Limited Liability Partnership

Ø  INCORPORATION PROCEDURE:

1. DECIDING THE PARTNER:-

A LLP can be incorporated with a minimum of at least two partners who can be Individuals or Body Corporate through their nominees. Further for incorporating an LLP, of the total number no. of partners, at least two shall be Designated Partners, of which at least one must be an Indian Resident.

Parameters for deciding the Partners and Designated Partners:

1. At least Two Partners; Individuals or Body Corporate through individual nominees.
2. Minimum of Two Individuals as Designated Partners, of total no. of Partners.
3. At least One Designated Partner to be Resident Indian.

A person ‘Resident in India’ means a person who has stayed in India for a period of not less than one hundred and eighty two days during the immediately preceding one year. (Explanation to Section-7())

‘Designated Partner’ means a partner who is designated as such in the incorporation documents or who become a designated partner by and in accordance with the Limited Liability Partnership Agreement

2.  OBTAINING DPIN

Designated Partner Identification Number (DPIN): Section 7 (6) of LLP Act 2008, provides that every Designated Partner to obtain a DPIN from the Central Government.

DPIN is an eight digit numeric number allotted by the Central Government in order to identify a particular partner and can be obtained by making an online application in e-Form 7 to Central Government and submitting the physical application along with necessary identity and Address proof of the person applying with prescribed fees.

Digital Signature Certificate: As all the documents and forms required for incorporating an LLP in India to be filed electronically and under the signatures of Designated Partners, thus at least one Designated Partner to obtain the digital signature certificates from government recognized DSA’s. The signatures shall also be required for signing and filing of all relevant forms and documents to be filed, annually or event based after incorporation of the LLP, asking for approvals or as intimation.

Likewise the manual signatures, digital signature certificates are individual specific and no partner needs to obtain more than one.

3. CHECKING THE NAME AVAILABILITY:

The next step is to decide the name for the proposed LLP to be incorporated, anyone intending to incorporate an LLP has to evaluate his proposed name under the prescribed parameters and make an application in Form 1of Rule 18(5) of the Limited Liability Partnership Act 2008, for reservation of the desired name. The name of the limited liability partnership shall not be similar or identical with Company or LLP already registered in India and it should not contains words prohibited under the ‘Emblems and Names (Prevention of improper use) Act, 1950’or which are also not ‘Undesirable’ in the opinion of Central Government or which satisfies the conditions prescribed under rule 18(2). For more information check Name Availability Guidelines. In case any Body Corporate is partner, copy of Board resolution authorizing the incorporation of LLP shall be attached.

4. DRAFTING OF LLP:

The next pertinent step is drafting of Limited Liability Partnership Agreement governing the mutual rights and duties among the partners and among the LLP and its partners.

The basic contents of Agreement are:

• Name of LLP
• Name of Partners & Designated Partners
• Form of contribution
• Profit Sharing ratio
• Rights & Duties of Partners
• Proposed Business
• Rules for governing the LLP

In case no agreement is entered into, the rights & duties as prescribed under Schedule I to the LLP Act shall be applicable

It is not necessary to have the LLP Agreement signed at the time of incorporation, as the details of the same needs to field in eform 3 within 30 days of incorporation but in order to avoid any dispute between the partners as to the terms & conditions of the agreement after the formation of LLP, it is always beneficial to have the LLP Agreement drafted and executed before the incorporation of the LLP. In case the Agreement is executed outside India, than it must be notarized and consularized, for more information check “Incorporation of LLP” under FAQ’s

5.  INCORPORATION DOCUMENT:

Next is the filing of Incorporation documents, consent of Partners and declaration electronically through the medium of e-forms prescribed with the Registrar of LLP for incorporation of the LLP on payment of prescribed fees based on the total monetary value of contribution of partners in the proposed LLP. 

eForm 2: Incorporation Document

This is an informative document setting down the details of LLP, its Partners including designated partners along with their amount of contribution and consent for forming a Limited Liability Partnership to carry on a lawful business with profit motive along with declaration stating that all the requirements of Limited Liability Partnership Act, 2008 regarding incorporation of LLP in India have been complied with. 

eForm 3: Details of LLP Agreement

This form provides for the necessary information in respect to the LLP Agreement entered into between the partners.

eForm 4: Consent of Partners Consent of each partner to become a partner of Limited Liability Partnership along with their address and identity proof to be filed with the Registrar of Companies.

Subscription Sheet: Just like in case of Company formation, the partners are required to subscribe their names along with signatures to the subscription sheet, which shall be witnessed by any chartered Accountant/Company Secretary/Advocate in practice.

In case the subscription sheet is executed outside India, than it must be notarized and consularized, for more information check “Incorporation of LLP” under FAQ’s

eForm 3 & 4 are required to filed within 30 days of the incorporation.

All the eforms will be digitally signed by any Designated partner and shall be certified by an advocate/company secretary/chartered accountant/cost accountant in practice engaged in the formation of LLP.

6. CERTIFICATE OF INCORPORATION:

After the Registrar is satisfied that all the formalities with respect to the incorporation has been complied, he will issue a Certificate of Incorporation as to formation of the LLP within maximum of 14 days from date of filing of documents. The Certificate of Incorporation issued shall be the conclusive evidence of formation of the LLP.

7. CLOSING OF LLP:

• Declaring the LLP as defunct
• Winding up of LLP

Declaring the LLP as Defunct

In case the LLP wants to close down its business or where it is not carrying on any business operations, it can make an application to the Registrar of Companies for declaring the company as defunct and removing the name of the LLP from its register of LLP’s.

The procedure is given below

1. An application is required to be made in eForm 24 to the Registrar of Companies for Striking off the name of the LLP under clause (b) of sub rule 1 of Rule 37 of LLP Rules 2008 with the consent of all partners.
2. The Registrar shall publish a notice on its website as to the content of the application for a period of one month for the notice of the general public.
3. Application submitted to be supported by Indemnity Bonds to indemnify any person legally claiming after the LLP to be striked off and duly sworn Affidavits declaring all the information provided and statements given to be true, from all partners.
4. Application filed also to be supported by approvals or No Objection Certificates from concerned Regulatory Authorities with which the LLP is registered. For eg. LLP engaged in or registered with RBI for Banking Business has to obtain NOC from RBI before winding up of its affairs.
5. The Registrar, where he has sufficient cause to believe that the limited liability partnership has any asset or liability, satisfy himself that sufficient provision has been made for the realization of all amount due to the limited liability partnership and for the payment or discharge of its liabilities and obligations by the limited liability partnership within a reasonable time and, if necessary, obtain necessary undertakings from the designated partner or partner or other persons in charge of the management of the limited liability partnership.
6. On the expiry of period of one month, the Registrar may, by an order, unless cause to the contrary is shown by the limited liability partnership, strike its name off the register, and shall publish notice thereof in the Official Gazette, and on the publication in the Official Gazette of this notice, the limited liability partnership shall stand dissolved.

