PLC
Limited Liability Partnership
Limited Liability Partnership is a form of business organisation that is easy to maintain and gives very limited liability to its owners. An LLP reaps the benefits of both a Company and Partnership. However, in a Limited Liability Partnership, one Designated Partner is not responsible for the misconduct or negligence of the other Designated Partner. It doesn’t take much to establish an LLP, but there are certain minimum requirements.
- A minimum of 2 Designated Partners (DP) out of which 1 needs to be an Indian National.
- In case a body corporate is one of the Designated partners in an LLP, it needs to appoint a natural person to serve as a Designated Partner.
- It is mandatory for both partners to get a Designated Partner Identification Number (DPIN) to incorporate a Limited Liability Partnership.
- However, Digital Signature Certificate (DSC) is not compulsory for both partners. Just one partner’s DSC is required to sign any digital documents.
To understand more about a Limited Liability Partnership, we need to first learn to differentiate between a company that is set up on shareholdings and a partnership firm. The company’s rules are regulated under the Companies Act, 2013, whereas a partnership firm falls under the Limited Liability Partnership Act, 2008, and is simply a contractual agreement between partners. Furthermore, the LLP has lesser compliance requirements as compared to any other company. A Limited Liability Partnership enjoys more flexibility when it comes to the management ownership divide, which is more predominant in a company.
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Since we have established that a partnership is different from any other company, we must understand that it comes with its own set of advantages. Let’s discuss some of them in detail so you can make the right decision for your choice of business set up.
- It is easier to set up LLP, especially for entrepreneurs. An agreement is signed between 2 or more partners while forming a Limited Liability Partnership which can be customised as per the needs of the Designated Partners. Furthermore, there are lesser formalities in terms of legal compilation, annual meetings and resolutions passed as compared to a Private Limited Company.
- No minimum amount of capital is required to start LLP. The contribution can be in the form of tangible assets like land and machinery, cash or intangible assets.
- As discussed before, the LLP requires a minimum of 2 Designated Partners wherein the maximum number can be as many as required which simply means there is no upper limit to the number of Designated Partners.
- It is more economical to set up a Limited Liability Partnership. The cost to set up a LLP is lesser the capital required to set up other type of companies.
- It is not compulsory for the LLP to get their books of accounts audited every year. It is one of the major benefits of forming this kind of company. However, an LLP will have to get its accounts audited only if the contribution exceeds Rs. 25 Lakhs and/or when the annual turnover of said company exceeds Rs. 40 Lakhs.
- A Limited Liability Partnership needs to submit an Annual Return Report and a Statement of Accounts and Solvency as a mandatory compliance requirement. Therefore, we can say that an LLP enjoys less compliance burdens as compared to other companies.
- LLP is mandated to pay tax on the share of its partners and the income it earns. Therefore, under Section 40(b), the LLP does not have to pay Dividend Distribution Tax (DDT) i.e. if any of the partners withdraw their profits from the company, they do not owe any additional tax liability. Any bonus, commission or remuneration, interest to partners and payment of salary is allowed as Deduction. However, the provision of ‘deemed dividend’ is not applicable to LLP under the Income Tax Act, 1961.
Just like every other kind of company, LLP is also registered with the Registrar of Companies (RoC) at the Ministry of Corporate Affairs (MCA). Our experts at All India ITR take care of the incorporation process for you when you register with us. Let’s take you through our process –
- The first step of incorporation is to get the Digital Signature Certificate (DSC) for the Designated Partners. DSC is essential for obtaining the identification number of the partners and also after the formation of LLP, it is used to sign all important documents digitally. Therefore, it is important to get the DSC in order to initiate the incorporation.
- Once we get the DSC, we can apply for the Designated Partner Identification Number (DPIN). This is equivalent to a Director Identification Number (DIN) in other structures of company. However, one partner can have just one DPIN. Usually the application of DPIN requires only the DSC. In rare cases the other documents are required for the DPIN application.
- The next step is to register the company name with the MCA and get approval for the same. It is extremely essential for the Designated Partners to keep the LLP Naming Guidelines in mind while selecting an appropriate name for the partnership, this makes the approval process faster. The RoC processes the application for name approval in the state of incorporation after the application has been sent to the MCA which then issues a letter approving the name of the partnership.
