Chapter 4. Limited Liability Partnership (LLP) The Indian Scenario

Transcription

1 Chapter 4 Limited Liability Partnership (LLP) The Indian Scenario Section A: Evolution of LLP form of Business Structure in India In the era of competitive globalised market, India has many choices at her disposal to determine her future growth path. The selection of the growth path and how to follow that would depend on the common understanding of the government, the private initiative and the civil society. India has rich knowledge base and can focus on such policies and strategies that can make effective use of that knowledge base. This would increase the productivity of the entire economy and lead to welfare of the population. This, in turn, would help India to be at par with the other countries that are moving towards knowledge economy. Joint stock company, sole proprietorship and partnership forms of organisation exist in both manufacturing and service sectors which contribute towards Indian economic development. An innovative form of business structure in the form of LLP, combining the benefits of the corporate form and the partnership structure will provide opportunities for the development of India s knowledge sector, particularly for the professionals. In today s scenario, investment and services are not restricted within the territorial boundaries and flow across borders. This has lead to the fast growth of knowledge-based enterprises and international competition. Thus, the LLP structure would be a relief to the Indian entities especially for the professionals. The professionals originally were prevented from participating in the corporate form of organisation. Thus, being a proprietor of an organisation or a partner in a general partnership firm was a risky affair for the professionals. This is because these types of organisations suffer from unlimited personal liability of the proprietor or the partner(s). It is for this reason the firms of professionals like the accountants, lawyers, etc., in India have not grown in terms of size and competence to face international competition effectively ( India has observed considerable growth in the recent years and the quality of her professional manpower has been acknowledged globally (Patanjaliassociates.com/uploaded files/news/ pdf). Thus, a need was felt to provide the professionals with an organisational vehicle that would combine 87

2 entrepreneurship knowledge and risk capital, leading to India s growth. Since professionals are not allowed to participate in the company form of organisation and there are several disadvantages associated with the partnership form, the legislators thought of introducing the LLP form of organisation to balance between the two ( In 1957, the iron, steel and hardware merchants chambers gave a suggestion to introduce the LLP legislation before the 7 th Law Commission on the Indian Partnership Act, They raised the issue of introduction of the LLP legislation since the private limited companies were facing problems vis-a-vis the framework of the Companies Act. In fact, some of the requirements of the said Act like clauses on compulsory presence of Company Secretaries (CSs), directors and shareholders interest protection, etc., have created difficulties for the private limited companies. It was rejected outright since it would nullify the whole purpose of amendment of the Companies Act ( LLP has been a matter of discussion for many years and this is evident from the reports of the various committees. In India, the committees that have recommended the LLP structure in various ways for various entities are mentioned below. 1. Bhat Committee (1972) 2. Naik Committee (1992) 3. Expert Committee on Development of Small Sector Enterprises (SSEs) headed by Abid Hussain (1997) 4. Study Group on Development of SSEs headed by Dr. S. P. Gupta (2001) 5. Two committees set up by the Ministry of Company Affairs (MCA) have also suggested legislation on LLP, namely, Committee on Regulation of Private Companies and Partnerships headed by Naresh Chandra (2003) and Committee on New Company Law headed by Dr. J. J. Irani (2005). The Bhat Committee (1972) suggested limited liability for small-scale industrial entrepreneurs so that more people would be induced to invest in the small-scale sector. Later, the Naik Committee (1992) also recommended legislation for LLPs. The Expert Committee on Development of SSEs (1997), headed by Abid Hussain, recommended the enactment of the Limited Liability Partnership Act so that the SSEs would have access to additional funds raised from the persons investing in the 88

3 partnership firms as sleeping partners. Thereafter, the Study Group on Development of SSEs (2001), headed by Dr. S. P. Gupta, felt the need of the professionals to practise in limited liability entities. The Study Group observed that since the Indian professionals are having exposure to international transactions, representing multinationals, they should be able to do it without any apprehension of excessive liability. Moreover, the Study Group also felt that the maximum limit to the number of partners in a partnership firm is acting as a deterrent for the professionals and affecting their growth. Soon the Committee on Regulation of Private Companies and Partnerships (2003), headed by Naresh Chandra, popularly known as the Naresh Chandra Committee II, developed the concept of LLP in India. That Committee observed that operating through partnership firms with unlimited liability in the litigious market environment is unattractive and risky. Moreover, in order to encourage the professionals like lawyers, chartered accountants, etc., so that they can compete with their international counterparts, the option of LLP should be given to them. Finally, the Committee on the New Company Law (2005), popularly known as Dr. J. J. Irani Committee, felt the need for a separate legislation for LLP in India. The Naresh Chandra Committee II observed the importance of LLP in the service sector and the Dr. J.J. Irani Committee focused on the importance of LLP for small enterprises not seeking capital through listing in the stock exchanges. The Naresh Chandra Committee II felt that the option to practise through LLPs should be extended initially to the professionals only. After the evaluation of inherent advantages and risks, the option could be extended to the small-scale manufacturing and trading businesses. However, the LLP Bill gave importance to the recommendations of the Dr. J. J. Irani Committee by extending the option of LLP beyond professionals and making it a general-purpose business vehicle ( The two main reasons advocated by the Naresh Chandra Committee II for the introduction of LLP in India are (i) the risk factor advantage associated with this structure and (ii) increased global competitive advantage that an LLP offers to the professionals like accountants, lawyers, etc. Firstly, the partners of an LLP are protected from incurring any liability due to misconduct and fault of other partners. This protection from joint liability that exists in a general partnership firm is the most attractive feature of an LLP especially in a litigious market environment. The feature 89

