Download 11267The Limited Liability Partnership

1.
The Limited Liability Partnership(LLP)- An Overview
a. Background:
The LLP is viewed as an alternative corporate business vehicle that provides the
benefits of limited liability but also allows its members the flexibility of
organizing their internal structure as a partnership based on mutual agreement.
Owing to flexibility in its structure on operation, the LLP would also be suitable
vehicle for small enterprises and for investments by venture capital.
The Limited Liability Partnership Act, 2009 (The Act) contains 14 Chapters and
81 Sections with 4 Schedules
It has become a notified Act on 7th of January, 2009 but there are many issues in
the regulation which still needs to be put in place or formulated.
b. Salient Features of LLP:
The Salient Features of Limited Liability Partnership Act, 2009 are as follows:
 The LLP shall be a body corporate and a separate legal entity from its
partners.
 Any two or more persons, associated for carrying on a lawful business with a
view to profit, may by subscribing their names to an incorporation document
and filing the same with the Registrar, form a Limited Liability Partnership .
 The mutual rights and duties of partners of an LLP interest and between LLP
and the partners shall be governed by an agreement .
 The LLP will be separate legal entity, liable to the full extent of its assets with
liability of the partners being limited to their agreed contribution.
 Every LLP shall have atleast two partners and shall also have atleast two
individuals as designated partners, of whom atleast one shall be a resident.
 The LLP would be under the obligation to maintain annual accounts reflecting
true and fair view of its affairs.
 The Central Government would have the powers to investigate the affairs of
an LLP.
 The Indian Partnership Act, 1932 shall not be applicable to LLPs. The other
entities could covert themselves to LLP
2.
Issues for Conversion of an existing Partnership firm into an LLP
 The Second Schedule to the Act contains provision for the purpose of
conversion of a firm into an LLP. However the forms required for the applying
for registration and the form for issuing the certificate for registration is yet to
be notified. As on date only Draft rules and Forms have been published and
only after relevant notification the procedure issues can be put into force. That
means to state that practically though the law has been effected it can not be
executed due to non notification of the rules and forms.
 Another major issue is related with Stamp Duty Liability on transfer of the
Assets by a partnership at the time of their conversion into L.L.P What would
be the rates of stamp duty , are any Concessional rates provided by the
government and what is mode for the valuation of assets.?
 In the Act it is provided that, contributions made by the partners are in form of
money or intangible assets. It is not clear how it should be disclosed in the
books of account and what the methodology for the valuation of assets is. This
will create problems at the time of practical application of conversion to a LLP.
3.
Taxation Issues
The Act does not specify how the LLP will be taxable. This would be
governed by the provisions of Income Tax Act, 1961. Currently as on date
the Tax provisions do not specify the tax treatment in respect of LLP’s. This
would most probably be taken up in the next budget which is likely to be taken up in
June or July 09. (In Feb. 09 only a Vote on Account is expected) . There are many
tax issues that needs to be understood before
converting into a LLP. Few of these
issues are as follows:

In case of partnership or a proprietorship converting into a company the transfer
of assets would not be treated as capital gains( Section 47(Xiii)and (xvi) of the
Income Tax Act , 1961) . The Income Tax Act does not specify whether the
capital gain tax will be waived on conversion of partnership into an LLP.

Another major issue is related with Capital Gains Tax Liability. It is not clear–
whether there would be any capital gains liability on partners contributing
assets towards the Capital at the time of formation of LLP Or contributing their
share of capital and accumulated profits on conversion of firm into LLP as
share capital of LLP. What is the mode of valuation of assets for income tax
purpose and who will pay the capital gains tax on transfer of the assets of a
partnership, upon their conversion into a L.L.P. under the provisions of the
Clauses 54 or 55 or 56.
The Income Tax Act does not specify how LLP would be taxed .They could
either be taxed as Private companies where they are taxed on their income and
further income distributed to the shareholders are taxed again as Dividend
Distribution tax or as a partnership firm .

 The provision of payment of tax by an LLP is yet to be effected in the Income
tax act , where in it may have the following provision.
It may be taxed as Partnership firm and where in the profits would be
taxed after the deduction of business expenditure , salaries and interest
-
paid to partners and the Partners would be liable to pay tax on salary and
interest receipts , where as the share in the profits is exempt .
Only the profits in the hands of the LLP partners would be taxed , the
partners will be liable to pay tax on share in profits received in their hands
which is also known as Tax Transparency .
It is not clear whether interest and salary would be allowed as an
expenditure while calculating income of LLP.
 On conversion of firm into LLP the provision of carry forward of business
losses is yet to be incorporated in the Income Tax Act which is likely to happen
in the next budget .
 The Income Tax Act does not specify what would be the value of depreciable
assets in the hands of LLP on conversion.