ccs- llp model report - 1011015,1011048
TRANSCRIPT
Understanding the LLP Model
SUBMITTED BY
ASHISH VERMA (1011015)RAVEESH SHARMA (1011048)
April 7, 2023
SUBMITTED TO
PROF. S KRISHNAMURTHY
FINANCE AND CONTROL
INDIAN INSTITUTE OF MANAGEMENT, BANGALORE
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CONTEMPORARY CONCERNS STUDY Understanding The LLP Model: Impact of LLP Act 2008 on Indian Business
TABLE OF CONTENTS
Introduction...........................................................................................3
Evolution of LLPs....................................................................................4
Need for Limited Liability Partnership Model..........................................5
Features of Limited Liability Partnership Model.....................................5
Advantages............................................................................................6
Disadvantages.......................................................................................9
Issues.....................................................................................................9
Partnership at Will..............................................................................9
Death of a Partner............................................................................10
Treatment of Minors.........................................................................10
Comparison between a LLP and Partnership,.......................................11
References...........................................................................................16
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CONTEMPORARY CONCERNS STUDY Understanding The LLP Model: Impact of LLP Act 2008 on Indian Business
INTRODUCTION
There are multiple forms of doing business ranging from Individual
Proprietorship to Business Enterprise. Generally, the endeavors smaller
in size and requiring more personal involvement are carried out in
individual capacity, while for those requiring effort of multiple
personnel, partnership or enterprise form is more suited. So the choice
of the form for the business endeavor depends upon multiple factors
like nature and duration of business, scale of operation, level of control
required, and capital structure, apart from the legal and regulatory
requirements. The forms of business entities also varies from country
to country according to jurisdiction, however the most common are
listed as under:
- Sole Proprietorship: It is a For-profit business owned by one
person. The proprietor has complete 100% ownership of the
business and unlimited liability for the debts incurred by the
business. The businesses are generally small in size and
unregulated.
- Partnership: In a partnership, two or more people have the
ownership of the business. The partners share the risk, capital
investment and the returns in a mutually agreed ratio. The
distinctive features of the partnership firms are listed as under:
Multiple Partners (more than 2)
Written Agreement
Sharing of Risks/Returns
Joint Ownership and Control
Unlimited, Joint and Several Liability of Partnership
Partnerships are further classified as under:
General Partnership
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CONTEMPORARY CONCERNS STUDY Understanding The LLP Model: Impact of LLP Act 2008 on Indian Business
Limited Partnerships
Limited Liability Partnerships
- Corporation: A corporation is a limited liability form of business
that is treated as a separate legal entity separate from its
members. The corporation has a separate identity distinct from
its shareholders. A Corporation can sue and be sued by others.
The extent of the liability of the members (shareholders) is
limited to the extent of the investments they made. Corporations
can be either owned by the government or privately owned.
Privately owned corporations are generally run by a shareholder
appointed Board of Directors. The corporations can be either
owned privately or listed on the stock market and owned publicly.
Although Corporations are separate entities from individuals but
they do not have fundamental rights like other citizens. However
Corporations can own property etc. Corporate entities have some
salient features. One is that of perpetual succession. The life span
of a company is not decided by the life span of its founders or
promoters. The members may cease to exist but the
corporation’s existence remains unaffected. Another feature is
that of transfer of ownership. The shares of the listed company
are tradable and with the transfer of shares, the ownership
pattern changes.
- Cooperative: Cooperatives are associations of people having
shared goals or interests. Cooperatives differ from corporations in
their management control. In a cooperative, members take all
the important decisions as opposed to the corporations where
Board of Directors takes decisions on behalf of shareholders.
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CONTEMPORARY CONCERNS STUDY Understanding The LLP Model: Impact of LLP Act 2008 on Indian Business
Fig 1: Various Forms of Business Entities
EVOLUTION OF LLPS1
Limited Liability Partnerships (LLP) first emerged in the United States
(in the state of Texas) in the early 1990s. A large number of law firms
in the United States became bankrupt due to US $ 980 bn Loan and
Savings Scam as a result of suits decreed in malpractice litigation. The
firms’ assets were liquidated. The partners of the insolvent firms were
held jointly and severally responsible for all the liabilities of the
partnerships and the assets were recovered from them. (Most of these
firms were owned by lawyers and accountants). This made being a
partner in the firm an unattractive prospect. The LLP model gained
widespread adoption after the revision of the Uniform Partnership Act2
in 1996. And by the year 1997 nearly all the states in United States had
passed legislation related to limited liability partnership. Taking a cue
from the United States, the discussion about the LLPs in India had
1 LLP: Law and Practice – Sanjiv Agarwal2 Uniform Partnership Act, 1914 is a state law drafted by US Uniform Law Commission for the governance of business partnerships in the US.