4 of unlimited personal liability in a general partnership firm is the main hurdle that the firm of accountants, lawyers, etc., face, which prevent their growth. As a result, they are unable to meet the international challenges in a globalised environment. Secondly, the professionals originally were prevented from practising in the form of an incorporated entity. With the advent of globalisation, the professionals are competing in the international arena. To enable them to compete more effectively, without the apprehension of incurring excessive liability, a structure like LLP seems a positive move in the desired direction. The Indian Partnership Act, 1932, stipulates the maximum number of partners in a firm to be 20. This provision acts as an obstacle in the growth of a firm of professionals. Moreover, though section 11 of the Companies Act allows more than 20 members, as already stated, the professionals are restricted to function through the company form of organisation. The Dr. J. J. Irani Committee suggested removal of section 11 of the Companies Act and enactment of a separate Act for addressing various issues of LLP. The Dr. J. J. Irani Committee advocated a statute for LLP to accelerate the growth of the service sector and to encourage the development of SSEs so that they can face the global competition ( The Naresh Chandra Committee II suggested that the LLP form should be first available to the firms providing professional services and not to the trading and manufacturing sector to begin with. The Committee had cited three reasons for its suggestion. Firstly, since the professionals are not allowed to practise in any other incorporated form due to regulatory restrictions like the trading and manufacturing businesses, they should get the benefit of the LLP structure first. Secondly, the professionals are governed by the respective regulatory bodies for the professionals. These regulatory bodies effectively monitor their professional conduct, prescribe code of ethical conduct for them, etc. Thus, introduction of the LLP structure for the professionals will be less risky. After evaluation of the preliminary advantages and disadvantages of the new structure, the LLP form may be introduced in other sectors. Thirdly, according to the said Committee, the LLP structure does not offer any special benefit to the SSEs as the Committee had already advised relaxation of various norms relating to small private companies. However, the recommendation of the Naresh Chandra Committee II was not accepted while drafting the LLP legislation in India. LLP is a general-purpose vehicle in India and the structure is not confined only to the 90

5 professionals. Internationally, LLP is a general business structure. It is a remedial measure and a helpful alternative to the unlimited business organisational structures. It is expected that the entities will shift to this innovative organisational structure after careful evaluation of its inherent advantages and disadvantages (ibid.). The MCA, after careful evaluation of the suggestions of the various committees, drafted The Concept Paper on LLP on 2 nd November, This move was initiated to invite public comments and opinions over the ideas that would be incorporated in the LLP Bill. The LLP Bill was drafted keeping in mind the U.K. s LLP Act, The Concept Paper received positive response from researchers. (Viswanathan, 2006). On the one hand, the Concept Paper had tried to blend the advantages of the partnership form and the company form in the LLP structure and, on the other hand, it had tried to lessen the drawbacks and limitations of those two forms. The LLP form as drafted in the said Concept Paper provides the protection to its partners in terms of limited liability, the flexibility relating to management of internal affairs and reduces various regulatory hassles that a company is to face. Moreover, the LLP form as suggested in the Concept Paper also does away with the feature of separation of ownership and management. According to the Concept Paper, a partner of an LLP is an agent of the LLP but he/she is not an agent of the other partners. Thus, he/she is not responsible for the acts of the other partners. The Concept Paper highlights that, in accordance with the recommendations of the various committees, the LLP form is suggested primarily to meet the demands of the SSEs and the professionals ( The responses to this Concept Paper on LLP form the basic foundation of the first draft of the LLP Bill, 2006 ( Thereafter, on 1 st May, 2008, the Cabinet approved the introduction of the revised LLP Bill, 2008 in Parliament ( Finally, the LLP Bill was placed before the Rajya Sabha on 21 st October, 2008 and it was passed by the Rajya Sabha on 24 th October, Soon after this, the Bill was introduced in the Lok Sabha and was passed without any change. On 7 th January, 2009, the Bill received the assent of the President and was eventually notified in the Official Gazette in The Limited Liability partnership Act was put into force by the Central Government on 31 st March, However, the Rules framed were made 91

