LIMITED LIABILITY PARTNERSHIP Overview & Tax Issues on Conversion to LLP CA AKSHAY K GUPTA- Kanpur

LIMITED LIABILITY COMPANY LEGAL ENTITY PERPETUAL SUCCESSION LIMITED LIABILITY SEPERATION OF OWNERSHIP & MANAGEMENT CORPORATE DEMOCRACY

UNLIMITED LIABILITY PARTNERSHIP Partnership is an agreement between two and more persons to work for each other to carry on a business or profession for profits or gains. An agreement or arrangement between two or more persons: No legal entity separate from partners-unlimited joint and several liability To work for each other:agent for each other.Acts of one may effect others. Carry on a business or profession: essentially for business or profession Share profits or gains:sharing of profits or gains may not be of losses

ISSUES FOR PROFESSIONAL BODIES  LIMITED LIABILITY COMPANY No mutual relationship Professionals completely insulated Profession vs. Business Free Entry and Exit  UNLIMITED LIABILITY FIRM Each partner liable not only for own acts but also of others Unlimited – Personal assets are at risk Joint & Several liability Maximum 20 partners

LIMITED LIBILITY PARTNERSHIP SALIENT FEATURES  SEPARATE LEGAL ENTITY: Independent of persons granted charter Rights of A Person Can own assets  PERPEPTUAL SUCESSION:Continuous existence  MUTAL AGREED RELATIONSHIP: Mutual rights and duties of partners interse Rights and duties in relation to LLP continued…..

 PARTNERS AGENT OF LLP BUT NOT OF OTHER PARTNERS  PARTNERS ACT WITHOUT AUTHORITY:LLP not liable  FRAUDLENT ACT:unlimited liability …..continued

THE LIMITED LIABILITY PARTNERSHIP ACT 2008 An overview

SEC 1: Whole of India from 7 th January 2009 (Rules Notified w.e.f 1 st April 2009) SEC 3: - LLP a body corporate incorporated under the Act -LLP shall have perpetual succession -Change in partners –no effect in existence,rights or liabilities of LLP SEC 66: Partner may lend or transact business with LLP as another person SEC 4: Partnership Act do not apply SEC 67: Companies Act not to apply-Except as specified by central government APPLICABILITY & STRUCTURE

PARTNERS AND THEIR RELATIONS SEC 6: - Minimum two partners Below two for six months - Individual obligation SEC 22: Who are Partners - Subscribers to incorporation documents are partners -New partner with LLP agreement SEC 23: Relationship of partners -Mutual rights and duties of partners interse and with LLP as per agreement -Agreement and changes to file with registrar-Form 3 -If no agreement First schedule apply continued……

I. Individual (including Minor) Not HUF II. Limited liability partnership III. Company IV. Foreign Limited liability partnership V. Limited liability partnership incorporated outside India VI. Foreign company VII. Company incorporated outside India

SEC 24: Cessation of Partner Interest -As per agreement -Notice not less than 30 days -Death of a partner -Dissolution of LLP SEC 24(5): Former Partner entitle to: Capital contribution Share in accumulated profits less losses SEC 25: Changes in partners to be registered …….continued

EXTENT AND LIMITATION OF LIABILITY SEC 26 :Partner agent of LLP, not of other partners SEC 27 :-LLP liable for all the acts of partners- including wrongful act or omission-done in ordinary course or with authority -LLP not bound by partners unauthorized Act and person known he has no authority or person does not know him as a partner -LLP sole obligation-not of partners -LLP liability out of LLP property Continued…..

SEC 28:- Partners not personally liable for LLP obligation -Partners may be liable for own wrongful act or omission. Not other partners SEC 30: Unlimited liability in case of fraud ……continued

Every Partner Including DP Agent of LLP LLP not liable for unauthorized act of Partners Not Agent of other Partners Any Liability of LLP to be met out of its property & not otherwise

Sec. 25 of Partnership Act states- Every partner is liable, jointly with all the other partners and also severally, for all acts of the firm done while he is a partner. Limited Liability of Partners Partner not personally liable for an obligation of LLP Partner also not liable for wrongful act or omission of other partners But a partner is personally liable for his own wrongful act without authority

Liability of a person misrepresenting himself as partner vis-à-vis Limited Liability Partnership (LLP’s) liability A person who is not Partner in a LLP, represents himself as Partner in that LLP & deals with any person, who on his faith gives credit to LLP, is liable to that person Deceased Partner not liable for acts done by LLP after death

Unlimited Liability when arises LLP as well as partners exposed to unlimited liability in case any of them defraud creditors or does any other act for fraudulent purpose Liability of LLP is restricted to the extent that of a partner who acts so, only if the act is done without knowledge & authority of LLP

Penalty against the person who acted so (1) Rs < Fine < Rs. 5 Lac (2) LLP & partner jointly & severely liable to compensate the loss to the sufferer (3) Penalty may be waived/reduced by court/tribunal if found that such person has provided useful information in finding out an offence.

