A comparison of LLP Vs other forms (Company / Partnership)

Transcription

1 A comparison of LLP Vs other forms (Company / Partnership) By: Rajesh Batra Head, Centre for MSME

2 Comparative Chart showing the difference between the three forms of business organization Features Governing Law Registration Nature/Status The Company s Act, 1956 and Rules made therein Compulsory registration required with the ROC. Certificate of incorporation is the conclusive evidence. Company is a body corporate formed and incorporated under the Company s Act, 1956 and which has a legal entity separate from its members having perpetual succession and the liability of its members shall be limited. The Indian Partnership Act, 1932 and various Rules made there under. Registration is not mandatory. Unregistered partnership firms shall not have the ability to sue. Partnership is a relation between persons who have agreed to share the profits of business carried on by all or any of them acting for all with unlimited liability. The LLP and various Rules made there under Compulsory registration is required with the ROC. An LLP is a body corporate formed and incorporated under the LLP Act and which has legal entity separate from that of its partners having perpetual succession and the liability of its partner shall be limited.

3 Comparative Chart showing the difference between the three forms of business organization Features Name Change of name Change of the registered office within the same state. Public company: to end with the limited private company : to end with the words private limited The name of the company can be changed by a special resolution and with the prior approval of the Central Government. (Section 21) Company can change its registered office from one place to another within a State only upon confirmation by the Regional Director (Section 17 A) No guidelines. The name can be changed. Name to end with LLP Limited Liability Partnership The name of the LLP can be changed by filing with the Registrar a notice of such change of name in the prescribed form and manner along with the payment of an application fee as LLP Rules (Section 16) LLP may change the place of its registered office by following the procedure laid down in the LLP Agreement and file the notice of change with the Registrar in the prescribed form and manner and such change shall take effect only upon such filing. (Section 13(3) read with Rule 17(1) & (2)

4 Memorandum and Articles of Association / LLP Agreement Internal Governance structure Management ownership distinction Minimum paid-up Capital / Contribution Memorandum and Articles of Association is a charter of the company which, inter alia, defines the objects and scope of operation of the Company. Regulated the Articles of Association, which are based on the provisions of the Companies Act, The management of the affairs of the company ought to be conducted through board/shareholders meetings, resolutions other defined provisions etc. Inherent in the company. Through enactment of Companies (Amendment) Act, 2015 notified on 25 th May, 2015, the amendment included Omitting requirement for minimum paid up share capital at time of incorporation. No minimum capital prescribed LLP Agreement is a charter of the LLP which specifies the mutual rights and obligations between LLP and its partners, and partners inter se. Governed by an agreement between partners / between LLP and the partners (LLP Agreement). No statutory stipulations. LLP offers far greater flexibility. There is no distinction between management and the ownership. No minimum capital prescribed

5 Legal entity status and Perpetual succession. Legal Proceedings (Capacity to sue and to be sued) Purchase of property Ownership of assets Company is a Separate legal entity, separate from its members and directors. Company can sue and be sued in its own name. Company can purchase movable/immovable property in its name. Company has ownership of assets and members own share in the company. A partnership firm is neither a separate legal entity nor has a perpetual succession. It is not distinct from the several persons who compose it. Only registered partnership can sue. Partnership firm cannot purchase movable or immovable property in its name, the same must be purchased in the name of its partners. Partners have joint ownership of all assets. LLP is a Separate legal entity, separate from its partners and designated partners and has perpetual succession LLP is a separate legal entity and therefore, can also sue and be sued in its name, without involving the partners. LLP can purchase movable/immovable property in its name. LLP has ownership of assets and partners own capital contribution in the LLP.

6 Agency relationship Director identification Number (DIN)/Designated Partner Identification Number (DPIN) Digital Signature Certificate (DSC) Offences Compounding of offences Directors act in fiduciary capacity. Each Director is required to have a DIN before being appointed as a Director of a company. At least one Director of the Company should have a digital signature, required for e-filing of documents. Company/Directors are liable for offences committed under the Companies Act. Offences punishable with fine are compoundable. The partners are not required to obtain n any identification number. Not applicable Documents are filed manually. Partners are personally liable. Joint and severe liability of partners. Partners are considered as agents of an LLP, not of other partners. Each designated partner is required to have a DPIN (which includes DIN issued under section 226A, 226B and 266E of the Companies Act, 1956) before being appointed as a designated partner of an LLP. If a person holds both DIN and DPIN, his DPIN shall stand cancelled and DIN shall be sufficient for being appointed as Designated Partner under LLP Act. At least one designated partner should have; a digital signature, required for e-filing of documents. LLP/Partners/designated partners are liable; for offences committed under the LLP Act. Offences punishable with fine are compoundable.

