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Limited Liability Partnership
Limited Liability Partnership (LLP), a legal form available world wide, has now been introduced in India and is governed by the Limited Liability Partnership Act 2008 with effect form April 1, 2009.The newly passed Limited Liability Partnership Act 2008 provides flexibility to existing partnership firms, private limited companies and unlisted public companies to get converted in the Limited Liability Partnership format.
Comparative analysis amongst a traditional partnership firm, a company setup and an LLP.
Features Partnership firm Company Limited Liability Partnership
Cost of Partnership The Cost of Formation is negligible. Minimum Statutory fee for incorporation of Private Company is Rs.6,000/- and minimum Statutory fee for incorporation of Public Company is Rs.19,000/-. The Cost of Formation is statutory filing fees, comparatively lesser than cost of formation of Company.
Registration Not compulsory. Compulsory registration require with ROC. Compulsory registration required with the ROC.
Name No guidelines Name of the public company to end with the word “limited” and a private company with words “private limited”. “LLP ”/ “Limited Liability Partnership” is required to be suffixed to the name.
Liability Unlimited , can extend to the personal assets of the partners. Limited to the extent of unpaid capital. Limited to the extent of the contribution to the LLP.
Legal Entity Status. Not a separate legal entity. Is a separate legal entity. Is a separate legal entity.
No. of shareholder / Partner  Minimum 2 partners and maximum 20 partner. Minimum of 2. In a private company, maximum of 50 shareholders. There is no maximum limit for public co. Minimum of 2. Maximum limit not specified.
Incorporation Document Partnership Deed between the partners. Memorandum of Associations and Articles of Association is required. An agreement between the partners of the LLP or between the LLP and the  partner
Taxability  The income is taxed at 30%. In addition to the tax , education cess as applicable would be levied. The income is taxed at 30%. In addition to the tax, education cess as applicable would be levied. The income is taxed at 30%. In addition to the tax, education cess as applicable would be levied.
Capital contribution Not specified Private company should have a minimum paid up capital of Rs.1 lakh and for a public company the limit is Rs.5 lakh. Not specified
Foreign Nationals as shareholder / Partner Foreign nationals cannot form partnership firm. Foreign nationals can be shareholders. Foreign nationals can be shareholders. At least one of the designated partners shall be a resident in India.
Dissolution By agreement of the partner, insolvency or by court order. Very procedural. Voluntary or by order of National Company Law Tribunal. Less procedural compared to company. Voluntary or by order of National Company Law Tribunal.
Annual Return No returns to be filed with the Registrar of Firms. Annual Accounts and Annual Returns to be filed with ROC. Annual statement of accounts and solvency & Annual Return has to be filed with ROC.
Whistle Blowing No such provision. No such provision. Protection provided to employees and partners who provide useful information during the investigation process.
Other advantages of LLP
  • Limitation on Liability of individual Partners
    The LLP will be a separate legal entity, liable to the full extent of its assets, with the liability of the partners being limited to their agreed contribution in the LLP which may be of tangible or intangible nature or both tangible and intangible in nature. No partner would be liable on account of the independent or un-authorized actions of other partners or their misconduct. The liabilities of the LLP and partners who are found to have acted with intent to defraud creditors or for any fraudulent purpose shall be unlimited for all or any of the debts or other liabilities of the LLP

  • Conversion of partnership firm into LLP.
    The conversion of partnership firms into LLP would have no tax implication if the rights and obligations of the partners remain the same after conversion and if there is no transfer of any asset / liability after conversion. If there is a violation of these conditions, the provision of section 45 (Capital Gain) would apply.

    Tax Liability of partners at the time of liquidation of LLP
    The liability of the partner in respect of recovery of tax , at the time of liquidation of LLP, would be joint and several , except where the partner is able to prove that the non –recovery of tax cannot be attributed due to gross neglect / misconduct on the part of the partner.

    It may be observed that by virtue of the proposed provision, an LLP would not be subject to the following provisions which are applicable only to companies.

  • Dividend Distribution Tax (DDT )
    DDT is payable by resident companies on distribution of profits to its shareholders. As an LLP is not a company, DDT would not be applicable on distribution of profits by an LLP.

  • Deemed Dividend
    Transaction involving distribution by a company of accumulated profits entailing release of all / any part of asset to its shareholder / distribution to shareholders at the time of reduction in capital / payment of advance / loan to a shareholder etc, are normally categorized as ' deemed dividends' as per the provisions of the Income Tax Act,1961. Again as this provision is applicable only to companies, LLP would not be affected.

  • Carry forward / set – off Losses
    Business losses arising to an assessee is eligible to be carried forward for sett-off against profits from business in future years. However, in case there is change in shareholding of more than 51% in company in the year of carry forward / set-off of loss arises, then such carry forward / set off of losses is not permitted. As such provision are applicable only to companies , there would not be any implications for an LLP and it would be able to carry forward / set – off losses as per the provisions of the Act.

  • Audit of LLPs
    Now the Limited Liability Partnership form has opened the door for manufacturing sector to enjoy the dual advantage of less compliance with higher access to credits in the market. Another advantage for SMEs ( Small and Medium size Enterprises ) is that unlike Companies only, the Limited Liability Partnership having turnover in excess of Rs.40 or contribution exceeding 25 lakhs per annum will have to get their accounts audited, thus providing a step ahead in the flexibility.
The LLP model has the potential to effectively act as an engine of growth for the economic development of country and is likely to foster the growth of professional services in the country. LLP, as an alternate business model, will encourage joint ventures and make Indian services sectors globally competitive. However, it remains to be seen as to how the law makers would address certain relevant issues before the idea gains full momentum.