Guidelines

1. There should have been no liability existing or obligation subsisted on part of LLP and its partners.
2. There should be no litigation pending for or against LLP.
3. The assets of the limited liability partnership shall be made available for the payment or discharge of all its liabilities and obligations even after the date of the order removing the name of the limited liability partnership from the register
4. Liability of the Designated Partners subsists even after dissolution of LLP for payment of any legal dues to its creditors and other persons as if the LLP has not been dissolved.

Declaring the LLP as defunct is much easier process to close down the LLP as compared to wounding up because it does not involves high formalities and due to simplified procedure, the time consumed is comparatively very less. 

Winding up of LLP

Winding up is process, where all the assets of the business are disposed off to meet the liabilities of the same and surplus any, is distributed among the owners. The LLP Act 2008 provides for following two modes for winding up the LLP i.e.:

1. Voluntary winding up-
2. Compulsory winding up

Voluntary Winding up: Under this, the partners may between themselves decide to stop and wound up the operations of the LLP.

Compulsory winding up- A limited liability partnership may be compulsorily wound up by the Tribunal,—

1. if the limited liability partnership decides that limited liability partnership be wound up by the Tribunal;
2. if, for a period of more than six months, the number of partners of the limited liability partnership is reduced below two;
3. if the limited liability partnership is unable to pay its debts;
4. if the limited liability partnership has acted against the interests of the sovereignty and integrity of India, the security of the State or public order;
5. if the limited liability partnership has made a default in filing with the Registrar the Statement of Account and Solvency or annual return for any five consecutive financial years; or
6. if the Tribunal is of the opinion that it is just and equitable that the limited liability partnership be wound up.

The Ministry of Corporate Affairs has issued the draft rules in respect of the procedure to be followed for winding up of the LLP but the same has not been notified yet.

Contribution as per the lexicon interpretation means “Part or Share”. In reference to LLP, contribution can be termed as, What a partner is contributing towards the Limited Liability Partnership for running of his business. For ease of understanding, what Share Capital is in case of Company, is Contribution in case Limited Liability Partnership. Therefore, in case of LLP, the ownership will be judged on the basis of contribution by the partners in the LLP. 

IS IT NECESSARY TO CONTRIBUTE FOR A PARTNER?

No, as per LLP Act 2008 Contribution is not a pre requisite for formation of a Limited Liability Partnership or for being a Partner in any Limited Liability Partnership. Under the Act, organizational flexibility has been offered to the Partners through LLP Agreement wherein the Partners can decide the amount and form of Contribution as per their suitability. The LLP Agreement must specify the contribution intended to be paid by all the members and the form in which it will be paid.

Form of Contribution:

As per the requisite of Section 32(1) of LLP Act 2008 the contribution can be in the form of tangible, movable or immovable or intangible property or other benefit to the limited liability partnership, including money, promissory notes, and other agreements to contribute cash or property and contracts for services performed or to be performed.

The monetary value of contribution of each partner shall be accounted for and disclosed in the accounts of the limited liability partnership in the manner as may be prescribed.

Valuation of Intangible Contribution In case of intangible form of Contribution, the value of the same shall be certified by a practicing Chartered Accountant or Cost Accountant or by approved valuer from the panel maintained by the Central Government. The monetary value of contribution of each partner shall be accounted for and disclosed in the accounts of the Limited Liability Partnership in the manner as may be prescribed.

Return of contribution, in case of cessation of Partner

Whenever a partner of a LLP ceases to be a partner than unless otherwise provided in the LLP agreement, the former partner or a person entitled to his share in consequence of the death or insolvency of the former partner, shall be entitled to receive from the limited liability partnership, an amount equal to the capital contribution of the former partner actually made to the limited liability partnership.

AUDIT OF ACCOUNT:

Limited Liability Partnership alike Companies are required to get their accounts audited as per the provisions provided under Limited Liability Partnership Rules 2009.

Is it necessary for all LLPs?

No, Only the Limited Liability Partnership whose contribution exceed Rs. 25 Lakh or the Limited Liability Partnership whose turnover exceed Rs. 40 Lakh are required to annually get their accounts audited by any Chartered Accountant in practice.

Limited Liability Partnerships who are exempted from mandatory audit may also get their accounts audited as per the Limited Liability Partnership Rules 2009.

In case if the partners do not decide for the for audit of the accounts of the LLP a statement to be included in the Statement of Account and Solvency by the partners to the effect that the partners acknowledge their responsibilities for complying with the requirements of the Act and the Rules with respect to preparation of books of account and a certificate in the form mentioned below:

“We declare that the turnover does not exceed/exceeds 40 lakh or the contribution does not exceed/exceeds 25 lakh rupees. The partners/authorized representatives have taken proper care and responsibility for maintenance of adequate accounting records and preparation of accounts in accordance with the provisions of the LLP Act and the Rules made there under”.

This certificate to be filed with the Registrar of Companies, LLP along with e Form 8. 

Appointment of Auditor:

Limited Liability Partnerships who mandatory require auditing of their accounts shall appoint an auditor within 30 days before the end of each Financial Year i.e. before 1st March of each year. In case of First Financial year the auditor to be appointed before the end of the First Financial Year.

The Designated Partners responsible for the compliances of LLP will appoint the auditor also. However if the designated partner fails to appoint the auditor then the partners may appoint the auditor. The auditor appointed shall remain in office until new auditor is appointed or the majority of Partners have given a notice for the non appointment of existing auditor. Such notice of auditor of Partners may be in hard copy or electronic Form and must be authenticated by the Partners giving the notice.Remuneration of Auditors Remuneration of Partners may be fixed by the Designated Partners or if any procedure has been prescribed in the LLP Agreement the remuneration to be decided as per that provision.

Resignation of Auditor

An auditor may resign by depositing a notice in writing to that effect at the LLP’s registered office. Such Notice is to be accompanied by the statement of the circumstances connected with his ceasing to hold office. In case if a auditor is unwilling to be re –appointed he shall give a notice in writing to that effect at the LLP’s registered office, not less than 14 days before the end of the time allowed for appointing the new auditor.

Removal of Auditor

An auditor may be removed from his office at any time as per the procedure mentioned in the LLP Agreement. In the absence of LLP Agreement the auditor may be removed with the consent of all the Partners,

COMPLIANCE AND PENALTIES:

S. No.	Title	Section	Provision	Penalty for Non - Compliance
1.	No. of Designated Partners	7(1)	Every Limited Liability Partnership shall have at least two designated partners who are individuals and at least one of them shall be a resident in India. Provided that in case of a Limited Liability Partnership in which all the partners are bodies corporate or in which one or more partners are individuals and bodies corporate, at least two individuals who are partners of such limited liability partnership or nominees of such bodies corporate shall act as designated partners. Explanation.—For the purposes of this section, the term “resident in India” means a person who has stayed in India for a period of not less than one hundred and eighty-two days during the immediately preceding one year.	The Limited Liability Partnership and its every partner shall be punishable with fine which shall not be less than Rs 10000 but which may extend to Rs 5,00,000.
2.	Consent of Designated Partners	7(4)	Every Limited Liability Partnership shall file with the Registrar the particulars of every individual who has given his consent to act as designated partner in such form and manner as may be prescribed within thirty days of his appointment.	The Limited Liability Partnership and its every partner shall be punishable with fine which shall not be less than Rs. 10,000 but which may extend to Rs. 1,00,000.
3.	Compliances for being Designated Partners	7(5)	An individual eligible to be a designated partner shall satisfy such conditions and requirements as may be prescribed.	The Limited Liability Partnership and its every partner shall be punishable with fine which shall not be less than Rs. 10,000 but which may extend to Rs. 1,00,000.
4.	Liability of Designated Partners	8	Unless expressly provided otherwise in this Act, a designated partner shall be— (a) responsible for the doing of all acts, matters and things as are required to be done by the Limited Liability Partnership in respect of compliance of the provisions of this Act including filing of any document, return, statement and the like report pursuant to the provisions of this Act and as may be specified in the Limited Liability Partnership agreement; and (b) liable to all penalties imposed on the Limited Liability Partnership for any contravention of those provisions.	The Limited Liability Partnership and its every partner shall be punishable with fine which shall not be less than Rs. 10,000 but which may extend to Rs. 1,00,000.
5.	Vacancy in Designated Partner	9	A Limited Liability Partnership may appoint a designated partner within thirty days of a vacancy arising for any reason and provisions of sub-section (4) and sub-section (5) of section 7 shall apply in respect of such new designated partner : Provided that if no designated partner is appointed, or if at any time there is only one designated partner, each partner shall be deemed to be a designated partner	The Limited Liability Partnership and its every partner shall be punishable with fine which shall not be less than Rs. 10,000 but which may extend to Rs. 1,00,000.
6.	Statement by professional regarding Compliances of Incorporation	11(1)	For a Limited Liability Partnership to be incorporated,— (c) there shall be filed along with the incorporation document, a statement in the prescribed form, made by either an advocate, or a Company Secretary or a Chartered Accountant or a Cost Accountant, who is engaged in the formation of the Limited Liability Partnership and by anyone who subscribed his name to the incorporation document, that all the requirements of this Act and the rules made there under have been complied with, in respect of incorporation and matters precedent and incidental thereto. If a person makes a statement under clause (c) of sub-section (1) which he— (a) knows to be false; or (b) does not believe to be true	The person making such false or untrue statement shall be punishable with imprisonment for a term which may extend to 2 years and with fine which shall not be less than Rs 10,000 but which may extend to Rs 5,00,000.
7.	Registered Office of LLP.	13	(1) Every Limited Liability Partnership shall have a registered office to which all communications and notices may be addressed and where they shall be received. (2) A document may be served on a limited liability partnership or a partner or designated partner thereof by sending it by post under a certificate of posting or by registered post or by any other manner, as may be prescribed, at the registered office and any other address specifically declared by the Limited Liability Partnership for the purpose in such form and manner as may be prescribed. (3) A Limited Liability Partnership may change the place of its registered office and file the notice of such change with the Registrar in such form and manner and subject to such conditions as may be prescribed and any such change shall take effect only upon such filing.	The Limited Liability Partnership shall be punishable with fine which shall not be less than Rs 2000 but which may extend to Rs 25,000.
8.	Change of Name on Government Direction	17	(1) Notwithstanding anything contained in sections 15 (Name) and 16 (Reservation of Name), where the Central Government is satisfied that a Limited Liability Partnership has been registered (whether through inadvertence or otherwise and whether originally or by a change of name) under a name which— (a) is a name referred to in sub-section (2) of section 15 (identical or too nearly resembles to that of any other partnership firm or Limited Liability Partnership or body corporate or a registered trade mark, or a trade mark which is subject of an application for registration, of any other person under the Trade Marks Act, 1999 (47 of 1999) ; or (b) is identical with or too nearly resembles the name of any other Limited Liability Partnership or body corporate or other name as to be likely to be mistaken for it, the Central Government may direct such Limited Liability Partnership to change its name, and the Limited Liability Partnership shall comply with the said direction within three months after the date of the direction or such longer period as the Central Government may allow.	The Limited Liability Partnership shall be punishable with fine which shall not be less than Rs 10,000 but which may extend to Rs 5,00,000 and every designated partner of such limited liability partnership shall be punishable with fine which shall not be less than Rs 10,000 but which may extend to Rs 1,00,000.
9.	Use of ‘LLP’ & ‘Limited Liability Partnership’ in business name	20	No person or persons shall carry on business under any name or title of which the words “Limited Liability Partnership” or “LLP” or any contraction or imitation thereof is or are the last word or words unless duly incorporated as limited liability partnership,	Such person shall be punishable with fine which shall not be less than Rs 50,000 but which may extend to Rs 5,00,000.
10.	Name of LLP on invoices & Official Correspondence	21	(1) Every Limited Liability Partnership shall ensure that its invoices, official correspondence and publications bear the following, namely :— (a) the name, address of its registered office and registration number of the limited liability partnership; and (b) a statement that it is registered with limited liability.	The Limited Liability Partnership shall be punishable with fine which shall not be less than Rs 2000 but which may extend to Rs 25,000.
11.	Intimation for change of Name & Address of Designated Partner	25(1)	Every partner shall inform the Limited Liability Partnership of any change in his name or address within a period of fifteen days of such change.	Such partner shall be punishable with fine which shall not be less than Rs 2000 but which may extend to Rs 25,000.
12.	Cessation of Partners	25(2)	A Limited Liability Partnership shall— (a) where a person becomes or ceases to be a partner, file a notice with the Registrar within thirty days from the date he becomes or ceases to be a partner; and (b) where there is any change in the name or address of a partner, file a notice with the Registrar within thirty days of such change.	The Limited Liability Partnership and every designated partner of the limited liability partnership shall be punishable with fine which shall not be less than Rs 2000 but which may extend to Rs 25000.
13.	Unlimited Liability in case of Fraud.	30(1)	In the event of an act carried out by a Limited Liability Partnership, or any of its partners, with intent to defraud creditors of the Limited Liability Partnership or any other person, or for any fraudulent purpose, such limited liability Partnership or partners shall be punishable for such fraudulent transaction. Provided that in case any such act is carried out by a partner, the Limited Liability Partnership is liable to the same extent as the partner unless it is established by the Limited Liability Partnership that such act was without the knowledge or the authority of the limited liability partnership.	The liability of the Limited Liability Partnership and partners who acted with intent to defraud creditors or for any fraudulent purpose shall be un-limited for all or any of the debts or other liabilities of the limited liability partnership.
14.	Liability of the person knowingly party for any fraud transaction.	30(2)	Where any business is carried on with intent to defraud creditors of the Limited Liability Partnership or any other person, or for any fraudulent purpose, every person who was knowingly a party to the carrying on of the business in the manner aforesaid shall be punishable.	Such person shall be punishable with imprisonment for a term which may extend to 2 years and with fine which shall not be less than Rs 50,000 but which may extend to Rs 5,00,000.
15.	Compensation to the victim in case of fraud	30(3)	Where a Limited Liability Partnership or any partner or designated partner or employee of such limited liability partnership has conducted the affairs of the limited liability partnership in a fraudulent manner, then without prejudice to any criminal proceedings which may arise under any law for the time being in force, the limited liability partnership and any such partner or designated partner or employee shall be liable to pay compensation to any person who has suffered any loss or damage by reason of such conduct. Provided that such Limited Liability Partnership shall not be liable if any such partner or designated partner or employee has acted fraudulently without knowledge of the limited liability partnership.	The Limited Liability Partnership and any such partner or designated partner or employee shall be liable to pay compensation to any person who has suffered any loss or damage by reason of such conduct
16.	Books of Accounts	34	(1) The Limited Liability Partnership shall maintain such proper books of account as may be prescribed relating to its affairs for each year of its existence on cash basis or accrual basis and according to double entry system of accounting and shall maintain the same at its registered office for such period as may be prescribed. (2) Every Limited Liability Partnership shall, within a period of six months from the end of each financial year, prepare a Statement of Account and Solvency for the said financial year as at the last day of the said financial year in such form as may be prescribed, and such statement shall be signed by the designated partners of the limited liability partnership. (3) Every Limited Liability Partnership shall file within the prescribed time, the Statement of Account and Solvency prepared pursuant to sub-section (2) with the Registrar every year in such form and manner and accompanied by such fees as may be prescribed. (4) The accounts of Limited Liability Partnerships shall be audited in accordance with such rules as may be prescribed : Provided that the Central Government may, by notification in the Official Gazette, exempt any class or classes of limited liability partnerships from the requirements of this sub-section.	The Limited Liability Partnership shall be punishable with fine which shall not be less than Rs 25,000 but which may extend to Rs 5,00,000 and every designated partner of such limited liability partnership shall be punishable with fine which shall not be less than Rs 10,000 but which may extend to Rs 1,00,000.
17.	Annual Return	35	(1) Every limited liability partnership shall file an annual return duly authenticated with the Registrar within sixty days of closure of its financial year in such form and manner and accompanied by such fee as may be prescribed.	The Limited Liability Partnership shall be shall be punishable with fine which shall not be less than Rs 25000 but which may extend to Rs. 5,00,000 The designated partner of such limited liability partnership shall be punishable with fine which shall not be less than Rs. 10,000 but which may extend to Rs. 1,00,000.
18	Liability for any Miss-statement as required by LLP Act 2008.	37	If in any return, statement or other document required by or for the purposes of any of the provisions of this Act, any person makes a statement— (a) which is false in any material particular, knowing it to be false; or (b) which omits any material fact knowing it to be material,	Any person making such statement shall be punishable with imprisonment for a term which may extend to 2 years, and shall also be liable to fine which may extend to Rs. 5,00,000 but which shall not be less than Rs. 1,00,000.
19.	Investigation	47(5)	If any person fails without reasonable cause or refuses— (a) to produce before an inspector or any person authorised by him in this behalf with the previous approval of the Central Government any book or paper which it is his duty under sub-section (1) or sub-section (2) to produce; or (b) to furnish any information which it is his duty under sub-section (2) to furnish; or (c) to appear before the inspector personally when required to do so under sub-section (4) or to answer any question which is put to him by the inspector in pursuance of that sub-section; or (d) to sign the notes of any examination	Such person shall be punishable with fine which shall not be less than Rs. 2000 but which may extend to Rs 25,000 rupees and with a further fine which shall not be less than Rs. 50,000 but which may extend to Rs 500 for every day after the first day after which the default continues.
20.	Filing of Tribunal Order	60(3)	An order made by the Tribunal under sub-section (2) shall be filed by the limited liability partnership with the Registrar within thirty days after making such an order and shall have effect only after it is so filed.	The limited liability partnership, and every designated partner of the limited liability partnership shall be punishable with fine which may extend to Rs. 1,00,000.
21	Liability for any subsequent and offence	70	In case a limited liability partnership or any partner or designated partner of such limited liability partnership commits any offence, the limited liability partnership or any partner or designated partner shall, for the second or subsequent offence, be punishable for such offence.	Imprisonment as provided, but in case of offences for which fine is prescribed either along with or exclusive of imprisonment, fine shall be twice the amount of fine for such offence.
22.	Failure to comply with Tribunal Order.	73	Whoever fails to comply with any order made by the Tribunal under any provision of this Act shall be punishable for such non Compliance of the order.	Such person shall be punishable with imprisonment which may extend to 6 months and shall also be liable to a fine which shall not be less than Rs. 50,000.
23.	General Penalty	74	Any person guilty of an offence under this Act for which no punishment is expressly provided shall be liable as mentioned here.	Such person shall be liable to a fine which may extend to Rs. 5,00,000 but which shall not be less than Rs. 5000 and with a further fine which may extend to Rs. 50 for everyday after the first day after which the default continues.