6 effective from 1 st April, It is through this chain of events and incidents that the LLP form of organisation was introduced in India (Sen and Mathen, 2011). Section B: Overview of the LLP Law in India The innovative business structure in the form of LLP was introduced in India by the enactment of the LLP Act, It is known that this Act received the President s assent on 7 th January, 2009 and was, thereafter, notified in the Official Gazette. The salient features of this hybrid business entity in the form of LLP have been stated below. a) LLP is a body corporate that is formed and incorporated under the LLP Act, This business vehicle possesses separate legal entity distinct from its partners and enjoys perpetual succession. At least two persons (natural or artificial), intending to carry on a lawful business, can form an LLP in accordance with the requirements of this Act. b) LLP in India is governed and regulated by a different statute and, therefore the Indian Partnership Act, 1932, is not applicable to it. The agreement between the partners in an LLP is the deciding factor and the backbone of the concerned LLP. c) Though LLP in India is a general-purpose business entity, it is primarily suited to meet the needs of the professionals like the Chartered Accountants (CAs), Cost and Management Accountants (CMAs), Company Secretaries (CSs), Advocates, etc. Moreover, this unique organisational vehicle allows the formation of multi-disciplinary LLP. d) Since LLP is a blend of partnership and company structure, it enjoys the organisational flexibility of the partnership structure and the separate legal personality of the corporate structure. e) An LLP in India should keep the words Limited Liability Partnership or LLP at the end of its name. f) Though the LLP agreement is the constitution document of the concerned LLP, it is not compulsory for an LLP to draft it. In the absence of the LLP agreement, the mutual rights, duties and obligations of the partners will be governed by Schedule I to the LLP Act, g) As already stated, an LLP must have at least two partners. Minimum of two individuals are required in an LLP to act as designated partners out of which, 92

7 at least, one of them should be resident in India. There is no maximum limit to the number of partners or designated partners. h) The partners of an LLP are agent of the LLP but they do not act as agents of the other partners. i) A partnership firm, a private limited company and an unlisted company can convert into an LLP in accordance with the Sections 55, 56 and 57 of the LLP Act, 2008, along with the Schedules II, III and IV. j) An LLP is not required to obtain prior approval of the Central Government to increase the number of designated partners. k) The winding up of an LLP can be done voluntarily or by following the order of the Tribunal as per the Companies Act ( and Barve, 2013). According to the LLP Act, 2008, LLP is a partnership formed and registered under this Act. Thus, in order to be treated as an LLP, there are two basic requirements. These two stipulations are existence of partnership and the need for its registration. So registration of an LLP is mandatory according to the Act and the certificate of incorporation is the conclusive evidence of its formation and registration. Sections 11 and 12 of the Act deal with the requirements of incorporation of an LLP. It is already known that two or more persons intending to carry on a lawful business may form an LLP. The registering authority in this regard is the Registrar of Companies (ROC). The ROC will register an LLP and issue the certificate of incorporation within fourteen days on compliance of all stipulations under the Act. After an LLP is registered, it must ensure that its name, address (of the registered office), registration number and a statement that it is registered with limited liability are present in all its documents and official correspondences. For incorporation, it is necessary to file the Incorporation Form 2 (incorporation document and subscriber s statement) with the ROC (ibid.). An individual or a body corporate is eligible to be a partner of an LLP. The term body corporate, according to the Act, includes a company as defined in Section 3 of the Companies Act, an LLP formed and registered under the Act, an LLP incorporated outside India and a company incorporated outside India. Individuals may 93

8 be resident or non-resident in India. If a body corporate is a partner of an LLP, it should nominate a natural person as its nominee for the purposes of the LLP (ibid.). An LLP must have, at least, two individuals as its designated partners. Out of such designated partners, at least, one of them should be resident in India. In a situation, where all the partners of an LLP are bodies corporate or where there is one individual partner and other partners are bodies corporate, such bodies corporate shall appoint nominees to act as designated partners of the LLP. The functions and the role of the designated partners would be to ensure that an LLP complies with and fulfils all the requirements of the Act like filing of document, return, etc. It is mandatory for all the designated partners of a proposed LLP to obtain the Director Identification Number (DIN) by filing the e-form DIN 1. Previously, it was necessary for the designated partners to obtain the Designated Partner Identification Number (DPIN) from the Central Government. If a person is allotted with both the DIN and the DPIN, then the DPIN will stand cancelled. If a person already possesses DIN before agreeing to act as a designated partner of an LLP, the same DIN can be used for the purpose of this Act. Before the commencement of the incorporation formalities for an LLP, the prospective designated partners should obtain the DIN. All the documents that are required to be filed by an LLP should have the digital signatures of the persons authorised to sign on behalf of the LLP. Thus, the designated partners should acquire and register the Digital Signature Certificate (DSC) (ibid.). According to the LLP Act, 2008, every partner is an agent of LLP but he/she does not act as an agent of the other partners. Hence every partner has the ability to bind the LLP on the basis of his/her acts subject to the rules set out in the LLP Agreement. If a partner carries out any lawful act in the normal course of business, then the LLP, the concerned partner and the other partners will be held liable only to the extent of their shares in the LLP. If any unlawful or wrongful act is carried out by any partner in the normal course of business or within his authority, then the LLP would be held liable and the other partners are held liable only to the extent of their share in the LLP. The faulty partner will incur unlimited liability that may extend to his personal assets as well. Lastly, if any act is carried out by any partner without authority, then only the concerned partner will be personally liable to meet the same. The LLP and the other partners cannot be called upon to meet any claim arising from the above act ( 94