Types
Sole Proprietors
hipPartnership
General Limited Limited Liability
Co-Operatives
Limited Companies
Private Limited
Public Limited
Public Enterprise
(PSUs)
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CONTEMPORARY CONCERNS STUDY Understanding The LLP Model: Impact of LLP Act 2008 on Indian Business
started as early as 1997 (Abid Hussain Committee). But the long
overdue act was passed only in 2008 after recommendations from two
committees (Naresh Chandra Committee, 2003 and JJ Irani Committee,
2005).
NEED FOR LIMITED LIABILITY PARTNERSHIP MODEL3
As already described above LLPs came into being to address the
concern of professionals (who were generally involved in legal,
accounting, consulting services etc.) from the consequences they faced
in case the firms, in which they were partners, became insolvent. And
in an increasingly competitive and litigious business environment, it
was becoming a major disincentive for two or more skilled and like
minded people sharing common vision to come together and start a
partnership. Thus a new kind of business entity was needed that would
not only make it possible but incentivize the entrepreneurs and
professionals engaged in multiple disciplines to come together and
form commercially efficient vehicles that suited their requirements.
Thus Limited Liability Partnership came into existence as an alternative
to the other existing models combining the benefits of limited liability
at the same time providing the benefits of partnership in organizing the
structure of the firm. As a consequence of the flexibility offered, LLP
model is an ideal choice for the professionals seeking to provide
services in multiple disciplines like legal services, chartered
accountancy etc. Apart from that LLP form is also suitable for small
manufacturing enterprises.
FEATURES OF LIMITED LIABILITY PARTNERSHIP MODEL
3 http://www.llp.gov.in/aboutllp.htm
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CONTEMPORARY CONCERNS STUDY Understanding The LLP Model: Impact of LLP Act 2008 on Indian Business
Limited Liability Partnerships (LLPs) are commercial vehicles which
combine the features of Partnership and Corporate form of business. In
an LLP one partner is not responsible for other partner's misconduct or
negligence. In an LLP, all partners have limited liability for each
individual's protection within the partnership, similar to that of the
shareholders of a limited company. However, unlike the company
shareholders, the partners have the right to manage the business
directly. Limited liability does not imply, in any sense, limited liability of
the firm. The LLP, as a separate entity, is liable to complete extent for
the assets it has. Only the members of the LLP have limited liability to
the extent of their agreed contribution. This is possible because, LLP by
law, like corporations, is a body separate from its founding members
and partners. It has perpetual succession. And there is no upper limit
on the maximum number of partners that a LLP can have (unlike in
Partnerships where the range of number of partners is 2 to 20). As a
consequence of the limited liability, the LLPs are required to maintain
their accounts, just like the corporate, to keep a check on the reckless
behavior. The Indian LLP Act 2008 has elaborate provisions for the
actions like Mergers and dissolutions of the LLP which are discussed in
detail later in this report.
ADVANTAGES4
LIABILITY AND ASSET PROTECTION
In sole proprietorship, the promoter and the business are considered
legally inseparable. Expressed differently, the firm’s debts are legally
the debts of the proprietor i.e. any legal action against the business is
also a legal action against the proprietor. The implication is that all the
personal assets of the proprietor could be taken away should the
business be liquidated. On the other hand the general partnerships are
4 http://www.legalzoom.com/pdf/llc_070112_003.pdf
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CONTEMPORARY CONCERNS STUDY Understanding The LLP Model: Impact of LLP Act 2008 on Indian Business
comparatively more risky. The decision of each partner affects the firm
and one bad decision by one of the partners can make all the other
partners liable to cover for the consequent damage claims. In contrast
to this, an LLP is a legally distinct entity and the partners are not
personally held responsible. The debts and claims on the LLP can’t be
construed as a personal liability on the partners. And the partners don’t
have to carry the firm’s debt to their next venture. Thus the LLP model
saves the partners from potentially damaging situations. However
there is a caveat here, the partners can be held liable in case they
make personal commitment to the debt of the firm.
TAX SAVINGS & FLEXIBILITY
LLP model also offers flexibility in taxation. In the UK and the US, all the
activities are assumed to be carried out by the partners and not the
LLP. So the income is taxed at the personal Income marginal rate and
not at the corporate tax rate (and hence taxed at a lower rate). Thus
LLPs enjoy the pass-through status of for Income tax purpose.