Ø  Regular Compliance

S. No.	Head	Section	Compliance	Penalty for Non Compliance
1.	Minimum number of Designated Partners	7(1)	Every Limited Liability Partnership shall have at least 2 partners who would be designated partners and out of which at least 1 partner shall be resident in India.	The Limited Liability Partnership and its every partner shall be punishable with fine which shall not be less than Rs 10000 but which may extend to Rs 5,00,000
2.	Procuring Designated Partners Identification Number	7(6)	Every Designated Partner should have to obtain a Designated partner Identification Number (DPIN) from the Central Government and in respect of this, all the provisions of sections 266A to 266G of the Companies Act, 1956 shall apply accordingly	Every individual or partner , who is in default shall be punishable with fine which may extend to Rs 5000 and where the contravention is continuing one, with further fine , which may extend to Rs 500 for every day during which the default continues.
3.	Consent and Particulars of Designated Partners	7(3) & 7(4)	Filing of consent of Designated Partner to act as such with the Registrar of Companies in eform 4 with in 30 days of the appointment as the designated partner	The Limited Liability Partnership and its every partner shall be punishable with fine which shall not be less than Rs. 10,000 but which may extend to Rs. 1,00,000.
4.	Vacancy of Designated Partner	9	Filing of vacancy in Designated Partner with in 30 days of vacancy and intimation of same to Registrar of Companies and in case if no designated partner being appointed or if any time there is only one designated partner, then each partner shall be deemed to be the designated partner	The Limited Liability Partnership and its every partner shall be punishable with fine which shall not be less than Rs. 10,000 but which may extend to Rs. 1,00,000.
5.	Change of Registered Office	13(3)	File the notice of any change in registered office with the Registrar of Companies in eform and any such change shall take effect only upon such filing.	The Limited Liability Partnership and its every partner shall be punishable with fine which shall not be less than Rs. 10,000 but which may extend to Rs. 1,00,000.
6.	Change of Name	19	A Limited Liability Partnership may change its name registered with the Registrar by filing with the Registrar notice of such change in such form and manner and on payment of such fees as may be prescribed.	Person guilty of offence shall be punishable & liable to a fine which may extend to Rs 5,00,000 but which shall not be less than Rs 5000 and with a further fine which may extend to Rs 50 for everyday after the first day after which the default continues.
7.	Name of LLP on Invoice and official Correspondence	21(1)	All invoices and official correspondence of the Limited Liability Partnership shall bear its name, address and registration number and a statement that it is registered with Limited Liability.	The Limited Liability Partnership shall be punishable with fine which shall not be less than Rs 2000 but which may extend to Rs 25,000.
8.	LLP Agreement & Changes there in	23(2)	A Limited Liability Partnership Agreement and any changes made therein shall be filed with the Registrar in such form and manner and accompanied by such fees as may be prescribed.	Person guilty of offence shall be punishable shall be liable to a fine which may extend to Rs 5,00,000 but which shall not be less than Rs 5000 and with a further fine which may extend to Rs 50 for everyday after the first day after which the default continues.
9.	Change in Partners	25(2)	Where a person becomes or ceases to be a partner or where there is any change in the name or address of a partner, notice of the same signed by the designated partner to be filed within 30 days to the Registrar.	The Limited Liability Partnership and every designated partner of the limited liability partnership shall be punishable with fine which shall not be less than Rs 2000 but which may extend to Rs 25,000.
10.	Books of Accounts	34(1)	Limited Liability Partnership shall maintain proper Books of Accounts for each year on cash basis or on accrual basis and according to the Double Entry System of Accounting at its registered office and shall get them audited in accordance with the rules as may be prescribed otherwise exempted by notification of the Central Government	The Limited Liability Partnership shall be punishable with fine which shall not be less than Rs 25,000 but which may extend to Rs 5,00,000 and every designated partner of such limited liability partnership shall be punishable with fine which shall not be less than Rs 10,000 but which may extend to Rs 1,00,000

