LIMITED LIABILITY PARTNERSHIP

Overview & Tax Issues on Conversion to LLP

CA AKSHAY K GUPTA- Kanpur

LIMITED LIABILITY COMPANY

•LEGAL ENTITY

• PERPETUAL SUCCESSION

•LIMITED LIABILITY

•SEPERATION OF OWNERSHIP & MANAGEMENT

•CORPORATE DEMOCRACY

UNLIMITED LIABILITY PARTNERSHIP

Partnership is an agreement between two and more persons to work for each other to carry on a business or profession for profits or gains.

•An agreement or arrangement between two or more persons: No legal entity separate from partners-unlimited joint and several liability

•To work for each other:agent for each other.Acts of one may effect others.

•Carry on a business or profession: essentially for business or profession

•Share profits or gains:sharing of profits or gains may not be of

losses

THE LIMITED LIABILITY PARTNERSHIP ACT 2008

An overview

SEC 1: Whole of India from 7th January 2009

(Rules Notified w.e.f 1st April 2009)

SEC 3: -LLP a body corporate incorporated under the Act

-LLP shall have perpetual succession

-Change in partners –no effect in existence,rights or

liabilities of LLP

SEC 66:Partner may lend or transact business with LLP as another person

SEC 4: Partnership Act do not apply

SEC 67:Companies Act not to apply-Except as specified by central

government

APPLICABILITY & STRUCTURE

PARTNERS AND THEIR RELATIONS

SEC 6:- Minimum two partners

Below two for six months - Individual obligation

SEC 22:Who are Partners

- Subscribers to incorporation documents are partners

-New partner with LLP agreement

SEC 23:Relationship of partners

-Mutual rights and duties of partners interse and with

LLP as per agreement

-Agreement and changes to file with registrar-Form 3

-If no agreement First schedule apply

continued……

SEC 24:Cessation of Partner Interest

-As per agreement

-Notice not less than 30 days

-Death of a partner

-Dissolution of LLP

SEC 24(5):Former Partner entitle to:

Capital contribution

Share in accumulated profits less losses

SEC 25: Changes in partners to be registered

…….continued

EXTENT AND LIMITATION OF LIABILITY

SEC 26:Partner agent of LLP, not of other partners

SEC 27:-LLP liable for all the acts of partners-

including wrongful act or omission-done in ordinary

course or with authority

-LLP not bound by partners unauthorized Act and person

known he has no authority or person does not know him

as a partner

-LLP sole obligation-not of partners

-LLP liability out of LLP property

Continued…..

SEC 28:-Partners not personally liable for LLP obligation

-Partners may be liable for own wrongful act or omission.

Not other partners

SEC 30:Unlimited liability in case of fraud

……continued

CONTRIBUTIONS

SEC 32:-Contribution of a partner may be of Tangible or

Intangible property

-Cash or in kind or services

SEC 33: Obligation to contribute as per LLP agreement

-Creditor acting in reliance of LLP agreement may

enforce original obligation against such partner

ASSIGNMENT AND TRANSFER OF PARTNERSHIP RIGHTS

SEC 42: Rights to profits and losses and distributions of LLP are

transferable-wholly or in part

-Transfer itself is not disassociation of partner

or dissolution of LLP

-Transferee does not by itself entitle him the right to

manage or information

DESIGNATED PARTNERS

SEC 7: Minimum 2 individual designated partners

One shall be resident in India

Designated Partner Identification No – Form 7

Particulars and consent to be filed – Form 4

SEC 7(2): Designated partners—

As specified in incorporation document

As specified in LLP agreement with prior consent

Sec 8: Designated partners liability—

To comply provisions of the Act

Liable for all penalties.

OTHER PROVISIONS

SEC 34: Maintenance of accounts compulsory

File annual statement of accounts and Solvency –Form 8. Accounts shall be audited if contribution exceed 25 lakh or turnover exceed 40 lakhs.

SEC 35: Annual Return within 60 days of financial year – Form 11

SEC 43-54: Inspection of LLP.

SEC 63-65: Winding up voluntary or tribunal

SEC 55-58: Conversion – Firm to LLP

Private company to LLP

Public company to LLP

Beneficial Features of LLP Partners Shielded with Joint Liability Flexibility in Mutual Relations Acceptance of Deposit Rules Not Apply No Restrictions of Loans to Partners or Related

Parties Withdrawal of Capital & Profits No Restrictions Managerial Remuneration Rigors/Compliances of Co. Act not Apply

CONVERSION FROM FIRM TO LLP (SECOND SCHEDULE)

With the consent and shall comprise of all the partners.