- Within 20 days from getting the name approved, we will need to file the documents for incorporation to the MCA. A Certificate of Incorporation is provided to state, mentioning that the LLP has been registered.
- At this stage, a rough draft of a Limited Liability Partnership Agreement will be provided by us. You can add the clauses as per your requirements and convenience. The LLP Agreement mainly consists of the rights and duties of Designated Partners towards each other as well as towards the LLP. This agreement is governed by the Schedule One of the Limited Liability Partnership Act, 2008.
- Once the Designated Partners agree on the clauses mentioned in the agreement, it is supposed to be submitted to the MCA. Here we will also apply for the PAN of the LLP. After receiving the Certificate of Incorporation, the LLP agreement needs to be submitted within 30 days. Failing to do so, can result in a penalty.
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Now, that the incorporation process is complete, it’s time we talk about the compliance requirements that are mandatory for the LLP. Though, there are not as many compliances as in other companies, but there are certain requirements that a LLP is required to fulfil.
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Every Limited Liability Partnership is required to maintain a books of accounts, like every other kind of company. It is also mandatory to prepare an annual Statement of Solvency which needs to be done before 31st March of the relevant Financial Year. In case, the company does not carry out any transactions, then venture formation and allied expenses will be considered as part of the losses, which can be carried forward to the next Financial Year and be set off in the subsequent year. The Statement of Solvency is filed in Form 8 with the RoC within 30 days from the end of 6 months of said Financial Year i.e. by 30th October of the relevant Financial Year.
In case of a Limited Liability Partnership whose annual turnover exceeds Rs. 40 Lakhs or whose contribution exceeds Rs. 25 Lakhs, the books of accounts is supposed to be audited by a Chartered Accountant. Moreover, every LLP needs to file the annual return in Form 11 with the RoC within 60 days from the end of the relevant Financial Year i.e. on or before 30th May.
Negligence in filing Form 8 and Form 11, after the suggested period of time may lead to a penalty of Rs. 100 per day for each form, wherein there is no upper limit for the amount of penalty levied. This means that the penalty will increase every day of non-compliance. -
Another mandatory compliance for a LLP is filing of Income Tax Return. Like every other company, the Financial Year for a Limited Liability Partnership also ends on 31st March as per the Income Tax Act, 1961. Therefore, it needs to file the Income Tax Return on time. If the annual turnover of the company exceeds Rs. 40 Lakhs, then the books of accounts will need to be audited by a certified Chartered Accountant first and then the Income Tax Return will be filed. For thew LLP whose accounts are not required to be audited needs to file their Income Tax Return by31st July every year whereas in case of a company in which the books of accounts are needed to be audited, the Income Tax Return needs to be filed by 30th September or other suggested dates that are notified by the Income Tax Department.
If the Income Tax Return is filed after the due date but on or before 31st December of the Financial Year, a penalty of Rs. 5,000 is levied. If the Income Tax Return is filed after 31st December, then the Income Tax Department levies a hefty penalty of Rs. 10,000. However, for companies like a Limited Liability Partnership, a minimum of Rs. 200 is charged as penalty, if the IT Return is not filed on time. This can go up to a maximum of Rs. 11,000 to Rs.12,000.
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Now that you know all the good things that a LLP brings you, it is only fair to talk about some of the concerns that can arise while incorporating a Limited Liability Partnership.
- There is no concept of equity or shareholdings in a partnership unlike in a Private Limited Company or a One Person Company. A LLP cannot get its funding from angel investors, venture capitalists and/or equity funds. Partnership companies like such depend solely on the funds from promoters and debt funding.
- There is a high penalty for not adhering to compliance requirements. It is mandatory for a LLP to file Income Tax Return and Statement of Solvency annually even if it does not have any transactions. The penalty for not meeting this compliance starts with Rs. 100 per day for both Form 8 (Statement of Solvency) and Form 11 (Income Tax Return) and can go up to a 5-digit amount in Lakhs, if there is continued non-compliance.
- The Income Tax rate, for any company with an annual turnover of upto Rs. 250 crores, is 25%. However, a Limited Liability Partnership is taxed at 30% regardless of its annual turnover.