Additionally, an LLP need not pay the Dividend Distribution Tax unlike a
registered company. In India, the LLP Act 2008 does not contain any
separate provision for taxes. The provisions of Income Tax 1961 are
applicable.
EASE OF FORMATION AND TRANSFER
The LLP formation process is very simple as compared to forming a
Company and the formation procedures are relatively easier.
Ownership interests in an LLP can be sold to the third parties without
disrupting the continued operation of the business. In contrast, the sale
of interests in a sole proprietorship or general partnership is an
intensive process requiring much effort and time. An owner has to
individually transfer the assets, permits and licenses, accounts, and
other legal documentation. If a sole proprietor has a plan to one day
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CONTEMPORARY CONCERNS STUDY Understanding The LLP Model: Impact of LLP Act 2008 on Indian Business
pass the family business down to the next generation, converting the
sole proprietorship to an LLP can help smooth the transition.
OWNING OF PROPERTY
A LLP as a legal entity is capable of owning its funds and other
properties. The property of LLP is distinct from the property of its
partners. Therefore in case of a dispute among the partners, the
property of the LLP is insulated from the claims by the partners.
PERPETUAL SUCCESSION
As mentioned earlier, an incorporated LLP has perpetual succession.
An LLP remains the same entity with same property rights, privileges
and possessions despite any change in the partner(s). And it shall
continue to exist in the similar state till it is terminated in accordance
with the statutes of the relevant law.
CAPACITY TO SUE
As a legal entity, a LLP can sue in its name and be sued by others. The
partners can’t be sued for dues against the LLP.
NO OWNERSHIP RESTRICTIONS
There is no upper limit on the number of partners a LLP firm can have.
On the other hand the limited partnerships can have only 20 partners
at most.
FLEXIBILITY TO MANAGE
LLP Act 2008 gives the LLPs the freedom to manage their own affairs.
Partners can decide the way they want to operate and manage the
venture, in form of an LLP Agreement and the professionals would be
able to form multidisciplinary partnerships.
RAISING CAPITAL
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CONTEMPORARY CONCERNS STUDY Understanding The LLP Model: Impact of LLP Act 2008 on Indian Business
Making arrangements for financing a small unregulated business can
be difficult most of the times. On the other hand an LLP is a regulated
entity like company and a lot of financing options exist including
investment form Private Equity firms and other financial institutions.
New members can be admitted by selling membership interests. New
classes of membership interests with different voting or profit
characteristics can be created.
AUDIT REQUIREMENT
The audit by a practicing Chartered Accountant is required only if the
annual turnover exceed Rs 2500000. This is of great convenience to
small businessmen.
DISADVANTAGES
NUMBER OF PARTNERS
The minimum number of partners required to form a LLP is two. A
person alone can’t form a LLP. The exit of one partner in case of a two
person LLP will force the closure unless a new partner is admitted†.
†† However Companies Act is being amended to allow for One Man Company.
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CONTEMPORARY CONCERNS STUDY Understanding The LLP Model: Impact of LLP Act 2008 on Indian Business
LLP AGREEMENT
A LLP agreement is needed to avoid default provisions from being
applicable and to cover the situations not addressed by the default
provisions in the LLP Act 2008.
INFORMATION DISCLOSURE
Some risk-averse businessmen and family businesses may not prefer
LLP model due to certain information required to be made available in
the public domain and the legal processes and documentation required
in the formation process.
ISSUES
PARTNERSHIP AT WILL
Article 7 of Indian Partnership Act 1932 states that when there is no
provision in the contract for the duration of the partnership, the
partnership is treated as ‘Partnership At Will’. The implication is that
any partner can dissolve the firm by giving notice to other partners.
Partnership contract usually provides information regarding the
duration of the partnership or how the partnership will be brought to an
end.
The provisions have also been provided in the Act that if after a
partner's death the business is continued in the same name as before,
the continued use of that name if it contains the deceased partner's
name shall not by itself make his legal representative or his estate
liable for any act of the LLP done after his death.
DEATH OF A PARTNER
As a partnership is not a legal entity, it does not has perpetual
existence unlike a company or an LLP. As a result the death (or
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CONTEMPORARY CONCERNS STUDY Understanding The LLP Model: Impact of LLP Act 2008 on Indian Business
insolvency) can lead to the dissolution of the partnership firm. A
partnership firm can continue only if specific provisions have been
provided in the partnership deed regarding the continuation of the firm
despite the death of a partner.
