S. Murlidharan on the issues of concern in the proposed limited liability partnership regime

S. Murlidharan

THE Concept Paper on the proposed limited liability partnership (LLP) law floated by the Department of Company Affairs (DCA) is bound to be lapped up by small and medium enterprises (SMEs) as well as professionals.

All stops are being removed to welcome businesses and professions into the proposed Limited Liability Partnership Act, 2006. The benign law-to-be extracts no price from businesses which embrace it.

It seems there would be no registration fee or any annual fee at the time of filing the declaration of insolvency. Not only can new LLPs be formed, but partnership firms, private companies and unlisted public companies can all migrate to the more agreeable dispensation offered by the LLP regime at any time of their choice.

The proposed regime offers best of both the worlds limited liability to businessmen and professionals sans the rigours of the stifling company law regime as it now obtains.

Unlimited liability, which scared away many a wannabe businessman/professional from entering into partnerships, would be a thing of past, thus paving the way for attracting the best talent to meet the challenges posed by the new world order under the WTO regime, claims the paper.

As and when the LLP law comes into force, there would eventually be just two Acts of Parliament under which private businesses would be registered the Companies Act, 1956 catering to listed companies, and the LLP Act, towards which all others will snugly gravitate .

The rationale underpinning this divide is that listed companies, using as they do public money, should be subjected to a much more rigorous and elaborate control than other businesses, which do not mobilise public funds. The extant Partnership Act might as well be given the quietus simultaneously in the wake of the ushering in of the LLP Act.

The Registrars of LLPs in every State would be swamped with applications for registration, as every business hitherto conducted as partnership, private limited company or public company without going public would all make a beeline for LLP status. That of course is the least worrisome aspect of the problem.

What could be cause for concern is the singular lack of protection to creditors against the avarice of marauding businessmen despite the reassuring provision in the proposed law fastening individual partners with unlimited liabilities in the event of fraud, which would have to be established in a protracted, and expensive litigation spanning years. The Concept Paper has surprised many by offering LLP for everyone, contrary to the expectation that it would be esoteric and selective.

The other concerns include:

LLPs will not be assessed under the income-tax law. Instead the tax will fall on the individual partners. This disturbs the extant dispensation under which a firm is a taxable entity.

What would happen if there are a large number of partners given the fact that there is no upper limit absolutely on their number? Will not the assessment become cumbersome? The shareholders of companies, it may be noted, are immune from taxation with the company paying corporate and distribution tax.

LLPs will not pay capital gains tax under the income-tax law either. Instead, once again, the onus would be on individual partners.

The assumption as to ownership of assets by individual partners goes against the grain of the concept of pooling of interest. The LLP Act would be blowing hot and cold by saying this. Separate existence is for every purpose other than taxation. This flip-flop should be avoided.

Photographs of all the partners to form the records of Registrar. The Registrar could have albums bursting at the seams, especially in cases where public companies have migrated to this more agreeable regime.

Every LLP is required to have a manager. Fine. But what defies comprehension is the freedom to allow an outsider to this statutory office.

The manager ought to be a partner. An outsider may not be made privy to the goings-on. In the event, it would be unfair to burden him with onerous responsibilities, including penalties for non-compliance.

The diktat on manner of accounting accrual is unwarranted, especially when no public interest is involved in LLPs. In fact, this one requirement could scare away many a wannabe LLP.

Consent of all the partners is required before a new partner is inducted. This unanimity could be impossible and difficult to secure, especially if the LLP is very large.

The norm would be rule by democracy with the exception being unanimity for venturing into new business. Once again it is possible that an LLP may be stopped in its tracks by an intransigent minority of one or two.

Three-fourths majority for major decisions, including venturing into new businesses, should therefore be the norm.

(The author is a Delhi-based chartered accountant.)

(This article was published in the Business Line print edition dated December 8, 2005)
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