Ø  Annual Compliances

S. No.	Head	Section	Compliance	Penalty for Non Compliance
1.	Statement of Accounts & Solvency	34(2)	Limited Liability Partnership shall with in a period of six months from the end of every financial year prepare and file a Statement of Account and Solvency with the Registrar in such form and manner and accompanied by such fee as may be prescribed.	The Limited Liability Partnership shall be punishable with fine which shall not be less than Rs 25,000 but which may extend to Rs 5,00,000 and every designated partner of such limited liability partnership shall be punishable with fine which shall not be less than Rs 10,000 but which may extend to Rs 1,00,000
2.	Annual Return	35(1)	Limited Liability Partnership to file an Annual Return to the Registrar of Companies with in sixty days of closure of the financial year in such form and manner and accompanied by such fee as may be prescribed.	The Limited Liability Partnership shall be punishable with fine which shall not be less than Rs 25,000 but which may extend to Rs 5,00,000 and every designated partner of such limited liability partnership shall be punishable with fine which shall not be less than Rs 10,000 but which may extend to Rs 1,00,000

LLP BY PROFESSIONAL:-

In India professionals like the Chartered Accountants (CA), Company Secretaries (CS), Cost Accountants (CWA) and Advocates are allowed to practice their profession under partnership but they can enter into partnership with their own professional colleagues only. For instance, a CS partnership can have only CS as its partners; moreover they cannot practice their profession under Company form of business organization. The restriction on entering into partnership with professionals of other discipline is one of biggest reason for slow development of the profession and biggest obstacle in realizing the synergies of different professional expertise.

Even in case of partnership, the maximum number of persons, which can be made as partners, is restricted to 20, which severely restricts the scope of business and future expansion plans.

With the notification of Limited Liability Partnership Act, 2008, the Government of India has introduced the concept of Limited Liability Partnership (LLP) in India.

A Limited Liability Partnership is a hybrid of existing partnership firms and full-fledged Companies. A minimum of two partners are required for formation of an LLP. Besides, there is no limit on the maximum number of partners, unlike the current limit of 20 members in a partnership firm.

The concept of LLP offers great opportunity to professionals like CA/CS/CWA/Advocates to develop, as now they can enter into partnerships with professionals of different disciplines for instance, a CS can enter into partnership with CA. A LLP as a business organization for professionals offers following advantages:

• No Limit on maximum number of partners, can have partners all round the globe
• Can enter into partnership with professionals of other disciplines
• Limited Liability except in case of fraud
• Not liable for acts of other partners
• No exposure to personal assets
• LLP will be treated as Body Corporate and shall have perpetual succession
• Joining & Cessation of partners, will not lead to dissolution of the firm.
• Less compliances
• More creditworthiness than partnership

LLP is already a renowned business organization worldwide and most of big professional firms like PWC, E & Y etc. are registered in form of LLP.

In case of Professional LLP, the major issues to be considered is whether these are allowed to render audit and certification services. As in case of partnership, there is no separate identity between the partnership firm and the partner and therefore , for example while signing the audited balance of any company, the partner signing is personally responsible but in case of LLP, since there exist separate identity and partners would be doing all acts on behalf of the LLP, therefore they would not be personally liable for their wrong done and consequently will not be rendering efficient services.

Therefore it would take time, before professionals like CA/CS etc can form and start practicing under multi disciplinary LLP’s as there regulators — Institute of Chartered Accountants of India (ICAI) and Institute of Company Secretaries of India (ICSI) etc have yet allowed CA & CS to form multi disciplinary LLP.

Company Secretaries can become passive partner in LLP

The Institute of Company Secretaries of India has allowed Company Secretaries in practice to become passive partner of Limited Liability Partnership the objects of which include carrying out non-attestation services which fall within the scope of the profession of Company Secretaries irrespective of whether or not the practicing member holds substantial interest in that LLP

“Attestation Services” include services which require signing any certificate, document, report or any other statements relating thereto on behalf of a Company Secretary in Practice or a firm of such Company Secretaries in his or its professional capacity or which require signing anything that is required to be signed by a Company Secretary in practice.

A “passive partner” means a partner of LLP who fulfils the following conditions:

• he must not be a designated partner;
• subject to the LLP agreement, he may make agreed contribution to the capital of LLP and receive share in the profits of the LLP; and
• he must not take part in the management of the LLP nor act as an agent of the LLP or of any partner of the LLP;

Provided, none of the following activities shall constitute taking part in the management of the LLP:

1. Enforcing his rights under the LLP agreement (unless those rights are carrying out management function).
2. Calling, requesting, attending or participating in a meeting of the partners of the LLP.
3. Approving or disapproving an amendment to the partnership agreement.
4. Reviewing and approving the accounts of the LLP;
5. Voting on, or otherwise signifying approval or disapproval of any transaction or proposed transaction of the LLP including -
1. the dissolution and winding up of the LLP;
2. the purchase, sale, exchange, lease, pledge, mortgage, hypothecation, creation of a security interest, or other dealing in any asset by or of the LLP;
3. a change in the nature of the activities of the LLP;
4. the admission or removal of a partner of the LLP;
5. transactions in which one or more partners have an actual or potential conflict of interest with one or more partners or the LLP;
6. any amendment to the LLP agreement;

“Substantial Interest” a member shall be deemed to have a substantial interest in the LLP if he/she is entitled at any time to not less than 25% of the profits of such LLP.

LLP AGREEMENT:

LLP Agreement means any written agreement between the partners of the limited liability partnership or between the limited liability partnership and its partners which determines the mutual rights and duties of the partners and their rights and duties in relation to that limited liability partnership.