Application with the registrar. Form 17All movable, immovable property, interests,

rights, privileges, liabilities, obligations shall transfer.

Partners liable for Act prior to conversion although the LLP may indemnify to the partners.

CONVERSION FROM PRIVATE COMPANY TO LLP(THIRD SCHEDULE)

Partners of LLP comprises of all the shareholders and no one else.

Statement by all the shareholders. All movable, immovable property, interests,

rights, privileges, liabilities, obligations & whole of the undertaking will be transferred to LLP.

Company shall be deemed to dissolved & removed from the register of ROC.

CONVERSION FROM UNLISTED PUBLIC CO. TO LLP(FOURTH SCHEDULE)

Partners of LLP comprises of all the shareholders and no one else.

Statement by all the shareholders. All movable, immovable property, interests,

rights, privileges, liabilities, obligations & whole of the undertaking will be transferred to LLP.

Company shall be deemed to dissolved & removed from the register of ROC.

RESULT OF CONVERSION

All Properties, assets, interest, rights, privileges, liabilities, and obligations relating to the company and the whole of the undertaking of the firm/company shall be transferred to and shall vest in the LLP.

No further assurance, act or deed is required.The firm/company shall stand dissolved and shall

be removed from the records under Partnership Act/records of the Registrar of Companies.

CONVERSION NOT TO EFFECT :

Pending proceedingsAny conviction, ruling, judgement or orderAll deeds, contracts (including contracts of

employment ), schemes, bonds, agreements, applications, instruments and arrangements subsisting immediately before the date of registration

Any appointment, authority, or power of the firm/company

CONVERSION NOT TO APPLY TO:

Any approval, permit or

licence issued under any written law to the firm/company

TAXATION

Most countries treat LLPs as pass through entitiesShare of income and capital gains taxed in the

hands of partners In UK, tax relief for interest and trading losses

against partner’s income other than from LLP, limited to capital contribution

However, both US and UK require the LLP to file an annual return showing details of the whole partnership

Taxation in India As a Partnership Firm Sec 2(23)(i): Firm includes LLP Sec 2(23)(ii)(b): Partner shall mean Partner

under LLP Sec 2(23)(iii): Partnership shall mean

Partnership in LLP

Tax benefits to LLP v Company No Dividend Distribution Tax No Minimum Alternate Tax But Alternate

Minimum Tax 115 JC No Deemed Dividend u/s 2(22) No Application Explanation to Section 73 Interest on Capital allowable Salary to Partners

Tax neutral conversions of companies into LLP [47(xiiib) (w.e.f 1.4.2011)] Conversion in accordance with LLP Act All assets and liabilities of company to LLP All shareholders to become partners in LLP with

capital contribution and profit sharing ratio in the proportion of shareholding

Aggregate of profit sharing ratio of the shareholders of company in LLP ≥50% for a period of 5 years

...Tax Neutral Company to LLP Shareholders not to receive any consideration or

benefit, directly/indirectly, in any form except by way of share in profit and capital contribution in LLP

Sales, turnover or gross receipts in business of company in any of 3 years < INR 6 million

No direct / indirect payment to any partner out of accumulated profits of company for a period of 3 years post conversion date

Other Provisions on ConversionOnly to conversion u/s 47(xiiib) Carry forward losses and depreciation WDV of company to be the Cost of LLP Depreciation as if no transfer Amortization of VRS to be allowed

No Tax Provision For TDS & Tax Credit MAT Credit will lapse 115 JA(7) 43B payments by LLP Benefits u/s 80IA- 80IB etc Date of Acquisition of assets converted Cost step up if benefit forfeited Conversion of firm into LLP

Tax on Conversion of Firm/other companies to LLP No Specific Provision in IT Act Finance Bill 2009 Memorandum- no tax

implications if same rights of partners CIT vs. Texspin Engineering 263 ITR 345 Effect of Definition of Convert in LLP Act Taxability of partners/shareholders Whether Extinguishment of rights in shares

Other Issues Transfer of Stocks and other assets Interse transfer of shares after conversion Stamp Duty 50C Vat and Excise on Conversion Cenvat & Vat credit

THANK YOU