7 Formalities of incorporation Various documents / declarations executed in prescribed formats prefilled in e-forms (including consent of Directors) are required to be filled with the ROC along with the filing fee. The MOA and AOA are required to be filed as per provisions of the Companies Act. The procedure is mentioned in detail in Part II of the Companies Act (Incorporation of Company and Matters Incidental Thereto.) In case of registration, partnership deed along with form/affidavit required to be filed with Registrar of firms along with requisite filing fee. Various documents / declarations executed in prescribed formats prefilled in designated e- forms(including consent of designated partners) are required to be filled with the ROC along with the filing fee. The incorporation document is akin to the MOA of a company. In addition, LLP Agreement is to be filled. The procedure is mentioned in Chapter III of the LLP (Incorporation of Limited Liability Partnership and matters incidental thereto.)

8 Formation for charitable / notfor-profit activities. Liability status of members / Partners A company can be formed with notfor-profit/charitable purposes (popularly known as section 25 Companies) Limited to the extent of unpaid capital (to the extent of unpaid amount on shares held by them) Unlimited, can extend to the personal assets of the partners Profit motive is essential. According to Section 11(1)(a) of the LLP Act, an LLP to be incorporated there has to be two or more persons associated for carrying on a lawful business with a view to profit. In view of this, an LLP structure is not available for nonprofit activities like philanthropy or trust. Liability of partners Limited to the extent of their contribution to the LLP (capital contribution) However, in case a partner acts with an intention to defraud creditors or any other fraudulent purpose, then the LLP and the partner who acts in such a manner shall have unlimited liability. Every partner shall indemnify the LLP for any loss caused to it by his fraud in the conduct of the business of the LLP.

9 Power of members/partner s/directors Rights/duties/obli gations of Directors/partner s/designated partners. No. of shareholders/partners Directors have power to conduct day-to-day affairs of the Company. Members practically have no say in the day-to-day affairs of the company. Members exercise their powers on the matters which require their approval in a shareholders meeting or through postal ballot. Rights/duties/obligations of Directors are largely governed by the AOA and resolutions passed by shareholders or Directors. Private company: minimum of 2 shareholders Maximum of 50 shareholders. Public Company: minimum of 7 shareholders & no limit for max. No. of shareholders All partners have day to day management or as specified in partnership deed, if any. Rights/duties/obligatio ns of the partners is governed by the Partnership deed partners (After Companies Act, 2013, the maximum number of partners in case of partnership would be 100) The powers of partners / designated partners to conduct the day to day affairs of the LLP are set forth in the LLP Agreement. Rights / duties / obligations of Directors are governed by the LLP Agreement. Partners not to compete with the LLP by carrying any other business of similar nature. Partners to account to the LLP for any unjust enrichment. Minimum of 2 partners and no maximum limit

10 Foreign nationals as shareholders/ partners Designated Partners/Director s /Managing Partners Need for Designated Partner / Director / Managing Partner to be a partner / Member. Foreign nationals can be shareholders Minimum 2(two) Directors in case of a Private company and minimum 3 (three) in case of a public company. Appointment of Managing Director, Whole-time Director or Manager to be made in case of public companies having paid-up share capital of Rs. 5 crore or more. Further, appointment of Company Secretary is mandatory in case of companies having paid up share capital of Rs. 5 crore or more. Director need not be a member / shareholder of the company. Foreign nationals can not form partnership firm No cap on the minimum number of managing partners. Managing Partner shall be a partner of the firm. Foreign nationals can be partners. Managing 2 (two) designated partners. No other mandatory requirement viz. Appointment of Managing Partner, Whole-time Partner, Manager or Company secretary. Designated partner has to be a partner of the company. However, in case of body corporate partner, the designated partner need not be a partner of the LLP.

11 Change in Directors/partner s/ designated partners Cessation as partner/member Transferability/as signment of interest in a company/llp Notice of change of Director is to be given to the ROC. A member/shareholder shall cease to be member if he sells his shares. Share of every company (except in case of a private company) are freely transferable. Notice of change of partners should be given to Registrar of firms, particularly in the case of registered partnership firms. A person can cease to be a partner and will be entitled to his share of profit and capital at the time of retirement Transferability of interest subject to manual consent of all members. Notice of change in partner / designated partner is to be furnished to the Registrar. A person may cease to be a partner of an LLP in accordance with an agreement with the other partners, or, by giving notice in writing of not less than 30 days to the other partners of his intention to resign as a partner. Rights/interests of partners in LLP are transferable as per the provisions of the LLP agreement.

12 Transfer of shares / partnership rights in case of death Share Certificate In case of death of a member, shares are transmitted to the legal heirs by operation of law. Right/interest of the members in the company is evidenced by the accompanying share certificate(s) There are no provisions for issuing of share certificate. Rights/interest of the partners in the firm are evidenced by partnership deed, if any. In case of death of a partner, the legal heir shall be entitled to receive an amount equal to the capital contribution of the former partner actually made to the LLP along with his right to share in the accumulated profits of the LLP. There are no provisions under the LLP Act for issuance of share certificate. Rights/interest of the partners in the LLP are evidenced by the LLP agreement.

