Peninsula Business Park, Tower B, 19th Floor, Lower Parel, Mumbai-400013 T: 022-6124 6124
Content Origin Limited Liability Partnership ( LLP ) in India Salient Features of a LLP Private Company v/s LLP from the view of Companies Act, 2013 How to Form a LLP Compliance after formation of LLP Routine Compliance Taxation Aspects of LLP Conversion of LLP into Company Conversion of Firm into LLP Conversion of Company into LLP Foreign Direct Investment in LLP Overseas Direct Investment by LLP Questions worth asking 2016 mgb advisors Strictly Privileged and Confidential 2
Origin The idea is developed through several stages of general partnership. The legal concept of Limited Liability Partnership was formed in the early 1990s in United States in the consequence of the collapse of real estate and energy prices in Texas in the 1980s. This collapse led to a large wave of bank and savings and loan failures. Because the amounts recoverable from the banks were small, efforts were made to recover assets from the lawyers and accountants who had advised the banks in the early 1980s. The reason was that partners in law and accounting firms were subject to the possibility of huge claims which would bankrupt them personally, and the first LLP laws were passed to shield innocent members of these partnerships from liability. Apart from India many Countries like UK, Canada, China Germany, Greece, Japan, Poland, Romania, Singapore have felt the need to recognize LLPs in their country. 2016 mgb advisors Strictly Privileged and Confidential 3
Limited Liability Partnership in India 2003-Naresh Chandra Committee Report (Regulation of Private Companies and Partnerships) highlighted the grave need to introduce LLPs in India 2005- J.J.Irani Expert Committee on Company Law recommended introduction of LLPs In India, The Limited Liability Partnership Act, 2008 was published in the official Gazette of India onjanuary9,2009andhasbeennotifiedwitheffectfrom31march2009 GovernedbyLLPAct,2008andLLPRules,2009anddefinedasBodyCorporate The first LLP was incorporated in the first week of April 2009. Some sections relating to conversion of existing partnership firms and private as well as public unlisted companies into LLP have been brought into force on 31-5-2009 LLPActinIndiaismajorlymodelledonUKLLPAct,2000andSingaporeLLPAct,2005 Ministry of Corporate Affairs through Registrar of Companies office regulates LLP At present, there are about 10,000 LLPs formed and registered under the Limited Liability Partnership Act, 2008( LLP Act ) 2016 mgb advisors Strictly Privileged and Confidential 4
Salient features of a LLP Alternative corporate business vehicle Perpetual Succession& continuity LLP is a body corporate and legal entity separate from its partners Being the separate legislation (i.e. LLP Act, 2008), the provisions of Indian Partnership Act, 1932 are not applicable to an LLP and it is regulated by the contractual agreement between the partners It contains elements of both a corporate structure as well as a partnership firm structure Liability of the partner is limited to his agreed contribution No partner is liable on account of the independent or un-authorized acts of other partners, thus allowing individual partners to be shielded from joint liability created by another partner s wrongful acts or misconduct Borrow/ Investonitsownname.HowevercannotraisefundsfrompublicorcomeoutwithanIPO Initiate legal proceedings on its own name LLPisaformofbusinessmodelwhichisorganizedandoperatesonthebasisofanagreement 2016 mgb advisors Strictly Privileged and Confidential 5
Private Limited Company VS. LLP Particulars Private Company LLP No. of Partners/members Constitutional Document Board and Management AGM/EGM Profit Sharingand Remuneration Minimum 2 and maximum 200 MOA and AOA Meeting tobe held per quarter, minutes to be recorded within 30 days. First Board meeting within 30 days of incorporation. Duties and functions of Board defined in Cos Act, 2013 AGM to be held once in a year and EGM asand when shareholders approval is required Profit can be shared through Dividendand Remuneration to be paid as per provisions of Cos Act Minimum 2 and maximum no limit LLP Agreement Simpler and particularly governed as per LLP Agreement No provisions in LLP Act and governed as per LLP Agreement Share of profit is exempt to partners. Salaryand interest to partners in LLP shall be as per LLP Agreement Audit and Auditors Mandatory rotation for prescribed class of companies No such requirement in LLP Act CSR Mandatory CSR for companies meeting prescribed threshold No such requirement in LLP Act 2016 mgb advisors Strictly Privileged and Confidential 6
Private Limited Company VS. LLP Particulars Private Company LLP Borrowings Investments/guara ntee/security/loan Related Party Transactions Company hasto comply various provisions for borrowing money such as Section 179, 185,73 and 74 of Companies Act, 2013 As per the limits and conditionsspecified in Section 186 To comply with Section 188 and related party definitions LLP may borrowmoney and pay interest from its partners LLPmay invest/give guarantee/security/give loan however same shall not cross limit specified for NBFC business Tobe governed as per LLP Agreement Consolidationof Accounts Applicable if there is subsidiary/associates/joint venture co. as persection 129 Cost of compliance High Cost of compliance in terms of fees and penalties Nosuch requirement (beneficial for overseas investment and holding co. structure) Low cost of compliance 2016 mgb advisors Strictly Privileged and Confidential 7