9 Each partner s contribution to an LLP may consist of tangible or intangible property, movable or immovable property, any benefit to the LLP including money, promissory notes or any contract for services performed or to be performed. The quantum of contribution and the obligation to contribute by each partner shall be in accordance with the LLP agreement. In the absence of anything to the contrary in the LLP agreement, all the partners are entitled to share profits equally and are obliged to contribute equally and share losses equally (ibid.). As already stated, every LLP must have the terms Limited Liability Partnership or LLP at the end of its name. An LLP should not have a name that, in the opinion of the Central Government, is undesirable or is similar to a name of a partnership firm, another LLP, any other body corporate or a registered trademark or a trademark that for which an application of registration has been made by another person as per the Trademarks Act, A person is required to apply to the ROC for reservation of a name for a proposed LLP by filing Form 1 (Application for Reservation or Change of Name). The ROC will reserve the name for three months if it is satisfied regarding the compliance of different formalities subject to certain conditions. An LLP is also provided with an option to change its name by following the procedure laid down in the LLP Act, 2008, and the LLP Agreement (ibid.). The LLP agreement is the principal document of an LLP that describes the rights and duties as given in the First Schedule. It is a written statement that depicts the mutual rights and duties so far as the partners are concerned and the rights and duties so far as the relationship between an LLP and its partners is concerned. After the incorporation of an LLP, an initial LLP agreement is to be filed within thirty days of the incorporation in Form 3 (Information with regard to Limited Liability Partnership Agreement and changes, if any, made therein) (ibid.). According to Section 34 of the Act, an LLP has to maintain its books of accounts for every financial year at its registered office. The required books of accounts may be kept on cash basis or on accrual basis of accounting. An LLP has an obligation to prepare a Statement of Accounts and Solvency every year. Such Statement of Accounts and Solvency should be signed by the designated partners and should be submitted to the ROC every year. It is also compulsory for an LLP to file the Annual Return in Form 11with the ROC within sixty days from the close of the financial year. 95

10 The accounts of an LLP shall be audited according to Rule 24 of the LLP Rules, Such rules provide that, if the turnover of an LLP does not exceed forty lakh rupees in any financial year or the amount of contribution does not exceed twenty five lakh rupees, then such LLP may not audit its accounts. If the partners of such LLP decide to audit its accounts at their own discretion, such audit shall be carried out in accordance with the rules prescribed. But it is important to note that the turnover limit needs to be raised to one crore rupees to bring parity with the provision relating to tax audit given under the Section 44AB of the Income Tax Act, If the accounts of an LLP are not audited, then the partners shall include, in the Statement of Accounts and Solvency, a statement of acknowledgement stating that all the requirements of the Act and the Rules regarding preparation of accounts have been complied with. A certificate in Form 8 should also be filed by the partners of an LLP along with the above mentioned statement (ibid.). A partner is given an option to transfer his/her right to share profits and losses of an LLP and his/her entitlement to get distributions wholly as well as partly. However, this transfer of right would not lead to disassociation of such partner from the LLP and would also not affect the existence of the LLP. Similarly, the transferee would also not have any right to participate in the internal management of the LLP and would not get any access to the LLP s transaction-related information (ibid.). According to the LLP Act, 2008, a foreign LLP (FLLP) is an LLP incorporated and registered outside India that establishes its place of business in India. An FLLP has to file Form 27 [Registration of Particulars by Foreign Limited Liability Partnership (FLLP)] for establishing its place of business in India. The designated partners of an FLLP are not required to obtain the DIN but the DSC should be obtained by the authorised representative. Such e-form 27 should be digitally signed by the authorised representative (ibid.). A firm may be converted into an LLP in accordance with Chapter X and Second Schedule to the LLP Act, A firm needs to file Form 17 (Application and Statement for the Conversion of Firm into LLP). Form 17 has to be filed with Form 2 (Incorporation Document and Subscriber s Statement). On registration of the LLP, all assets and liabilities of the firm will be the assets and liabilities of the converted LLP. The firm will automatically dissolve and, if the firm is registered under the Indian 96