13 Taxation and Taxability Company is treated as a separate taxable entity under the Income-tax Act, Income Tax rate for Company upto Rs. 50 Cr Turnover is 25% from current Taxed as Firm at 30% + cess = 30.9% The surcharge is 12% if the income is more than Rs. 1 Cr. LLP is treated as a partnership firm under the income-tax Act, The income is taxed at 30% + cess = 30.9% (effective A.Y ) The surcharge is 12% if the income is more than Rs. 1 Cr. financial year. Surcharge : If the income is more than 1 Cr. But less than 10 Cr., Surcharge is 7% If the income is more than 10 Cr., the surcharge is 12% Cr. But less than 10 Cr., Surcharge is 7% Dividend/Profit Subject to Dividend Distribution Tax, Dividend/Profit share Dividend/Profit share is exempt. share which is 20% (approx.) after grossing up and Surcharge. is exempt. Wealth Tax Applicable Not Applicable Not Applicable

14 Meetings Minutes Quarterly board of directors meetings and annual shareholders meeting is mandatory and as per the provisions of the Companies Act. Decisions taken in the meeting of Board of Directors / shareholders must be recorded within the time prescribed under the Companies Act. Not required As per the provisions of LLP Agreements. LLP to follow the timelines for recording of decisions of partners/designated partners as provided in the LLP Agreement. In the absence of any such provision, the first schedule of the LLP Act provides that every LLP shall ensure that decisions taken by it are recorded in the minutes with in 30 days of taking such decisions and are kept and maintained at the registered office of the LLP.

15 Voting rights Authority to conduct business Voting rights are in proportion to the shares held by members. Individual member or nonexecutive/nominee Director does not have authority in conduct of business of the company. LLP Agreement may specify the manner of voting and the voting right of partners. First Schedule of LLP Act, however, provides that any matter or issue relating to the LLP shall be decided by a resolution passed by majority in number of the partners, and for this purpose, each partner shall have one vote. However, no change may be made in the nature of business of the LLP without the consent of all the partners. Unless the LLP Agreement provides, To the contrary, every partner may take part in the management of LLP.

16 Admission as a partner/member Filing of Annual accounts and Annual Return Compromise/arra ngements/merger s/amalgamation A person can become a member by subscribing to, or buying shares in the company. Annual Accounts and Annual Return to be filed with ROC annually in the prescribed format. Provision for compromise/arrangement/mergers and amalgamations for companies in Part VI, Chapter V of the Companies Act. (Arbitration, Compromises, Arrangements and Reconstructions) No Returns to be filed with the Registrar of Firms There are no provisions under the Indian Partnership Act for compromise/ arrangements or reconstruction of partnership firms) A person can be admitted as a partner as provided in the LLP Agreement. In the absence of any provision in the LLP Agreement to the effect, the first schedule of the LLP Act provides that no person may be introduced as a partner without the consent of all the existing partners. Annual statement of accounts and solvency & annual returns has to be filed with ROC annually in the prescribed format. Form # 8 Provisions exist for compromise/arrangement/merger/ amalgamation for LLP in Chapter XII of the LLP Act. (Compromise, Arrangement or Reconstruction of Limited Liability partnership)

17 Books of Account Manner of keeping books of Account Preservation of books of account Jurisdiction of NCLT, when constituted Audit Books of Account to be prepared and Not applicable Books of Accounts to be prepared maintained as specified in the and maintained as specified in the Companies Act. LLP Act. Accrual basis and double entry Cash basis or accrual basis and system of accounting. (Section double entry system of accounting. 209(3)(b)) (Section 34(1)) 8 years (Section 209(4A)) 8 years (Rule 24(3)) NCLT shall have jurisdiction over the affairs of the company. As per provisions of the Companies Act, 1956, books of account are required to be audited annually. Compulsory, irrespective of share capital and turnover Not compulsory NCLT shall have jurisdiction over the affairs of the LLP. As per provisions of the LLP Act, books of account are required to be audited annually. Exemption from audit given to small-size LLPs if the contribution is above Rs 25 lakhs or if annual turnover is above Rs 40 lakhs.

18 Profit sharing / remuneration How do the bankers view Dissolution /Winding up Remuneration can be given to the executive / non-executive Directors in accordance with the provisions of the Companies Act. High creditworthiness, due to stringent compliances & disclosures requirements Very procedural. Either voluntary or by order of National Company Law Tribunal (Part VII of the Companies Act), a company can be wound up. Winding up cases to be heard by 2- member Bench instead of a 3- member Bench in NCLT. The firm can pay remuneration to its partners. Creditworthiness depends on goodwill and credit worthiness of the partners By agreement of the partners, insolvency or by Court order Profit sharing / drawings to be as per the LLP Agreement. In the absence of any provision to the effect in the LLP Agreement, the first schedule provides that all the partners of an LLP are entitled to share equally in the capital profit and losses of the LLP. Remuneration of partners should be as per the LLP Agreement. Perception is higher compared to that of a partnership but lesser than a company Less procedural compared to company. A LLP can be wound up Either voluntary or by order of National Company Law Tribunal. (Section 63)

19 Dissolution by an act of partner Conventional partnership firms, being very small in terms of number of partners, are usually dissolved upon death/exit of any of its partners. Continuance of LLP is not affected by the acts of its partners. The retirement or death of a partner would not dissolve the LLP.

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