How to Form a LLP? Step I - Deciding the Partners and Designated Partners A LLP can be incorporated with a minimum of at least two partners who can be Individuals or Body Corporate through their nominees. Further for incorporating an LLP, of the total number no. of partners, at least two shall be Designated Partners, of which at least one must be an Indian Resident. Mandatory prior consent is required from partner willing to act as Designated Partner Parameters for deciding the Partners and Designated Partners 1) At least Two Partners; Individuals or Body Corporate through individual nominees, 2) Minimum of Two Individuals as Designated Partners, of total no. of Partners, and 3) At least One Designated Partner to be Resident A person Resident in India means a person who has stayed in India for a period of not less than one hundred and eighty two days during the immediately preceding one year Designated Partner means a partner who is designated as such in the incorporation documents or who become a designated partner by and in accordance with the Limited Liability Partnership Agreement. Designated partner is liable for complying with all the provisions of LLP Act 2016 mgb advisors Strictly Privileged and Confidential 8
How to Form a LLP? Step II - Obtaining DIN No. & Digital Signature Director Identification Number: Every Designated Partner is required to obtain a DIN from the Central Government. If a person already has a DIN, the same can be used for forming LLP. Please also check whether the DIN reflect residential or non-residential status otherwise file DIR-6 for correction Digital Signature Certificate: All the e-forms relating to incorporation and routine filing after incorporation is done electronically and hence DSC is mandatory Step III - Decide Registered office address Registered address proof in form of utility bill is required and NOC if owned by Director or any other Company or third party if taken on lease once the name is approved Step IV - Decide Contribution Partners among themselves has to agree on initial fixed capital contribution which will required to be mentioned in LLP Agreement and incorporation forms. P&L ratio is not required to be identical to capital contribution, however in case of conversion the capital and P&L ratio has to be identical In case of contribution is tangible assets or property or any benefits then valuation is required as per Rule 23 of LLP Rules, 2009 2016 mgb advisors Strictly Privileged and Confidential 9
How to Form a LLP? Step V - Main objects of the LLP Thoroughly draft the main objects and incidental objects and get it approved from Promoters of LLP based on which activity code is to be selected while incorporation Step VI - Checking the Name Availability Decide the name for the proposed LLP to be incorporated, anyone intending to incorporate an LLP has to evaluate his proposed name under the prescribed parameters and make an application in e- Form 1 of Rule 18(5) of the Limited Liability Partnership Act 2008, for reservation of the desired name The name of the limited liability partnership shall not be similar or identical with Company or LLP already registered in India and it should not contain words prohibited under the Emblems and Names (Prevention of improper use) Act, 1950 or which are also not Undesirable in the opinion of Central Government or which satisfies the conditions prescribed under rule 18(2) Step VII - Board Resolution from Body Corporate/Company if partner In case any Body Corporate is partner, copy of Board resolution authorizing the incorporation of LLP shall be attached 2016 mgb advisors Strictly Privileged and Confidential 10
How to Form a LLP? Step VIII - Drafting of LLP Agreement The next pertinent step is drafting of Limited Liability Partnership Agreement governing the mutual rights and duties among the partners and among the LLP and its partners. LLP agreement if prepared must be in writing but in the absence of LLP agreement, mutual rights and liabilities of partners shall be determined as provided under Schedule I to the LLP Act. (ROC asks for written LLP agreement as mandatory attachment in Form 3) The basic contents of Agreement are: 1. Name of LLP 2. Name of Partners & Designated Partners 3. Proposed Business 4. Form of Contribution 5. Profit Sharing ratio 6. Rights & Duties of Partners 7. Admission, Cessation, expulsion of partners 8. Management and Administration 9. Veto powers 10. Dispute Resolution 11. Dissolution 2016 mgb advisors Strictly Privileged and Confidential 11
How to Form a LLP? Step VIII - Drafting of LLP Agreement Kindly remember following provisions of First Schedule while drafting LLP Agreement: All partners are entitled to share equally in the capital, profits and losses EverypartnermaytakepartinthemanagementoftheLLP No partner is entitled to remuneration Each partner shall have one vote in the matters related to LLP and resolution shall be passed by majority Decisions concerning LLP must be recorded in the minutes within 30 days of taking decisions If a partner is carrying on competing business without consent of the LLP, he must account for any payfortheprofitsofsuchbusinesstothellp Stamp Duty on LLP Agreement: Maharashtra Stamp (Amendment) Act, 2015 has included LLP under Article 47 and stamp duty on Agreement is minimum Rs. 500/- if contribution does not exceed Rs. 50,000 and if more than Rs. 50,000 than one percent of contribution subject to maximum of Rs. 15,000. (if contribution is property then same as conveyance) 2016 mgb advisors Strictly Privileged and Confidential 12