CONTRIBUTIONS SEC 32 :-Contribution of a partner may be of Tangible or Intangible property -Cash or in kind or services SEC 33 : Obligation to contribute as per LLP agreement -Creditor acting in reliance of LLP agreement may enforce original obligation against such partner

ASSIGNMENT AND TRANSFER OF PARTNERSHIP RIGHTS SEC 42 : Rights to profits and losses and distributions of LLP are transferable-wholly or in part -Transfer itself is not disassociation of partner or dissolution of LLP -Transferee does not by itself entitle him the right to manage or information

NAME AND INCORPORATION SEC 15 : Limited liability Partnership or ‘LLP’ as last words of the name -Name not to be undesirable or identical Form 1 for Name Application SEC 11: Two or more persons associated for business may subscribe to incorporation document -Incorporation document to be filed with R.O.C. Form 2 -Statement of advocate,C.A.,C.S. or subscriber for compliance of act and rules -Incorporation document to include name,object,address,partners,designated partners,other information. continued…..

SEC 12 : Incorporation on registration Registration certificate with in 14 days – Form 16 Certificate conclusive evidence. SEC 14: Effect Of registration, capable of Suing and being Sued Acquiring, owing, hold property Having a Common Seal if decides to have Doing and Suffering acts and things as corporate …….continued

DESIGNATED PARTNERS SEC 7 : Minimum 2 individual designated partners One shall be resident in India Designated Partner Identification No – Form 7 Particulars and consent to be filed – Form 4 SEC 7(2) : Designated partners— As specified in incorporation document As specified in LLP agreement with prior consent Sec 8 : Designated partners liability— To comply provisions of the Act Liable for all penalties.

OTHER PROVISIONS SEC 34 : Maintenance of accounts compulsory File annual statement of accounts and Solvency –Form 8. Accounts shall be audited if contribution exceed 25 lakh or turnover exceed 40 lakhs. SEC 35 : Annual Return within 60 days of financial year – Form 11 SEC : Inspection of LLP. SEC : Winding up voluntary or tribunal SEC : Conversion – Firm to LLP Private company to LLP Public company to LLP

Beneficial Features of LLP Partners Shielded with Joint Liability Flexibility in Mutual Relations Acceptance of Deposit Rules Not Apply No Restrictions of Loans to Partners or Related Parties Withdrawal of Capital & Profits No Restrictions Managerial Remuneration Rigors/Compliances of Co. Act not Apply

HOW LLP CAN BE FORMED By Incorporation of a new LLP. By Conversion from firm to LLP. By Conversion from private company to LLP. By Conversion from unlisted public company to LLP.

REQUIREMENTS FOR INCORPORATION OF LLP Minimum two number of subscribers (section 11(1)(a)) 'person' includes individuals and companies. Minimum two number of Designated Partners all times Requirement for having DPIN (Section 7(6). Name of a LLP (Section 15(1) provides that every LLP must have the words “limited liability partnership” as the last words of its name. LLP shall have a registered office. Filing of Form 2 for incorporation of the LLP. Requirement to attach proof of address of registered office of LLP. Filing Form 9 along for consent to act as a designated partner

REQUIREMENTS FOR INCORPORATION OF LLP  Filing of statement of compliances by professional and applicant.  Filing of Form 4 with LLP agreement, if any.  Filing of Form 5 for consent to act as a partner by each of the partner of the LLP.  Certificate of incorporation is a conclusive evidence.

REQUIREMENTS FOR INCORPORATION OF LLP In the Form 2 in which the following particulars shall be given. (Appendix 1). (a) Name of the LLP; (b) Proposed business of the LLP; (c) Address of the registered office of the LLP; (d) Name and address of each of the persons who are to be partners of the LLP on its incorporation; (e) Name and address of the persons who are to be designated partners of the LLP on its incorporation; (f) Contain such other information concerning the proposed limited in which the LLP as may be prescribed. Requirement of payment of fee for incorporation of the LLP. Registrar shall register the LLP within 14 days.

