Businesses in India in terms of their structures of ownership are characterized by companies, sole proprietorship and partnership but in recent times the concept of Limited Liabilit Partnership has caught on the imagination which is a hybrid form drawing on the characteristics of the corporate form as well as partnership. In fact, a bill named as Limited Liability Partnership Bill was in introduced in the upper house of Parliament way back in 2006.
The move to provide such a form is significant in the sense that once the bill comes in the form of an enactment, it is going to fill in the hiatus left by the corporate and partnership forms. LLP would be a body corporate to be constituted under the LLP Act and would have a status distinct from the partners who are instrumental in bringing it into existence and would be endowed with perpetual succession. The implication of which is that any change in the partners of the LLP would not affect its existence, rights or liabilities. It provides for a smooth mechanism in the form of a notice to the Registrar and the provisions of the Partnership Act would have no applicability.
The salient features of the main provisions may be summarized as follows:
a) The LLP would be a separate legal entity for carrying on a lawful business by two or more persons who are subscribe their names to an incorporation document to filed with the Registrar and its liability would co-terminus with its assets and the liability of a partner would be limited to his agreed contribution in the LLP. It is very important to note that no partner would be liable on account of the independent or unauthorized actions of other partners or their misconduct.
b) The mutual right and duties of the partners inter se and those of the LLP and its partners shall be guided and governed by an agreement between partners or between the LLP and the partners subject to the provisions of the proposed legislations.
c) An LLP would have at least two partners to be appointed as “Designated Partners” of whom at least one must be resident in India and would have duties and obligations to be provided under the Act.
d) There are well-defined obligations to maintain annual accounts giving a true and fair view of the state of affair on the lines of the Companies Act. An audited statement of accounts and solvency must be filed with the Registrar every year.
What is of interest is that the powers in respect of mergers, amalgamation, winding up and dissolutions of the LLPs would be exercised by the Central Government by applying the provisions of the Companies Act.
Tax Implications
The tax treatment of the LLPs is one of the crucial issues. As per the current provisions of the bill, an LLP would be treated as a firm as defined under the Income Tax Act,1961. Thus there might be two ways to deal with the tax treatment. It may be the same basis as an ordinary partnership firm viz., paying tax on the profits after adjustment of business expenditure, salaries and interest paid to the partners. The partners would be liable to pay taxes on salary and interest receipts, whereas the share in the profits is exempt. There is another way which taxes the profits in the hands of LLP partners. This also known as tax transparency.
Similarly where an LLP carries on a trade or business with a view to profit, assets held by it would be treated as held by the partners for the purpose capital gains on the disposal of such assets. The provisions of the bill in respect of tax treatment still needs some clarity.