11 Partnership Act, 1932, its name will be removed from the records. It is necessary for the converted LLP to disclose the name of the firm, the registration number of the firm (if any) and submit a statement stating the fact that it was converted from a firm on all its official correspondences for a stipulated period of 12 months from the date of conversion (ibid.). Though the Act provides for the conversion of a partnership firm into an LLP, there are some constraints and obstacles in the way of conversion that requires some consideration of the law-makers. Firstly, an LLP has the same tax treatment like a partnership firm. So a partnership firm does not have any tax-saving incentive for converting itself into an LLP. Secondly, an LLP is subjected to more disclosure requirements and the LLP agreement and some other documents are open to public inspection. Thirdly, an LLP has to comply with more legal requirements than a partnership firm. Fourthly, stamp duty is payable on conversion of a partnership firm into an LLP. Fifthly, more procedures and formalities are there for dissolution and winding up of an LLP as compared to a partnership firm. Thereafter, an LLP is subjected to more governmental intervention and scrutiny than a partnership firm. Moreover, an LLP does not have the benefit of raising money from the public. In the rural areas, an LLP generally faces the difficulty of obtaining loan from the banks since the banks in the rural areas do not recognise an LLP as a body corporate. Registration of partnership firm is not mandatory but registration of LLP is compulsory under the law. An LLP is also required to file Annual Statement of Accounts and Solvency with the Registrar every year. Moreover, an LLP has to follow various guidelines given under the Act regarding name and has to keep the terms Limited Liability Partnership or LLP at the end of its name. Cost of formation of, or conversion to, an LLP is higher than a partnership firm. Lastly, various e-forms and the LLP Agreement have to be filed with the Registrar together with the required fees (ibid.). A private limited company and an unlisted company can be converted to an LLP following the requirements laid down in the Chapter X and Third Schedule and Fourth Schedule of the Act respectively. Any private company and an unlisted company, willing to get converted to an LLP, should apply by filing Form 18 (Application and Statement for Conversion of a private company/unlisted company into an LLP). As already stated, Form 18 should be filed along with Form 2 97

12 (Incorporation Document and Subscriber s Statement). On registration, all assets and liabilities of the company are transferred to the new LLP. Consequently, the company will be dissolved and its name will be removed from the records of the ROC. Moreover, the new LLP should mention in all its official correspondences the fact of its conversion from a company and the name, registration number of the company for a stipulated time of 12 months from the date of conversion. It is to be noted that a public company does not have the option of conversion to an LLP (ibid.). Again, there are some issues that may be unfavourable to a company willing to get converted to an LLP. Stamp duty is payable on conversion of a company to an LLP. An LLP will have lesser credit worthiness than a company. Banks in the rural areas generally do not give recognition to an LLP though it is a body corporate. An LLP does not have the benefit of raising money from the public. In an LLP, transfer of ownership is more difficult than a company. The LLP agreement needs to be altered and it is to be filed with the ROC. The legal community should consider these problems as their solutions will enhance the attractiveness of the LLP structure (ibid.). An LLP can close its business by declaring the LLP as defunct and by winding up of the LLP. In a situation where an LLP intends to shut down its business or is not carrying out its operating activities for one year or more, it may apply to the Registrar for closure of its activities and removal of its name from the Register of LLPs. E-form 24 should be filed by an LLP for striking off its name under the Rule 37(1)(b) of the LLP Rules. The Registrar also has the power to strike off any defunct LLP after satisfying himself/herself the need to strike off and has reasonable cause to take the same action. In this case, the Registrar sends a notice depicting his/her intention to the concerned LLP and gives the LLP one month time from the date of such notice to make representation. The Registrar also publishes such notice or the content of the application in the official website for public information within a time frame of one month. If the Registrar does not receive any objection to the same, then he/she strikes off the name of the LLP from the Register of LLPs (ibid.). The winding up of an LLP would mean sale and disposal of the assets of the LLP and meeting its liabilities and obligations from the proceeds. Sections 63, 64 and 65 of the LLP Act, 2008, deal with the winding up requirements of an LLP. There are two ways 98