It is not necessary to enter into an LLP Agreement as per the LLP Act 2008. In absence of LLP Agreement, the mutual rights of Partners and in relation to LLP will be determined as per Schedule I of the LLP Act 2008.

Features of Standard clauses of Schedule I

• All partners entitled to share equally in the Capital and Profits/losses.
• Indemnity Clause
• Every Partner shall take part in management
• No partner shall be entitled to remuneration.
• No partner introduced without consent of all partners.
• All decisions with majority of partners consent
• Minutes of decisions to be recorded within 30 days
• Rendering of true accounts & information by all partners
• All Disputes will be referred to Arbitration Act

Generally, every business and owners have their own way to manage to run the Business and therefore the standard clauses given in first schedule to LLP Act will not be practically acceptable in majority of the cases. Therefore to be on the secure side, it is always advisable to have a legally drafted agreement from qualified professionals.

Features can be inserted in agreement are :

• Form & Manner of Contribution between parties
• Profit & loss sharing ratio
• Business to be carried on
• Rights & Liabilities of Partner
• Admission & cessation of partners.
• Duties of partners
• Partners accountable/authorized for banking process.
• Specific decisions like Investment, taking/giving loan, disposition of property of LLP etc to be made by majority partners.
• Requirement of disclosure of substantial interest of Partner in transactions to be entered by the LLP.
• Manner of dispute resolution

In case of joint ventures & collaborations, it is always recommended to have clearly drafted LLP Agreement, which defines the rights & duties of all the parties to the Agreement, in order to avoid any dispute in future and smooth running of the business.

The LLP Agreement if executed is required to be registered with the Registrar of Companies. However if LLP agreement is executed before registration of LLP, the partners will have to ratify this agreement after incorporation of LLP and file with Registrar of Companies. LLP Agreement shall also be liable for stamp duty as per the Stamp Duty laws prescribed the related State Government, where the said agreement will be executed.

The LLP Agreement once entered into can be amended as per the terms and conditions mentioned in the Agreement and any change therein, must be intimated to the Registrar of Companies within 30 days of the change

The expert & experienced legal professionals of LLPonline.in can help you in drafting a clear LLP Agreement to meet all your business & personal needs. For further information click here.

DESIGNATED PARTNER:

“Designated partner” in reference to Limited Liability Partnership means any partner designated as such pursuant to section 7 of Limited Liability Partnership Act 2008. Every limited liability partnership shall have at least two designated partners who are individuals and at least one of them shall be a resident in India. In case if no partner is designated as such, or if at any time there is only one designated partner, each partner shall be deemed to be a designated partner of the LLP.

Provided that in case of a limited liability partnership in which all the partners are bodies corporate or in which one or more partners are individuals and bodies corporate, at least two individuals who are partners of such limited liability partnership or nominees of such bodies corporate shall act as designated partners.

An individual cannot become a designated partner in any limited liability partnership unless he has given his prior consent to act as such to the limited liability partnership in such form and manner as may be prescribed and he is also required to obtain a Designated Partner Identification Number.

The role of Designated Partners in case of LLP is on same footage as of Directors in case of Company. The Designated Partners as provided under Section 8 are directly responsible for the compliances of all provisions provided under LLP Act, 2008 and the provisions specified in the LLP Agreement.

Rights of Designated Partner are same as of other Partners. Alike other partners they are not entitled to any remuneration for their participation in management of LLP unless otherwise specifically provided in the LLP Agreement they, yet they have additional responsibilities to comply with.

 

  A designated partner shall be

1. responsible for the doing of all acts, matters and things as are required to be done by the limited liability partnership in respect of compliance of the provisions of this Act including filing of any document, return, statement and the like report pursuant to the provisions of this Act and as may be specified in the limited liability partnership agreement; and
2. Liable to all penalties imposed on the limited liability partnership for any contravention of those provisions.

  Major duties of Designated Partner

• Notify any changes in the LLP's to Registrar of Companies.
• Notify any changes in the Partners names & residential addresses to Registrar of Companies.
• Notify any change in Registered Office Address to Registrar of Companies.
• Filing of any Annual return, Statement of Accounts and other documents specified under the provisions of LLP Act with the Registrar of Companies.
• Statement of Accounts & Solvency to be signed by the Designated Partners of the Company.
• to preserve and to produce before an inspector or any person authorized by him in this behalf with the previous approval of the Central Government, all books and papers of, or relating to, the limited liability partnership or, as the case may be, the other entity, which are in their custody or power
• Responsible for signing all the eforms filed with the Registrar of Companies.

Any vacancy arising in the office of Designated Partner shall be filled within 30 days and the change shall be intimated to the Registrar of Companies

Partners are persons (whether natural or artificial) who have subscribed their name to the incorporation document and further any new person can be admitted to the LLP as per the provisions of LLP Agreement. The LLP Act 2008 defines the term partner under Section 2(q) as “Partner”, in relation to a limited liability partnership, as any person who becomes a partner in the Limited Liability Partnership in accordance with the Limited Liability Partnership Agreement.

Who can be a Partner?

There should be atleast 2 persons (natural or artificial) required to form a LLP. In case any Body Corporate is a partner, than it will be required to nominate any person (natural) as its nominee for the purpose of the LLP.

Following can become a partner in the LLP:

a) Company incorporated in and outside India
b) LLP incorporated in & outside India
c) Individuals resident in & outside India

The Government of India has not yet notified the policy for Foreign Direct Investment by Individuals resident in & outside India in LLP form of business and therefore, till the date policy is announced, such persons cannot form a LLP in India.

Role of Partner

Section 26 defines the role of partner and states that, every partner of a Limited Liability Partnership is, for the purpose of the business of the Limited Liability Partnership, the agent of the Limited Liability Partnership, but not of other partners. It means that the relation of principal and agent is only between the LLP & its partners and not between the partners per se.

Ø  Rights of Partners

Partners regarding the rights are alike the Partners in the traditional Partnership Firm. Partners have the right to participate in the management of the LLP though they are not entitled to any remuneration for participating in the management of LLP unless otherwise provided in the LLP Agreement. The partners would be entitled to share equal profits in the LLP or as may be provided by LLP agreement.

The rights of a partner to a share of the profits and losses of the limited liability partnership and to receive distributions in accordance with the Limited Liability Partnership agreement are transferable either wholly or in part provided that the :

• The transfer of any right by any partner does not by itself cause the disassociation of the partner or a dissolution and winding up of the limited liability partnership.
• Entitle the transferee or assignee to participate in the management or conduct of the activities of the limited liability partnership, or access information concerning the transactions of the limited liability partnership.

 Duties of Partners

Partners under ethical conduct are required to comply with all the provisions of LLP Act and LLP agreement and not to indulge in any fraudulent transaction with the creditors or outsiders. Further Partners for being transparent with the LLP are obligatory to provide some information to LLP like in case if there is any change in name and address of Partner he shall inform the same to LLP with 15 days of such change. In case of admission of partner the incoming partner shall give his prior consent to act as such partner. If any partner desires to resign from the partnership he shall inform the same by giving a 30 day notice to other partners.