INCORPORATION DOCUMENT (CLAUSE11)  Name  Proposed business  Address of the registered office  Name and address of partners  Name and address of designated partners  Any other information prescribed

MINIMUM COST OF INCORPORATION AND COMPLIANCE The fee expenses for incorporation is very nominal a minimum of Rs.500 and maximum of Rs.5,000/- only. The filing fee of normal documents also ranges between Rs.50/- to Rs.200/- per document only. See the Tables in next slides.

The difference between the fees payable on the increased slab of contribution and the fees paid on the preceding slab of contribution shall be paid through Form 4. For filing, registering or recording any document, form, statement, notice, Statement of Accounts and Solvency, annual returns, etc. by this Act or by this Rule required or authorized to be filed, registered or recorded in respect of Limited Liability Partnership: Limited Liability Partnership whose contribution does not Exceed Rs 1 lakh. Rs. 50 Limited Liability Partnership whose contribution exceeds Rs 1 lakh but does not exceed Rs 5 Lakhs. Rs.100 Limited Liability Partnership whose contribution exceeds Rs 5 lakhs but does not exceed Rs. 10 lakhs. Rs.150 Limited Liability Partnership whose contribution exceeds Rs 10 Lakh. Rs.200

 Fee for application or Inspection of documents or for obtaining certified copy thereof shall be as under:- An application for reservation of name u/s 16 Rs. 200 An application for direction to change the name u/s 18 Rs Application for striking off the name from the Registrar Rs. 500 Application for reservation of name by Foreign Limited Liability Partnership under rule 18(4) Rs Application for renewal of name under rule 18(4) Rs Fees for inspection of documents kept by registrar Rs. 50 Fees for obtaining certified copy of: Certificate of Incorporation or Certificate of registration of conversion of any LLP Rs. 50 Copy or extract of any document or any attachment Thereof to be certified by Registrar Rs. 5/page or fractional part thereof Any other application Rs. 500

COMPARITIVE CHART OF FEE APPLICABLE TO COMPANY V/S LLP FORMATION FEE FORM NO. FEES Rs.1LacRs.5LacsRs.10Lacs For compan yFor LLP For compa nyFor LLP For compan y For LLP DIN (for two persons) 200 Digital Signature(2 Yrs.) 1000 Name Approval1A Registration of MOA & AOA MOA & AOA Stamping 1500 Notice of situation/change in Registered office Particulars of Appointment of Director Stamp TOTAL

FORM NO.FEES Rs.1Lac Rs.1 lacs toRs.5Lacs Rs.5 Lacs to Rs.10Lacs For company For LLP For compan y For LLP For compa ny For LLP ANNUAL RETURN FILING FEE

HEAVY PENALTY ON NON COMPLIANCE: MAY TURN OUT TO BE A STUMBLING BLOCK Payment of additional fee of Rs.100/- for per day of default upto a period of 300 days (Section 69). Payment of additional fee after the period of 300 days. Severe punishment in case of second or subsequent offence (Section 70), be punishable for which fine is prescribed shall be twice the amount of fine for such offence.

 For registration of Limited Liability Partnership including conversion of a firm of a private company or an unlisted public company into Limited Liability Partnership: Limited Liability Partnership whose contribution does not Exceed Rs 1 lakh. Rs. 500 Limited Liability Partnership whose contribution exceeds Rs 1 lakh but does not exceed Rs 5 Lakhs. Rs.2000 Limited Liability Partnership whose contribution exceeds Rs 5 lakhs but does not exceed Rs. 10 lakhs. Rs.4000 Limited Liability Partnership whose contribution exceeds Rs 10 Lakh. Rs.5000

CONVERSION FROM FIRM TO LLP (SECOND SCHEDULE) With the consent and shall comprise of all the partners. Application with the registrar. Form 17 All movable, immovable property, interests, rights, privileges, liabilities, obligations shall transfer. Partners liable for Act prior to conversion although the LLP may indemnify to the partners.

CONVERSION FROM PRIVATE COMPANY TO LLP(THIRD SCHEDULE) Partners of LLP comprises of all the shareholders and no one else. Statement by all the shareholders. All movable, immovable property, interests, rights, privileges, liabilities, obligations & whole of the undertaking will be transferred to LLP. Company shall be deemed to dissolved & removed from the register of ROC.

