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LIMITED LIABILITY
PARTNERSHIP
Limited Liability Partnership (LLP) Act of
2008 has been enacted to allow formation of a new legal entity called
"Limited Liability Partnership" (LLP). Existing firms
and companies can now convert into limited liability partnerships (LLPs),
a new corporate structure that came into effect from April 1, 2009.
It is an alternative corporate business entity that provides the benefits
of limited liability of a company but allows its members the flexibility
of organizing their internal management on the basis of a mutually-arrived
agreement, as is the case in a partnership firm. The major difference
between an LLP and a company is that LLP will be liable to the full extent
of its assets, however the liability of the partners would be limited to
their agreed contribution in the LLP. Further, no partner would be liable
on account of the independent or unauthorized actions of other partners,
thus allowing individual partners to be shielded from joint liability
created by another partner’s wrongful business decisions or misconduct.
This format would be quite useful for small and medium enterprises in
general and for the enterprises in services sector in particular,
including professionals and knowledge based enterprises.
The salient features of the
LLP Act of 2008 are as follows:-
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The LLP will be an
alternative corporate business vehicle that would give the benefits of
limited liability but would allow its members the flexibility of
organizing their internal structure as a partnership based on an
agreement.
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The proposed Bill does
not restrict the benefit of LLP structure to certain classes of
professionals only and would be available for use by any enterprise
which fulfills the requirements of the Act.
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While the LLP will be a
separate legal entity, liable to the full extent of its assets, the
liability of the partners would be limited to their agreed contribution
in the LLP. Further, no partner would be liable on account of the
independent or un-authorized actions of other partners, thus allowing
individual partners to be shielded from joint liability created by
another partner’s wrongful business decisions or misconduct.
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LLP shall be a body
corporate and a legal entity separate from its partners. It will have
perpetual succession. Indian Partnership Act, 1932 shall not be
applicable to LLPs and there shall not be any upper limit on number of
partners in an LLP unlike a ordinary partnership firm where the maximum
number of partners can not exceed 20.
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An LLP shall be under
obligation to maintain annual accounts reflecting true and fair view of
its state of affairs. Since tax matters of all entities in India are
addressed in the Income Tax Act, 1961, the taxation of LLPs shall be
addressed in that Act.
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Provisions have been made
in the Bill for corporate actions like mergers, amalgamations etc.
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While enabling provisions
in respect of winding up and dissolutions of LLPs have been made in the
Bill, detailed provisions in this regard would be provided by way of
rules under the Act.
The ministry of corporate
affairs has written to the finance ministry requesting that the companies
and firms should be exempt from capital gains tax for the purpose of
conversion. “We have already written to the finance ministry. The
Parliamentary Standing Committee on Finance had recommended a tax-neutral
approach for converting an existing company or firm (into an) LLP. We
think it will encourage firms (to convert into an LLP),” a source said.
The sources said
the idea behind the proposal on tax neutrality is that interested parties
shy away from converting just because they have to pay capital gains tax
on conversion. |