- The books of accounts in case of a LLP are submitted to the MCA as public record. Even the personal income of its employees is accessible by the public on the MCA’s portal.
- The income incurred by the company is personal income and is taxed accordingly. However, there may be some tax advantages in incorporating as a company, which will depend on the personal circumstances of the Designated Partners.
- A Limited Liability Partnership cannot retain the profit in the same way as any other kind of company that is limited by shares can. All the profit that is earned is distributed with no flexibility in order to carry it forward, to the subsequent year.
- There are chances of an LLP to collapse, if one of the Designated Partners chooses to leave because a minimum of 2 partners are required for a partnership.
Considering a LLP agreement is only exclusive for all Limited Liability Partnerships, it’s important to talk about what it is and what goes into making this agreement.
Limited Liability Partnership Agreement is a written agreement between at least 2 Designated Partners, that states the rights and duties of the partners towards each other and also towards the LLP. These rules and regulations are governed by Schedule One of the LLP Act, 2008. The agreement provides the contractual freedom and flexibility to the Designated Partners to fulfil their needs and interests as per their choice.
The LLP agreement is drafted and filed within 30 days of receiving the Certificate of Incorporation of the company in Form 3. It describes, in detail, the roles, responsibilities and powers of the Designated Partners. Moreover, it sets well defined methodologies for decision making and creates the administrative outlook of the partnership. This agreement also contains the rules for adding a new partner and the disassociation of any existing Designated Partner. It serves at the grassroot level and the foundation that strengthens the functioning of the partnership. Our Tax Experts at All India ITR have the experience and expertise in the field of contract and corporate law, that can help you in drafting a comprehensive and all-inclusive documents that will serve as guide for the smooth functioning of the company.
A good LLP Agreement needs to be well-structured and should contain the following information:
- Name of the Limited Liability Partnership – AS per the provisions of the LLP Act, 2008, the name of the partnership needs to end with the suffix LLP or Limited Liability Partnership.
- Date of the Agreement and Parties of the Agreement – Since the LLP Agreement needs to drafted and filed within 30 days of incorporation of the company, it is essential to mention the date of incorporation, the state in which the company is registered and the activities carried out by the company in this section of the agreement.
- Introductory ProvisionsThis section states the definition of terms used in the agreement, the provision of future name changes, the initial partners, the appointment of new partners, a description of the company activities and the scope of the business, an estimate of the duration for which the company will be functional, the power that lies with the LLP, management of employees, the rules for accounting and auditing of the book of records.
- The contribution of the Designated Partners and their method of contribution – Here, the agreement talks about the contribution in ratio made by the partners in terms of capital and the interest on the contribution made by the partners. It also includes the ratio of profit sharing along with the time duration after which the partners can withdraw the capital. This section helps to maintain a cordial and functional relationship between the Designated Partners of the LLP.
- Record Keeping – The rules for maintaining the books of accounts and other related documents is mentioned in this part of the agreement.
- Allocation and Distribution of Profits – The method of profit sharing among partners and the distribution of said profits whether interim or final is stated in this section in detail.
- Current and Capital Account – This section covers the particulars of the amount that will be credited and debited in each, Current and Capital Account.
- Dissociation of Designated Partner –The terms and conditions of the dissociation and withdrawal of any Designated Partner is covered in this part of the agreement in detail. This will include the procedure of dissociation, the rights on assets of the dissociated partner, the notice sent to existing partner and the rights of existing partners.
- Cross Purchase and Redemption of Rights – This section states the methods of re-admission as well as the cross purchase of rights of the Designated Partners. Mainly, it consists of how the rights of the partners can be redeemed from the LLP.
- Issue of Partnership Rights – The information related to the appointment of new partners and their rights after joining the company are stated here.
- Sale and Transfer of Partnership Rights – The procedure of selling and transferring of the rights of partnership to an existing partner and a new partner, the meeting of the partners and the voting rules and procedure. It also consists the mode and time period of the meeting, the method of decision-making and the rights of voting for the partners.
