can be provisions in shareholders agreement viz. transfer of shares, decision making process of shareholders and board etc. which can become matter of litigation. However there are no such restrictions in LLP act and hence it can be considered as suitable for joint venture [JV] entities / Special Purpose Vehicles [SPV]. However, the protection of minority provided in section 397 and 398 of the Companies Act is absent in LLP.

 

Entities on Boundary Line of LLP

As on today following business/ entities cannot get registered as LLP

Non-banking financial businessiii

Entities having foreign direct investment or making Overseas Direct Investmentix

Multi-disciplinary firms of professionals like Chartered Accountants, Company Secretaries, Cost Accountants

 

To allow the above business/ entities to form LLP suitable amendments are required in following Acts, Rules, Guidelines etc..

Reserve Bank of India Act, 1934 (“RBI Act”)

Foreign Exchange Management Act, 1999 (“FEMA Act”)

The Chartered Accountant Act, 1949, The Cost and Works Accountants Act, 1959, The Company Secretaries Act, 1980, the Code of Conduct/ Ethics, Guidelines under all the Acts.x

 

Entities barred from LLP
LLP is formed for carrying any business or trade with a view to profitxi. Hence LLP cannot be formed with Non-profit making objective. There is no provision under LLP Act for such kind of registration under it.

 

Conclusion
Hence, we can conclude that, existing partnership firms OR new entities can go for LLP rather than Partnership Firm. AOPs can also think of forming LLP instead of unregistered form of organization. Misfit Private limited Companies [who also do not have bank finance] can convert themselves into LLP. LLP can be convenient mode of business for JV/ SPV entities.
Further if (1) RBI Act is amended, LLP can be formed with finance and investment object; (2) if FEMA provisions are amended FDI/ ODI/ ECB can be allowed in LLP; (3) if ICAI, ICSI and ICWAI acts are amended and if these institutes amend their code of conduct/ ethics, professionals like Chartered Accountants, Companies Secretaries and Cost Accountants can tie-up hands for providing services at one point contact under umbrella of LLP.

 

 

iSection 28 of the LLP Act
iiSub-section (2) of section 3 of LLP Act
iiiSub-section (1) of section 3 of LLP Act
ivProvision of filing charge, restriction on withdrawal of capital, requirement of statutory audit, restriction on related party transactions etc. offers protection to banks etc
vSub-section (3) of section 34 and sub-rule (4) of rule 24 of the Limited Liability Partnership Rules, 2009
viSub-section (1) of section 35 and sub-rule (1) of rule 25 of the Limited Liability Partnership Rules, 2009
viiWestern Maharashtra Development Corp. Ltd v. Bajaj Auto Ltd
viiiRBI norms for NBFC requires an entity to be Company
ixThere are no norms for FDI/ ODI/ ECB in LLP
xGovernment on 28.04.2010 has introduced in the Rajya Sabha three bills to enable Chartered Accountants, Company Secretaries and Cost Accountants to form LLP
xiClause (a) of sub-section (1) of section 11 of the LLP Act