Ø  Liability of Partners

• The Liability of Partners in LLP unlike partnership Firm is limited to the extent of their contribution.
• Any partner of the LLP would not be liable for the wrongful act or omission of any other partner of the limited liability partnership.
• Partners are not personally liable for any obligation of LLP arising out of a contract or otherwise solely by reason of being a partner of the limited liability partnership.
• .Partners shall be solely liable for all acts done without the authority of the LLP
• For protecting the public interest, section 30 provides for unlimited liability of the partners in case any fraudulent transaction has been carried with the intention to defraud with the creditors or any other person dealing with Limited Liability Partnership.

Ø  Admission & cessation of Partner

A new partner can join the LLP or an existing partner can cease to be partner of the LLP subject to the compliance of the terms and conditions of the LLP Agreement.

TAX PROVISION ON LLP:-

Ø  Taxation aspect of Limited Liability Partnership

The Budget 2009-10 has introduced the provisions regarding taxation aspect of the newly introduced form of business Limited Liability Partnership.

As per the Budget 2009-10, LLP will be treated as Partnership firms for the purpose of Income Tax and will be taxed like a partnership firm. 

Ø  Change in Definition of Firm, Partner & Partnership

The Budget 2009-10 has amended the definition of Firm and Partners in the following manner:

1. Firms shall have the meaning assigned to it in the India Partnership Act 1932 and shall include a limited liability Partnership as defined in the Limited Liability Partnership Act 2008.
2. Partner shall have the meaning assigned to it in the Indian Partnership Act 1932 and shall include:
   • Any person, being a minor, has been admitted to the benefits of partnership ; and
   • A partner of a limited liability partnership as defined in the Limited Liability Partnership Act 2008.
3. Partnership shall have the meaning assigned to it in the India Partnership Act 1932 and shall include a limited liability partnership as defined in the Limited Liability Partnership Act 2008.

Ø  Tax rate:

• 30% flat tax rate + 3% education cess
• No Minimum Alternate Tax & Dividend Distribution Tax

Ø  Eligibility (section 184):

In order for Limited Liability Partnership to be assessed as firm as Income Tax Act, it has to satisfy the following criteria

• The LLP is evidenced by an instrument i.e. there is a written LLP Agreement.
• The individual shares of the partners are very clearly specified in the deed.
• A certified copy of LLP Agreement must accompany the return of income of the LLP of the previous year in which the partnership was formed.
• If during a previous year, a change takes place in the constitution of the LLP or in the profit sharing ratio of the partners, a certified copy of the revised LLP Agreement shall be submitted along with the return of income of the previous years in question.
• There should not be any failure on the part of the LLP while attending to notices given by the Income Tax Officer for completion of the assessment of the LLP.

Ø  LLP can claim the following deductions:-

• Interest paid to partners, provided such interest is authorised by the LLP Agreement.
• Any salary, bonus, commission, or remuneration (by whatever name called) to a partner will be allowed as a deduction if it is paid to a working partner who is an individual.
• The remuneration paid to such working partner must be authorised by the LLP Agreement and the amount of remuneration must not exceed the given limits
  
  When section 184 is not complied with, the consequence is that no deduction towards interest and remuneration is allowed. This is the mandate of the section 185.

Ø  Steps for Computation of taxable income of a LLP:-

• Find out the firms income under the different heads of income, ignoring the prescribed exemptions. The heads of income are:-
• Income from House Property
• Profits and Gains of Business or Profession
• Capital Gains
• Income from other sources including interest on securities, winnings from lotteries, races, puzzles, etc. ('Salary' income head is not included)
• The payment of remuneration and interest to partners is deductible if conditions of section 184 and section 40(b) of the Income Tax Act are satisfied. Any salary, bonus, commission or remuneration which is due to or received by partners is allowed as a deduction from income of the partnership firm and the same is taxable in the hands of partners.
• Make adjustments on account of brought forward losses/ disallowances of interests, salary, etc paid by firm to its partners. The total income so obtained is the "gross total income".
• From the "gross total income", make the prescribed deductions and the balancing amount is the "net income" of the firm.

Assessment of Partners of LLP:

• Exemption of partner’s share income from LLP :
  Section 10(2A) exempts the share income from the LLP in the hands of the partner. The share of a partner in the total income of a LLP separately assessed as such shall, be an amount which bears to the total income of the LLP the same proportion as the amount of his share in the profits of the LLP in accordance with the LLP Agreement bears to such profits.
  
  The share of the partner in the income of the LLP is not included in computing his total income i.e. his share in the total income of the LLP shall be exempt from tax.
• If conditions of Section 184 and 40(b) of the Act are satisfied, then any interest, salary, bonus, commission or remuneration paid/payable by the LLP to the partners is taxable in the hands of partners (to the extent these are allowed as deduction in the hands of the LLP). 
• The points to be noted are :-
• Remuneration to partner not to be treated as salary income : Explanation 2 to section 15
  
  This Explanation provides that the salary, bonus or commission received by a partner from his LLP will not be treated as salary. This Explanation implies that the provision of tax deduction at source for salary (section 192) will not be attracted to the remuneration received by the partner from the LLP.

• Treatment of remuneration and interest to a partner as business income : Clause (v) of section 28. Section 28(v) provides that interest and remuneration received by a partner from his LLP shall be chargeable to income-tax as profits and gains of business. The proviso clarifies that where the remuneration, interest, etc., is in excess of the ceiling fixed under the new section 40(b) and is disallowed in part for that reason then the income under the head referred to in section 28(v) shall be adjusted to the extent of the amount not so allowed to be deducted.
  
  Any expenditure incurred in order to earn such income can be claimed as a deduction from such income. For example, if a partner borrows money to make his capital contribution to the LLP and he is paid interest on his capital contribution, the amount of such interest will be taxed under the head "Profits and gains of business or profession", but the interest paid by him on the borrowed money will have to allowed as a deduction. If the whole or a part of salary/interest is not allowed as deduction in the hands of the LLP, than the whole or that part of salary/ interest is not taxable in the hands of the partners. In other words, in the hands of partners the entire remuneration/ interest (excluding the amount disallowed under section 40(b) and/or section184 of the Act) is chargeable to tax.

CEILING AS TO REMUNERATION PAYABLE TO WORKING PARTNERS AND INTEREST TO PARTNERS: SECTION 40(B)
Section 40(b) is a disallowance provision and disallows remuneration, interest, etc., received by the partners from the firm provided the same exceeds the ceiling prescribed in the same provision. It also specifies as to how the matter of deductibility of interest and remuneration is to be dealt with where a partner is a partner in representative capacity.

The Explanation 3 defines the term “book profit” which is relevant for computing the upper ceiling of remuneration payable to all the working partners put together. The Explanation 4 defines “working partners” who alone are made entitled to remuneration if the deductibility of the related amount in the hands of the LLP is not to be barred by section 40(b).

Limits of Remuneration to Partners:

The Income Tax Act prescribes the ceiling limit upto which any payment of salary, bonus, commission or remuneration will be allowed as deduction for income of LLP, the limits of remuneration are outlined below:

On First Rs 3,00,000 of book profit or in case of loss	Rs 1,50,000 or at the rate of 90% of the book-profit, whichever is more
On the balance of book profit	at the rate of 60%

Ø  Signing of Income tax Return:

·         The designated partner shall be responsible for signing the income tax return of LLP , where for unavoidable reasons, such designated partner is not able to sign the same or where there is no designated partner, any partner will sign the return.