13 of winding up, namely, voluntary winding up and compulsory winding up. Under the voluntary winding up, the partners themselves decide to wind up the activities of an LLP. The compulsory winding up of an LLP is initiated by the Tribunal in the circumstances mentioned below. 1. If an LLP decides that it would be wound up by the Tribunal 2. If the number of partners of an LLP has fallen below two and this situation has continued for more than six months 3. If an LLP is unable to meet its obligations and debts 4. If an LLP has acted against the interest, sovereignty and integrity of the nation, state and public order 5. If an LLP fails to file with the Registrar the Statement of Annual Accounts and Solvency or Annual Returns for five consecutive years 6. If the Tribunal deems it fit that it is justified to wind up an LLP (ibid.) After having a brief overview of the LLP legislation in India, it is necessary to point out the advantages arising from this hybrid organisational structure. The advantages are stated below. 1. Though the LLP form has been introduced in India only in 2008, it is already a well known business structure accepted internationally and it has gained popularity mostly in the services sector. 2. The formation and incorporation of an LLP is simpler than formation of a company and burdened with less procedural and other requirements. 3. An LLP is a body corporate like a company and possesses separate legal entity distinct from its partners. An LLP and its partners are distinct in the eyes of law. An LLP is known by its own name and is not identified with the names of its partners. 4. A registered LLP enjoys perpetual succession. Partners may come and go but an LLP s existence is not disturbed until it is wound up following the provisions of the Act. 5. Since an LLP enjoys distinct legal personality, any debt incurred by an LLP is borne by the LLP only. Any business venture with the potential of incurring huge debts and becoming liable and inviting lawsuits should consider 99

14 formation of an LLP. This is because the LLP gives a layer of protection to the owners forming it. 6. The internal management of the affairs of an LLP is based on the LLP agreement. So the partners have the freedom and flexibility to manage and organise their internal affairs. The LLP Act, 2008, does not impose any mode of management on an LLP. 7. The minimum amount of contribution for an LLP is one rupee, whereas, in case of private companies, the minimum amount of paid-up capital is one lakh rupees. 8. Since an LLP is a body corporate, it is an artificial person in the eyes of law. It is capable of owning its own property(ies) and funds in its name. The partners cannot claim such property(ies) and funds in case of dispute among themselves. 9. LLP has a separate legal entity and this artificial personality gives it the right to sue others. Similarly, it can be sued by others as well. The partners do not have any obligation, if an LLP is sued for dues by the third parties. 10. In an LLP, a partner is an agent of the LLP but they are not the agents of the other partners. This means that an individual partner can bind an LLP by his acts in the ordinary course of business but cannot bind the other partners. Thus, the individual partners are not liable for the acts of the other partners and this goes a long way in protecting their interest. 11. An LLP is taxed in the same manner like that of a partnership firm. It is not subjected to Dividend Distribution Tax (DDT) and Minimum Alternate Tax (MAT). But provisions relating to Alternate Minimum Tax (AMT) are applicable to an LLP from the assessment year only if an LLP has claimed deduction under the Chapter VI-A (C) or under the section 10AA of the Income Tax Act, 1961 available to a SEZ unit. An LLP has no obligation to comply with the provisions relating to deemed dividend under section the 2(22)(e) of the Income Tax Act, Similarly, the presumptive taxation scheme under the Section 44AD of the Income Tax Act, 1961, is not applicable to an LLP. 12. Requirements for compliance are lesser in case of an LLP than a limited company. 100

15 13. Moreover, an LLP does not have any maximum limit to the number of partners. 14. There are very few requirements regarding maintenance of statutory records. 15. The partners personal assets are not claimed except in case of fraud. 16. A multi-disciplinary LLP can be formed which is a boon to the professionals. 17. An LLP is exposed to less governmental interference. 18. For an LLP, a Company Secretary need not be in whole-time practice. 19. The designated partners are not under any obligation to retire by rotation. 20. There is no mandatory requirement to conduct meetings at stipulated intervals. 21. There is no existence of specific requirements regarding related party disclosure. 22. An auditor of an LLP is not required to retire at specific interval (ibid.). Though this unique organisational form tries to pick and mix the best features of the partnership form and the company form, it is not free from limitations and drawbacks. The various drawbacks of the LLP form are stated below. 1. Any partner can bind the LLP through his actions in the ordinary course of business without the association of the other partners. 2. An LLP does not have the benefit of raising money from the general public. 3. The procedure for dissolution and winding up of an LLP is more complicated than in case of a partnership firm. 4. For every change in the constitution of an LLP (like change in partners, change in the profit-sharing ratio, change in the address), the initial LLP agreement has to be modified every time. 5. An LLP does not enjoy adequate privacy because the financial statements are required to be disclosed under the Section 34 of the LLP Act, Since LLP is rather a novel idea in India, there are some grey areas and uncertainties that require consideration of the lawmakers (ibid.). This innovative organisational structure, with all its advantages and disadvantages, is strikingly different from the partnership form and the company form. The different points of distinction amongst the three organisational vehicles are presented below. 101