LLP Act 2008 states that in the event of death of a partner, the
business can be conducted in the same LLP name even if contains
deceased partner’s name. The continued use of the name of the
deceased partner’s name does not make his legal heirs/representatives
or his estate liable for any business transaction of the LLP done after
the partner’s death. However, according to the Act of 2008, an LLP
must have at least two members. If the number of partners falls below
two, and the business is carried for more than six months, the person
carrying on the business (being aware of the fact) will be personally
liable (i.e. jointly and severally liable along with the LLP) for the
obligations of the LLP during that period. In addition the Tribunal may
wind up the affairs of the LLP, if the number of partners remains less
than two for more than six months. In a way the partner has less than
six months to find a new partner to continue with the entity. Thus the
death of a partner may lead to winding up of the LLP only if it is an
entity with only two partners and the other partner is not able to find a
new partner within six months of the death of the deceased partner.
TREATMENT OF MINORS
Minors can be admitted to the benefits of a partnership (as per
Partnership Act 1932) but the LLP Act 2008 is silent on this issue. LLP
Act 2008 states that any individual or Body corporate can be a partner
of limited liability partnership, an individual is not eligible only when:
- The person has been found to be mentally unsound by a court of
competent jurisdiction and that finding is still applicable.
- the person is an undischarged insolvent
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CONTEMPORARY CONCERNS STUDY Understanding The LLP Model: Impact of LLP Act 2008 on Indian Business
- the person has applied to be adjudicated as an insolvent and his
application is pending
The act has defined the eligibility of an individual to become a partner
in an LLP in a negative manner by listing only the conditions in which a
person is ineligible to become a partner rather than the other way by
laying down the conditions to be eligible to be a partner.
Thus every person who is competent can become a partner. There is
no separate provision has been provided on the treatment of a minor.
To become a partner a person has to sign the LLP Agreement. Thus
each person who is competent to a contract can become a partner.
However Indian Contract Act 1872 states that a minor is not eligible to
enter into a contract. Thus a minor can’t be bound by the partnership
agreement in an LLP; however, partnership of a minor may not render
the partnership agreement void.
COMPARISON BETWEEN A LLP AND PARTNERSHIP5,6
S.N
o.
Particulars Partnership LLP
1. Registration It is not a
mandatory
requirement under
the Indian
Partnership Act,
1932. If a
partnership firm is
not registered,
partners will not
Registration is
mandatory and the
incorporation document
is filed as prescribed by
the Registrar of the state
in which the registered
office of the LLP is to be
situated
5 Indian Partnership Act, 19326 The Limited Liability Partnership Act, 2008
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have the right to file
a suit to enforce a
right arising from a
contract. An
unregistered firm
cannot sue a third
party.
2. Firm Name
Partners are free to
choose to any name
for their business
Every LLP name has to
be approved (should not
be undesirable, identical
or too closely resembles
partnership firm) and
firm name is suffixed by
the either the words
“limited liability
partnership” or acronym
“LLP”
3. Legal Entity
A partnership firm is
not a legal entity. It
has limited identity
for the purpose of a
tax law. It is a
relationship
between persons
who have agreed to
share the profits of
a business carried
on by all or any of
them acting for all.
LLP is a body corporate
formed and incorporated
under the LLP Act, 2008.
It is a separate legal
entity, separate from its
partners.
4. Number of
Partners
A partnership has
minimum of 2
LLP must have minimum
of 2 partners and no
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CONTEMPORARY CONCERNS STUDY Understanding The LLP Model: Impact of LLP Act 2008 on Indian Business
partners,
partnership act puts
no limit on
maximum number
of partners but the
section 11 of
company act limits
the maximum
number of partners
to 20.
limit on the maximum
number of partners.
5.Time
Duration
Partnership can
have a specified
duration as
mentioned in the
contract; also
partnership is
“Partnership-At-
Will”. It is not a body
corporate.
LLP is a body corporate
has a perpetual
succession unless legally
wound up by
partners/creditors.
6. Liability Every partner is
liable jointly liable
with all the other
partners and also
severally for all acts
of the firm done
while he is a partner
Limited liability, i.e. a
partner is liable only to
the extent of his
contribution in LLP (as
specified in agreement).
An obligation of the LLP
arising in contract or
otherwise shall be
obligation of LLP only
and a partner is not
personally liable, directly
or indirectly for any such
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CONTEMPORARY CONCERNS STUDY Understanding The LLP Model: Impact of LLP Act 2008 on Indian Business
obligation.
7.Foreigners
as Partners
Only NRI’s and PIO’s
(persons of Indian
origin) can set up a
partnership.
