ISSUES IN LIMITED LIABILITY PARTNERSHIPS ACT 2008Dr. Ankita Gupta India has witnessed considerable growth in services sector; it is highly expected that in coming years Indian professionals would be providing accountancy, legal and various other professional/technical services to a large number of entities across the globe, which offer solutions to international clients. It is necessary that entrepreneurship knowledge and risk capital combine to provide a further impetus to our impressive economic growth. It is herein that the framework for LLPs is operational, the non-suitability of The Companies Act to the liability and governance structure intended for Limited Liability Partnerships. The administration and enforcement of partnership firms under the Indian Partnership Act, 1932 is at the State level. Besides, a partnership firm involves full joint and several liabilities of the partners. Because of this, many firms/enterprises engaged in biotech, information technology, Intellectual property and other knowledge based sectors find traditional partnerships unsuitable. The traditional partnerships are also considered unsuitable for multi-disciplinary combinations comprising a large number of partners, seeking a flexible working environment but with limited liability. The desirability of LLP form has been expressed by the following Committees set up by M/o Company Affairs Committee on Regulation of Private Companies and Partnerships headed by Sh. Naresh Chandra (2003)
In accordance with the recommendations of the Irani Committee, it is felt appropriate to bring about a separate legislation for LLPs. LLP structure would promote growth and enable such firms/enterprises expands their trade/business or services across States in India as also abroad. Limited Liability Partnership (‘LLP’) is a form of business structure which combines best elements of the partnership and corporate structures of carrying out business and provides considerable flexibility in management and for conducting businesses, especially to small and medium firms. The LLPs were recently introduced in India vide the Limited Liability Partnership Act, 2008 (‘LLP Act’). A Limited Liability Partnership (LLP) shares many of the features of a normal partnership - but it also offers reduced personal responsibility for business debts. The Introduction and passing of LLP act 2008, as it is called was the result of a consultative approach adopted by the Ministry of Corporate Affairs it gathered the viewpoints from various concerned Ministries/Departments and autonomous bodies like Comptroller and Auditor General of India (C&AG), Securities and Exchange Board of India (SEBI), Insurance Regulatory Development Authority (IRDA) etc. for their comments. The LLP structure is in vogue in other countries like United Kingdom, United States of America, various Gulf countries, Australia and Singapore It is broadly based on UK LLP Act 2000 and Singapore LLP Act 2005. Both these Acts allow creation of LLPs in a body corporate form i.e. as a separate legal entity, separate from its partners/members. LLP is an alternative corporate business form that gives the benefits of limited liability of a company and the flexibility of a partnership. The LLP can continue its existence irrespective of changes in partners. It is capable of entering into contracts and holding property in its own name. The LLP is a separate legal entity, is liable to the full extent of its assets but liability of the partners is limited to their agreed contribution in the LLP The LLP, however, is not relieved of the liability for its other obligations as a separate entity. Since LLP contains elements of both ‘a corporate structure’ as well as ‘a partnership firm structure’ LLP is called a hybrid between a company and a partnership. LLP is a business model characterized by- (i) Is organized and operates on the basis of an agreement. The LLP framework could be used for service providing enterprises, enterprises in new knowledge and technology based fields where the corporate form is not suited, for professionals such as Chartered Accountants (CAs), Venture capital funds where risk capital combines with knowledge and expertise, professionals and enterprises engaged in any scientific, technical or artistic discipline, Small Sector Enterprises (including Micro, Small and Medium Enterprises). Provisions for taxation of LLPs The need for a clear cut tax regime in respect of the income of the LLP was essential to give certainty in all respects of conducting business via this mode of business, 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. The Union Budget 2009 announced on July 6, 2009 has laid down the roadmap for the taxation of the LLPs in India. (a) LLPs to be taxed 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. (b) Consequent changes to be made 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 (c) 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. (d) 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. (e) 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. (f) If there is a violation of these conditions, the provisions of section 45 of Income-tax Act shall apply. (g) These amendments are proposed to be made effective from the 1st day of April 2010 i.e. assessment year 2010-11 The new provisions introduced in relation to the taxation of LLP do not treat the LLP as a transparent entity but treat the same at par with the general partnerships under the Indian Partnership Act, 1932. Accordingly, the profits and losses of the LLP would not pass through in the hands of the partners but would be assessable in the hands of the LLP. The LLP Act provides for the conversion of general partnerships and private limited companies or unlisted public companies into LLP. However, no amendments have been proposed to the IT Act per se clarifying the tax implications arising on the conversion of a general partnership into a LLP. The memorandum to the budget states that no tax liability would arise in case of a conversion of a general partnership into LLP, so long as there is no change in the rights and obligations of the partners and no transfer of assets or liabilities post the conversion. However, the conversion of a general partnership into LLP would inevitably involve the limitation of personal liability of the partners, thereby resulting in a change in the obligations of the partners. Therefore, the issue would arise whether such a conversion would lead to a transfer liable to tax under section 45 of the IT Act. The exclusion of LLPs from the 8% presumptive rate as provisioned for general partnerships, infuses ambiguity in the LLP act. Although partners are not personally liable for the liabilities of the firm in LLP act, they are jointly and severally liable for the taxes to be paid by the LLP for the period during which he was a partner as provisioned in the section 167C Income Tax act. The practice of taxing the income of the LLP in the hands of the firm is a divergence from the practice of treating the LLP as a tax transparent entity in certain other countries like UK and USA, which tax the income of the LLP in the hands of the partners. Thus, in case of the income of the LLP is also taxed in other jurisdiction where the income is taxed in the hands of the partners, the availability of tax credit to LLP in India might lead to certain difficulties. However, LLP, which is a hybrid structure between a company and a firm, could have been more attractive mode of investment if a pass through status was accorded to it for tax purposes. The introduction of a tax regime will provide a road of certainty in relation to the tax costs associated with carrying the business via the LLP mode. It still requires clarity in amendments and there is a long road ahead. References: http://www.llp.gov.in on 22-10-20098 http://www.vccircle.com/500/news/the-limited-liability-partnerships retrieved on 22-10-2009 http://www.indianmba.com retrieved on 22-10-2009 http://www.wikipedia.com retrieved on 22-10-2009 Notes: Limited Liability partnerships -LLP Income tax Act -IT Act |