16 Points of Distinction Prevailing Statute Registration Creation Legal Entity Name of the Entity Cost of Formation Partnership Company LLP Partnership in India is governed by the Indian Partnership Act, Registration is optional for a partnership firm. Partnership firm is created by contract. A partnership firm does not have separate legal entity. A partnership firm may have any name as per its choice. Cost of formation of a partnership firm is negligible. Company in India was governed by the Companies Act, However, the Companies Act, 2013, passed by the Parliament, received the President s assent on 29 th August, The Act has been notified in the Official Gazette on 30 th August, ( MinistryV2/companiesa ct.html). Registration with the ROC is mandatory for a company. Company is created by law. A company is a separate legal entity under the Companies Act 1956 and under the Companies Act A public limited company should have the word Limited in its name as its suffix and a private limited company should have the words Private Limited in its name as its suffix. Cost of formation of a company is the highest amongst the three business structures. LLP in India is governed by the LLP Act, 2008 and various rules made there under. Registration with the ROC is compulsory for an LLP. LLP is created by law. An LLP is a separate legal entity under the Act. An LLP should have the words Limited Liability Partnership or its acronym LLP at the end of its name. Cost of formation of an LLP is lesser than that of a company but higher than that of a partnership firm. 102

17 Points of Distinction Perpetual Succession Principal Document Common Seal Partnership Company LLP A partnership firm does not have perpetual succession as it depends upon the will of its partners. The partnership deed is the main document of the firm that defines its operations, and rights, duties and relationships so far as the partners are concerned. There is no concept of common seal in partnership. A company has perpetual succession. Members may come and go but the company continues. The Memorandum of Association and the Articles of Association are the two constitutional documents of a company. It indicates the signature of the company and it is compulsory for every company to have a common seal. An LLP has perpetual succession and the entry and/or exit of the partners from the LLP do/does not affect its existence. The LLP agreement is the principal document of an LLP that depicts the scope of its operations and rights and duties of the partners vis-a-vis the LLP. On registration of an LLP, if it desires, it may have its own common seal and this will again indicate its signature. 103

18 Points of Distinction Incorporatio n Formalities Legal Action Partnership Company LLP A partnership firm seeking registration will fill in the prescribed form signed by all the partners, file a true copy of the partnership deed with the Registrar of Firms and submit the same with the prescribed fees. A partnership firm may be sued by the third parties. But only a registered firm can sue the third parties. A company shall file with the ROC its Memorandum of Association and Articles of Association along with certain statements in the prescribed form with the prescribed fees for its incorporation. Companies Act, 2013 requires a Declaration under Section 11 in Form No. 21 to be submitted to the ROC. The declaration should state that the subscribers to the Memorandum of Association have paid for the value of shares agreed to be taken up by them to make the minimum paid-up capital of Rs for a private company and Rs for a public company ( net/divyangmajmudar/ companies-act and-llp-a-comparativestudy ). A company can sue and be sued in its own name. An LLP shall file the incorporation document, a true copy of the LLP agreement with the prescribed fees with the ROC to incorporate itself. Declaration is not required to be submitted to the Registrar. Minimum contribution by the partners can be even Re. 1. Annual return should be submitted before the end of May every year showing the obligation of the partners to contribute and the actual contribution made by them in the LLP ( are.net/divyangmaj mudar/companiesact-2013-and-llp-acomparative-study ). An LLP can sue and be sued in its own name. 104

19 Points of Distinction Number of Members Ownership of Assets Rights, Duties, Obligations of the Partners, Managing partners, Directors, etc. Partnership Company LLP Minimum of two and a maximum of ten partners in case of banking business and twenty partners in case of other business. Partners jointly own the assets of a partnership firm. Rights, duties, obligations of the partners are governed by the partnership deed. Minimum of two members and a maximum of two hundred members in case of private company and minimum of seven and no maximum limit of members for public limited companies as per the Companies Act, The Companies Act, 2013 introduces the concept of One Person Company (OPC) where one person acts as its member. Assets of a company belong to the company only and the members do not have any ownership right on the same. Rights, duties, obligations of the directors are stipulated in the Articles of Association and the shareholders and/or directors resolutions in this regard. Minimum of two partners and no limit to the maximum number of partners. Assets of an LLP belong to the LLP itself and the partners cannot impose ownership claim on them. Rights, duties, obligations of the partners are governed by the LLP agreement. 105

20 Points of Distinction Partners / Members' Liabilities Principal- Agent Relationship Director Identification Number (DIN) Dissolution Partnership Company LLP The partners liability is unlimited. They are jointly and severally responsible for the actions of the other partners and the firm and their liabilities can extend to their personal assets. Partners act as agents of the firm and that of the other partners. The partners are not required to obtain any identification number. A partnership firm is dissolved by mutual consent, by agreement, by insolvency of the partners, by court order and due to certain contingencies. The shareholders are liable only to the extent of the unpaid amount of their share capital. Directors act as agents of the company and not of the members. The directors should obtain the DIN before being appointed director of a company. A company may be wound up voluntarily or in accordance with the order of National Company Law Tribunal. The partners liability is limited to the extent of the unpaid amount of contribution but they may be personally liable in case of intentional fraud or wrongful act. Partners act as agents of the LLP and not of the other partners. The designated partners should obtain the DIN before being appointed as designated partner of an LLP. An LLP may be dissolved voluntarily or by following the order of the Tribunal. 106