LLP not covered under Presumptive Taxation

Under the Income Tax, if an eligible assessee is carrying on any eligible business, than for the purpose of calculation of his taxable income, a sum equal to 8% of the turnover or gross receipts of the assessee in the previous year on account of such business or as the case may be, a sum higher than the aforesaid sum ,claimed to have been earned by the eligible assessee, shall be deemed to be the profits and gains of such business chargeable to tax under the head "Profits and gains of business or profession". Tax payable on such income is called as presumptive tax.

An eligible assessee who claims that his profits and gains from the eligible business are lower than the profits and gains calculated as aforesaid and whose total income exceeds the maximum amount which is not chargeable to income-tax, shall be required to keep and maintain such books of account and other documents as required under sub-section (2) of section 44AA and get them audited and furnish a report of such audit as required under section 44AB of Income Tax Act.

Explanation.—

a) "eligible assessee" means,—

(i) an individual, Hindu undivided family or a partnership firm, who is a resident, but not a limited liability partnership firm as defined under clause (n) of sub-section (1) of section 2 of the Limited Liability Partnership Act, 2008; and

(ii) who has not claimed deduction under any of the sections 10A, 10AA, 10B, 10BA or deduction under any provisions of Chapter VIA under the heading "C.—Deductions in respect of certain incomes" in the relevant assessment year;

b) "eligible business" means,—

(i) any business except the business of plying, hiring or leasing goods carriages referred to in section 44AE; and

(ii) whose total turnover or gross receipts in the previous year does not exceed an amount of forty lakh rupees.'

·         Capital Gain on conversion of Partnership into LLP

·         LLP and general partnership is being treated as equivalent (except for recovery purpose) in the Act, the conversion from a general partnership firm to an LLP will have no tax implication, if the rights and obligation of the partners remain the same after conversion and if there is no transfer of any asset or liability after conversion. If there is a violation of these conditions , the provision of capital gain will apply.

·         * Capital Gain on conversion of Company into LLP

·         The Finance Bill 2010-11 has proposed to insert a new clause (xiiib) under Section 47 of the Income Tax Act, 1961 whereby any transaction concerning transfer of a capital asset or intangible asset by a Private Company or unlisted Public Company to a Limited Liability Partnership as a result of conversion of the company into a Limited Liability Partnership in accordance with the provisions of section 56 or section 57 of the Limited Liability Partnership Act, 2008 would be exempted from the provision of Capital Gain Tax, only if the following conditions are satisfied .

a.                  All the assets and liabilities of the Company immediately before the conversion shall become the assets and liabilities of the limited liability partnership;

2. All the shareholders of the Company immediately before the conversion shall become the partners of the limited liability partnership and their capital contribution and profit sharing ratio in LLP should remain in the same proportion as their shareholding in the company on the date of conversion;
3. The shareholders of the company do not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of share in profit and capital contribution in the limited liability partnership;
4. The aggregate of the profit sharing ratio of the shareholders of the company in the LLP shall not be less than fifty per cent at any time during the period of five years from the date of conversion;
5. The total sales, turnover or gross receipts in business of the company in any of the three previous years preceding the previous year in which the conversion takes place does not exceed sixty lakh rupees; and
6. No amount is paid, either directly or indirectly, to any partner out of balance of accumulated profit standing in the accounts of the company on the date of conversion for a period of three years from the date of conversion.

However in case of non compliance of any of the conditions provided as aforesad, the amount of profits or gains arising from the transfer of such capital asset or intangible asset not charged under section 45 by virtue of conditions laid down in the said proviso shall be deemed to be the profits and gains chargeable to tax of the successor limited liability partnership for the previous year in which the requirements of the said proviso are not complied with.”.

*Carry forward and set off of accumulated loss and unabsorbed depreciation allowance, on conversion into LLP:

In case of reorganization of business by way of conversion of a Private Company or unlisted Public Company to Limited Liability Partnership, which fulfills the conditions laid down in the proviso to clause (xiiib) of section 47 of the Income Tax Act 1961, the accumulated loss and the unabsorbed depreciation of the predecessor company, shall be deemed to be the loss or allowance for depreciation of the successor limited liability partnership for the purpose of the previous year in which business reorganisation was effected and other provisions of this Act relating to set off and carry forward of loss and allowance for depreciation shall apply accordingly

However in case of non compliance of the conditions provided under section 47(xiiib) , the set off of loss or allowance of depreciation made in any previous year in the hands of the successor limited liability partnership, shall be deemed to be the income of the limited liability partnership chargeable to tax in the year in which such conditions are not complied.

*Amortization of expenditure incurred under Voluntary Retirement Scheme

In case of reorganization of business by way of conversion of a Private Company or unlisted Public Company to Limited Liability Partnership, which fulfills the conditions laid down in the proviso to clause (xiiib) of section 47, the provisions of section 35 DDA of the Income Tax Act 1961 shall, as far as may be, apply to the successor limited liability partnership, as they would have applied to the said company, if reorganisation of business had not taken place, which means that successor LLP shall be allowed to carry forward the expenditure incurred under voluntary retirement scheme by the predecessor company and amortize the same in accordance the provisions of section 35DDA ,while calculating the profit and gains of the business in previous year

*Benefit of tax credit in respect of Minimum Alternate Tax (MAT) paid by the Company

In case of conversion of a Private Company or unlisted Public Company into a Limited Liability Partnership under the Limited Liability Partnership Act, 2008, the provisions of section 115JAA of the Income Tax Act 1961, providing for credit of MAT paid by the Company in the previous year out of the tax payable in the succeeding years, shall not apply to the successor Limited Liability Partnership. In other words, any benefit of the MAT credit in hands of Private Company or unlisted Public Companies will not be continued in the hands of successor LLP.

*The aforesaid provisions have been proposed by the Finance Bill 2010-11, which is not yet approved by the Parliament of India. Once approved, the said provisions will be effective from the assessment year 2011-12.

Key Highlights:

LLP’s will be treated as Partnership Firms for the purpose of Income Tax w.e.f assessment year 2010-11 No surcharge will be levied on income tax. Profit will be taxed in the hands of the LLP and not in the hands of the partners. Minimum Alternate Tax and Dividend Distribution Tax will not be applicable for LLP. Remuneration to partners will be taxed as “Income from Business & Profession”. No capital gain on conversion of partnership firms into LLP. Designated Partners will be liable to sign and file the Income Tax return. LLP shall not be eligible for presumptive taxation. Capital Gain on conversion of Company into LLP will be exempt from tax, if prescribed conditions are complied with. On conversion, the successor LLP , will be allowed to carry forward and set off of accumulated loss and unabsorbed depreciation allowance  On conversion, the successor LLP will be allowed to amortize the expenditure incurred under voluntary retirement schemeOn conversion, the successor LLP will not be allowed to take the credit of MAT paid by the predecessor company.