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T. C. A. Ramanujam

The Limited Liability Partnership Act, 2009 came into force w.e.f. April 1, 2009. The new law provides an alternative to the traditional partnership, with unlimited personal liability on the one hand, and statute-based governance structure of the limited liability company on the other, to enable professional expertise and entrepreneurship initiative to combine, organise and operate in a flexible, innovative and efficient manner.

Section 3 of the Act provides for the formation and registration of the new entity. The Act provides the partners with limited liability protection, that is, confined to the their capital contribution. The partner will not be liable for the debts and obligations of the LLP.

The LLP is separate from the partners. It has perpetual succession. Resignation, death or any kind of exit of a partner from the firm will not automatically dissolve the firm. The partner is like a shareholder of a company. LLP is a hybrid between a company and a partnership.

The origin of the new entity can be traced to the Abid Hussain Committee of 1997, the Naresh Chandra Committee of 2003 and the Irani Committee on company law.

Part 7 of the First Schedule lays down the mutual rights and duties of partners inter se. No new partner can be inducted without the consent of the existing partners, just like Section 30 of the present Partnership Act.

The American law in this regard permits admission of a general partner without the unanimous consent of all the partners. Section 67 enables the Central Government to apply the provisions of Companies Act to LLPs. Chapter VII deals with financial disclosures to be made by the LLP.

For obvious reasons, the LLP Act makes no mention of the way the new entity will be taxed. This is like the Partnership Act which also does not refer to the tax angle. This will have to be looked into by the Finance Bill, 2009.

In the UK, for purpose of taxation, Section 10 of the UK Act of 2000 lays down that the business shall be treated as being carried on by the partners. The LLP gets a pass-through status for purposes of taxation.

The firm itself is not taxed and the share of profit is taxed in the hands of the partners. Small entities will escape taxation altogether if the partners have income below the taxable limit.

An alternative can be to tax LLP as a company. This will leave the partners outside the ambit of taxation.

In the US, the LLP has the choice to decide on the mode of taxation. It can opt to be taxed as a company or only on the share of profits of the partners. This will be on a par with counties with whom India has entered into Double Taxation Avoidance Agreements (DTAAs).

Section 27 lays down that all liabilities of the firm shall be met out of the property of the firm. Section 4 rules out the possibility of application of the Partnership Act to the LLP. The LLP Act does not mention what will constitute the property of the firm. The Institute of Chartered Accountants of India (ICAI) has suggested that profits distributed among partners must be taxed in their hands. Salary paid to the partners by the LLP will of course be taxable.

Section 11 of the Companies Act lays down that an association of more than 20 partners formed for profit motive can exist only if it is incorporated as a company. The LLP removes this ceiling on the number of partners.

The new law has come as a boon to professional firms in India. They are forbidden by their regulatory laws from practising under any other legal form.

No wonder that registrations under the LLP Act are confined mainly to professional service firms. But the Act will be useful even for small enterprises not seeking access to capital market through listing on stock exchange. Provisions have been enacted for auditing of accounts.

The present Act is modelled on the British LLP Act, 2000 and the Singapore Act, 2005. But under the British law, LLPs have to provide for compulsory insurance to satisfy any judgment or decree against the LLP. This provision needs to be incorporated in our LLP Act too. This will protect the interest of creditors and others dealing with LLP.

LLP is an innovative business vehicle, but whether it will be successful or not will depend on how the tax issues are addressed in Finance Bill, 2009.

More Stories on : Taxation | Company Law

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