At least 1 member of LLP
has to be RoI(resident of
India), foreign nationals
other than PIO’s and
NRI’s can also be
partners in LLP
8. Financial
Disclosures
The partnership act
is silent on financial
disclosures, it’s not
mandatory to file
financial disclosures
A LLP has to maintain
proper account books on
cash basis or accrual
basis according to
double entry system.
Within a period of 6
months from end of a
financial year it has to
prepare a “Statement of
Account and Solvency”
for the said financial
year. Its accounts are
audited as per the rules
prescribed by GoI in the
Official Gazette. LLP has
to file an annual return
duly authenticated with
the Registrar within 60
days of closure of its
financial year
9. Whistle
Blowing
Indian Partnership
Act, 1932 says
nothing about
whistle blowing.
Court or Tribunal may
reduce or waive any
penalty levied against
partner or employee if
he has provided useful
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CONTEMPORARY CONCERNS STUDY Understanding The LLP Model: Impact of LLP Act 2008 on Indian Business
information during
investigation of such LLP
or the information given
by him/her leads to
conviction of LLP
10. Agreement
Partnership
agreement can be
‘written’ or ‘Oral’.
Written agreement
is compulsory for
partnership to be
registered
Mandatory written
agreement,
incorporation documents
are compulsory.
11.Minor
Partner
A minor can be a
partner in
partnership, if other
partners agree to it.
The act is silent on
position of minor in LLP.
A minor cannot be
appointed as a
designated partner of a
LLP. There are no
provisions to provide
excuse or immunity to
minor from any penal
provision
12.Asset
Ownership
Shares, property
and any others
assets cannot be
held in the name of
partnership firm.
They are generally
jointly owned by
partners
Shares, property or any
other assets can be held
in the name of LLP as it
is a body corporate and
a separate legal identity.
13. Partner’s A partnership may LLP continuous to exist
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Death
be dissolved with
the death of a
partner unless there
are other provisions
in the contract
as a legal entity even if
partner dies and it will
continue to do so until it
is legally wound up.
14.
Business
Transactions
with Partner
A partnership does
not provide
provisions to partner
to have any
business
transactions with
the it’s partnership
firm
A partner may lend
money to and transact
other business with LLP
and has the same rights
and obligations with
respect to loan or other
transactions as a person
who is not a partner
15.
Winding up
and
Dissolution
There are no
provisions for
compromise,
arrangement,
winding up,
reconstruction etc.
in partnership act
Specific provisions for
compromise,
arrangements, winding
up, amalgamation etc.,
which are regulated by
Tribunal /Courts
16. Taxation7
For the purpose of
Taxation,
partnership is
considered as a
separate legal entity
and taxed as a firm
LLP are treated in the
same manner as
partnership for taxation.
There are no differences.
Conversion from
partnership to LLP will
have no tax implications
17. Foreign
Investments8
Only NRI’s and PIO’s
can invest in
Foreign investments are
allowed in LLP
7 http://jurisonline.in/2010/05/limited-liability-partnership-vs-partnership
8 http://www.investindia.gov.in/faqs.htm
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partnership firm. No
person other than
NRI’s/PIO’s shall
make any
investment by the
way of contribution
to capital of a
proprietary/
partnership firm
18.Statutory
Compliance
According to
partnership act, all
partners are liable
for statutory
compliance
The designated partners
in LLP are liable for
statutory compliance
19.Identification
Number
Partners are not
required to obtain
any identification
number by central
government
Designated partners
have to obtain a
Designated Partner
Identification Number
(DPIN) from the Central
Government.
20.Partner’s as
an agent.
A partner in general
partnership is an
agent to the firm as
well as to other
partners, thus can
bind them legally by
its actions.
A partner in LLP is an
agent of LLP alone and
not other partners, thus
his actions will legally
bind only LLP and not
other partners.
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REFERENCES
LLP: Law and Practice – Sanjiv Agarwal
http://www.llp.gov.in/aboutllp.htm
http://www.legalzoom.com/pdf/llc_070112_003.pdf
Indian Partnership Act, 1932
The Limited Liability Partnership Act, 2008
http://www.investindia.gov.in/faqs.htm
http://jurisonline.in/2010/05/limited-liability-partnership-vs-
partnership
http://www.companyformationsindia.org/distinction-between-llp-vs-
partnership-vs-company.html
http://www.pluggd.in/limited-liability-partnership-llp-company-
comparison-297/
http://www.taxmanagementindia.com/visitor/detail_article.asp?
ArticleID=383
Limited Liability Partnership, Dewan PN Chopra Consultants Pvt. Ltd.
rbidocs.rbi.org.in/rdocs/notification/PDFs/40493.pdf
http://www.llphelpline.com/llp-vs-partnership.htm