- Management and the Fiduciary Duties – This part of the agreement covers the responsibilities of the management of the company and the appointment of the manager as well as the person responsible for taking care of the legal matters, funds and assets of the company. In case, there is any disagreement between the partners, they can take the help of a third party known as the arbitrator who is unbiased and makes a decision after listening to both the parties. This decision needs to be abided by both the concerned parties. The rules for the arbitrator as well as any general provisions are also covered in this last section of the Limited Liability Partnership Agreement.
Frequently Asked Questions
Q. Who can be a Designated Partner in a Limited Liability Partnership?
LLP is required to have a minimum of 2 Designated Partners, out of which at least one should be an Indian National. If a body corporate is one of the partners in the LLP then it needs to appoint an individual from said corporate to act as one of the Designated Partners.
Q. Who cannot be a Designated Partner in an LLP?
The following individuals are not allowed to be partners in an LLP –
- He has been found to be of unsound mind by a Court of competent jurisdiction and the finding is in force;
- He is an undischarged insolvent; or
- He has applied to be adjudicated as an insolvent and his application is pending;
- Any person who has been convicted by any court for an offence and sentenced to imprisonment for more than 6 months
Q. Does a Designated Partner need an identification number in an LLP?
A Designated Partner Identification Number (DPIN) is supposed to be acquired by any individual who wishes to serve as a DP in a Limited Liability Partnership. This identification number is the same as DIN in a Private Limited Company or One Person Company that is issued to the Director.
Q. How can an individual become a Designated Partner in an LLP?
Any individual who subscribes to the LLP Agreement at the time of incorporation of the LLP can serve as the Designated Partner in the LLP. After the incorporation process is complete and the LLP is registered, the LLP can, then, make additions to the list of Designated Partners as per the requirement of the LLP.
Q. What are the compliances that need to be adhered to, in case of change in partners or dissociation of any Designated Partner in an LLP?
The DP who wishes to dissociate himself with the LLP in accordance with the LLP Agreement needs to give a notice, 30 days prior to leaving the company. A notice also needs to be sent to the RoC informing about the change in partnership or dissociation of an existing Designated Partner. This change (resignation, admission, death or expulsion) needs to be filed in E-form 3 and E- Form 4 within 30 days of the change along with a prescribed fee.
Q. Does a Limited Liability Partnership need to maintain a books of accounts?
One of the compliance requirements for an LLP includes maintaining a books of accounts which gives a detailed account of the state of affairs, of the company. This is filed in Form 8, after being duly signed by the Designated Partners by October 30th every year. Failure to do so may lead to a penalty being levied at Rs. 100 per day.
Q. Which documents of an LLP are available for public viewing on the MCA web portal?
The incorporation document, names of partners, change in the partners (if any), Statement of Solvency and Annual Return is available for public viewing on the MCA web portal for every Limited Liability Partnership.
Q. Is it possible for a Partnership Firm, Private Limited Company or Unlisted Public Company to be converted to a Limited Liability Partnership?
Yes, there are provisions for conversion of Partnership Firm, Private Limited Company or Unlisted Public Company into a Limited Liability Partnership.
Q. What is the penalty if any false representation is made in any statement or document?
If the provisions of the LLP Act, 2008 requires any return, statement or any other document and an individual makes a statement therein –
- Which is false in any way
- Which omits any fact The person shall be punishable with imprisonment along with a fine being charged depending upon the severity of the offence.
Q. Is it mandatory for a Limited Liability Partnership to maintain a Minutes Book?
It is advisable for an LLP to maintain a record of the minutes of meeting for the Designated Partners and the management committee of the partners.
Q. What are the compliances related to the Meetings of Designated Partners of a LLP?
There is no specific provision concerning regular meetings of the Designated Partners of a Limited Liability Partnership. The Designated Partners have the liberty to decide when and how to conduct the meetings or as stated in the LLP Agreement.
Q. Can the Registrar of Companies demand information from a Limited Liability Partnership?
The RoC has the power to summon any Designated Partner, Partner or employee of the LLP if any information has not been furnished by said person. Moreover, the RoC has the power to obtain any information that may be necessary in regards to the provisions of the LLP Act, 2008. Any person who fails to comply with the summons of the Registrar of Companies will be punishable with a fine.