21 Points of Distinction Requirement of Managerial Personnel to Manage the Business Meetings Maintenance of Minutes of the Meetings Partnership Company LLP Partners have the autonomy to manage the internal affairs of the firm themselves. A firm has the freedom to hold and conduct meetings according to its convenience. A firm has no requirement to maintain the minutes of its meetings. Shareholders of a company do not manage the company. It is the directors who manage the company on behalf of the members. Board meetings and general meetings should be held at appropriate intervals as stipulated in the Act. A company has to maintain the minutes of its general meetings and board meetings compulsorily under law. Designated partners of an LLP are responsible for managing the business and statutory compliances. An LLP has no compulsion to hold meetings at definite interval. It also has the autonomy in this regard. An LLP may decide to record the minutes of its meetings in accordance with the LLP agreement. 107

22 Points of Distinction Voting Rights Partnership Company LLP The partners can exercise their voting rights as stipulated in the partnership agreement. The equity shareholders of a company limited by shares can exercise their voting rights on every resolution placed before the meetings in proportion to their shareholdings out of paid-up equity share capital of the company. Preference shareholders of a company limited by shares have voting rights on the resolutions that directly affect their rights, matters relating to the winding up of the company, reduction or repayment of equity share capital or preference share capital. Such shareholders shall exercise their voting rights in proportion to their shareholding in the paid-up preference share capital. If dividend on certain class of preference share has not been paid for two years or more, then such shareholders shall have the right to vote on every resolution placed before the company. It is the LLP agreement that will decide the extent of the partners voting rights. 108

23 Points of Distinction Annual Filing of Documents Audit of Accounts Partnership Company LLP No return is required to be filed by a firm with the Registrar of Firms. A partnership firm is subjected to tax audit in accordance with the provisions of the Income Tax Act, Annual financial statement and annual return are to be filed by a company with the ROC every year. Companies are required to have their accounts audited as per the provisions of the Companies Act, An LLP has to file Statement of Accounts and Solvency every year with the ROC along with the return. An LLP, whose turnover does not exceed forty lakh rupees or the amount of contribution does not exceed twenty five lakh rupees, is not required to get their accounts audited. But other LLPs not falling in the above category will have to audit their accounts annually. 109

24 Points of Distinction Applicability of Accounting Standards Compromise/ Arrangement with Creditors, Partners/ Members Creditworthi ness of Organisation Partnership Company LLP Accounting standards are generally not applicable to a partnership firm. A partnership firm cannot go for compromise/ arrangement with its creditors and partners. A firm s creditworthiness depends on its goodwill and the creditworthiness of its partners. Companies have to compulsorily follow the accounting standards while preparing and presenting their accounts. According to the Companies Act, 2013, the Central Government in consultation with and after following the recommendations of the National Financial Reporting Authority, may prescribe the accounting standards, issued by The Institute of Chartered Accountants of India (ICAI), for companies. A company can go for compromise and arrangement with its creditors and members. Since a company is subjected to more statutory compliances and disclosures, it enjoys the maximum creditworthiness amongst all the three structures. Till now, there is no rule regarding the applicability of accounting standards for an LLP. An LLP can go for compromise and arrangement with its creditors and partners. An LLP enjoys more creditworthiness than a partnership firm but less than that of a company. 110

25 Points of Distinction Whistle Blowing Partnership Company LLP There is no provision like whistle blowing in the Indian Partnership Act, There is no provision like whistle blowing in the Companies Act, There is a provision for whistle blowing in the LLP Act, 2008, to ensure protection to employees and partners, to provide useful information during investigation, and to convict a partner or the firm if the situation demands. ( and Thus, from the above table, it may be concluded that this innovative organisational form is expected to provide benefits to the professionals especially accounting professionals. Accounting professionals can carry on their professional practice in the LLP form, thereby having the opportunity to protect their personal wealth. It is known that, in an LLP, a partner is an agent of LLP but he/she is not the agent of the other partners. Thus, an innocent partner s personal assets can never be called upon to meet the claims arising from another partner s negligence or fault. A sole proprietorship and a small partnership firm of professionals who are content with the simplicity of their own organisational structure can also think of converting to an LLP because it would enable the professional(s) to protect his/her/their personal wealth and a chance to utilise the goodwill effectively. The LLPs would also help in the development of multidisciplinary professional firms. In this highly competitive era, consumers will demand variety of services and solutions like taxation (direct/ indirect) at local, state or national level, drafting of business agreements, raising of finance, issues of compliance with various laws, internal audit, management audit, etc. In order to meet the clients demands, it is necessary for the professionals to combine people with diverse skills who can provide wide variety of services under the same roof. The LLP 111