CONVERSION FROM UNLISTED PUBLIC CO. TO LLP(FOURTH SCHEDULE) Partners of LLP comprises of all the shareholders and no one else. Statement by all the shareholders. All movable, immovable property, interests, rights, privileges, liabilities, obligations & whole of the undertaking will be transferred to LLP. Company shall be deemed to dissolved & removed from the register of ROC.

RESULT OF CONVERSION  All Properties, assets, interest, rights, privileges, liabilities, and obligations relating to the company and the whole of the undertaking of the firm/company shall be transferred to and shall vest in the LLP.  No further assurance, act or deed is required.  The firm/company shall stand dissolved and shall be removed from the records under Partnership Act/records of the Registrar of Companies.

CONVERSION NOT TO EFFECT :  Pending proceedings  Any conviction, ruling, judgement or order  All deeds, contracts (including contracts of employment ), schemes, bonds, agreements, applications, instruments and arrangements subsisting immediately before the date of registration  Any appointment, authority, or power of the firm/company

CONVERSION NOT TO APPLY TO:  Any approval, permit or licence issued under any written law to the firm/company

INVESTIGATION 1/5 of the total partners, or partnership firm, or central government may ask for investigation. Application to Tribunal or court. Security to pay by applicant partners. Application be supported by evidence. Inspector can seize the documents. Cost of the Inspector will be incurred first by central government then to be recovered from concern person Designated Partner’s duty to provide documents & evidence to Inspector. Power to search duly authorized by magistrate.

WINDING UP AND DISSOLUTION Winding up and Dissolution Circumstances in which Limited Liability Partnership may be wound up by Tribunal Rules for Winding up and Dissolution

COMPROMISE, ARRANGEMENT OR RECONSTRUCTION OF LIMITED LIABILITY PARTNERSHIPS Compromise or Arrangement of Limited Liability Partnerships Power of Tribunal to Enforce Compromise or Arrangement Provisions for facilitating reconstruction or amalgamation of Limited Liability Partnerships.

TAXATION  Most countries treat LLPs as pass through entities  Share of income and capital gains taxed in the hands of partners  In UK, tax relief for interest and trading losses against partner’s income other than from LLP, limited to capital contribution  However, both US and UK require the LLP to file an annual return showing details of the whole partnership

Taxation in India As a Partnership Firm Sec 2(23)(i): Firm includes LLP Sec 2(23)(ii)(b): Partner shall mean Partner under LLP Sec 2(23)(iii): Partnership shall mean Partnership in LLP

Tax benefits to LLP v Company No Dividend Distribution Tax No Minimum Alternate Tax But Alternate Minimum Tax 115 JC No Deemed Dividend u/s 2(22) No Application Explanation to Section 73 Interest on Capital allowable Salary to Partners

Tax neutral conversions of companies into LLP [47(xiiib) (w.e.f )] Conversion in accordance with LLP Act All assets and liabilities of company to LLP All shareholders to become partners in LLP with capital contribution and profit sharing ratio in the proportion of shareholding Aggregate of profit sharing ratio of the shareholders of company in LLP ≥50% for a period of 5 years

...Tax Neutral Company to LLP Shareholders not to receive any consideration or benefit, directly/indirectly, in any form except by way of share in profit and capital contribution in LLP Sales, turnover or gross receipts in business of company in any of 3 years < INR 6 million No direct / indirect payment to any partner out of accumulated profits of company for a period of 3 years post conversion date

Other Provisions on Conversion Only to conversion u/s 47(xiiib)  Carry forward losses and depreciation  WDV of company to be the Cost of LLP  Depreciation as if no transfer  Amortization of VRS to be allowed

No Tax Provision For TDS & Tax Credit MAT Credit will lapse 115 JA(7) 43B payments by LLP Benefits u/s 80IA- 80IB etc Date of Acquisition of assets converted Cost step up if benefit forfeited Conversion of firm into LLP

Tax on Conversion of Firm/other companies to LLP No Specific Provision in IT Act Finance Bill 2009 Memorandum- no tax implications if same rights of partners CIT vs. Texspin Engineering 263 ITR 345 Effect of Definition of Convert in LLP Act Taxability of partners/shareholders Whether Extinguishment of rights in shares

Other Issues Transfer of Stocks and other assets Interse transfer of shares after conversion Stamp Duty 50C Vat and Excise on Conversion Cenvat & Vat credit

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