How to Form a LLP? Sr. no. LLP Form No. Purpose of form Time Limit 1 LLP Form No. 1 Application for reservation of name 2 LLP Form No. 2 For Incorporation of a LLP File within 3 months from the dateintimation of Name approval by ROC 3 ROC will issue Certificate of Incorporation in LLP Form No. 16. Certificate shall be conclusive evidence. 4 LLP Form No. 3 For information regarding LLP agreement Within 30 days from the date of incorporation 5 Execution of LLP Agreement May be : 1. After name approval but before formation OR 2. After formation 2016 mgb advisors Strictly Privileged and Confidential 13
How to Form a LLP? LLP Form No. 1 Name Application points to remember Attached NOC if the name is resembles to any registered trademark of any third party or Group Company Description of proposed business activity this will get pre-fill in LLP Form No. 2 for incorporation Body Corporate becoming partner has to pass board resolution before applying for name Only Designated partner details are filled in the form LLP Form No. 2 Incorporation points to remember Once name is approved, prepare subscriber sheet which needs to be filled and signed by every partner and to be signed by professional as witness Attach details of directorship in other entities of Designated Partner Attach proof of registered office along with NOC if required Board Resolution by Body Corporate as partner appointing nominee and incorporating LLP 2016 mgb advisors Strictly Privileged and Confidential 14
How to Form a LLP? Attach Affidavitby Designated Partners mentioning that they are not in default of Deposit Rules and provisions of Companies Act regarding Deposits Fill Partner and Designated Partner details carefully; Name, address, nationality will get prefilled by filling DIN No. Occupation, form of contribution has to be manually filled Where name includes specified sectors such as banking, insurance, VC, MF, stock exchange, Advocate, CA, CS, CWA, etc, a copy of the in-principle approval of the regulatory authority or council is required to be attached Form is required to be certified by professional stating that all requirement of Act and rules pertaining to incorporation is complied LLP Form No. 3 LLP Agreement points to remember Once LLP is incorporated, LLP is required to file LLP Agreement duly signed and executed by all partners. LLP Agreement is a mandatory attachment Stamp duty to be paid on LLP Agreement as per Maharashtra Stamp Act In case the Agreement is executed outside India, than it must be notarized and apostilled 2016 mgb advisors Strictly Privileged and Confidential 15
Compliance after Formation Obtain PAN and TAN, Profession Tax, Shop & Establishment and other registrations applicable to business Open Bank Account in the name of the LLP and deposit the initial contribution as decided by the partnersatthetimeofincorporationofthellp Every LLP shall ensure that its letter heads, invoices, official correspondence shall have name, addressandregistrationno.ofllpandastatementthatitisallp Maintain proper books of accounts on cash or accrual basis and according to double entry system of accounting.(rule 24(2)). Books of accounts and other documents/forms to be preserved for 8 years Apart from that, an LLP is also required to get its accounts auditedif annual turnover exceeds Rs. 40 Lakhs or the contribution exceeds 25 Lakhs Schedule III of Companies Act, 2013 is not applicable to a LLP. It applies to all companies registeredunderthecompaniesactbutllpisabodycorporateandnotacompany A LLP has to close its financial yearon 31 st March every year. However if LLP is incorporated after 30 th September,thefinancialyearmayendonthe31 st Marchoftheyearnextfollowingthatyear 2016 mgb advisors Strictly Privileged and Confidential 16
Routine Compliance Statement of Account and Solvency Declaration Every LLP shall prepare Statement of Account and Solvency declaration within 6 months from the end of the financial yearand file thesame with ROC in LLPForm No. 8within 30 days of expiry of 6 monthsfromtheendofthefinancialyeari.e.by30 th Octobereveryyear Annual return Every LLP shall file an annual return to the Registrar in LLP Form No. 11 within 60 days of completionofitsfinancialyeari.e.by30 th Mayeveryyear Change of Partners and/or Designated Partners due to admission/cessation etc Every change of Partner/Designated Partner(appointment/cessation/change in designation) shall be intimated by LLP to Registrar within 30 days in Form 4. If Designated Partner resigns and vacancy is not filled within 30 days then all partners will be considered as Designated Partners Changes in LLP Agreement Every change in LLP Agreement has to be intimated and revised/addendum LLP Agreement to be filedwithregistrarwithin30daysinform3 2016 mgb advisors Strictly Privileged and Confidential 17
Taxation aspects of LLP Income Tax: Budget 2009-10 has brought provisions regarding taxation of LLPs. Limited Liability Partnership will be treated as Partnership Firm for the purpose of Income tax and accordingly, all the relevant provisions regarding taxation of partnership firm has been modified. The Income of LLP will be chargedtotaxinthehandsofthellponlyandnotinthehandsofindividualpartners. The LLP is also subject to Alternate Minimum Tax (AMT) which is similar to Minimum Alternate Tax (MAT) in case of Companies. However, there is no concept of book profit and it is calculated based on the adjusted total income. The Income tax law has also been modified for bringing the taxation aspects of conversion of Private Company or unlisted Public Company into an LLP on the paper (refer 47 (xiiib) of Income Tax Act). There are no tax implications on conversion of a partnership firm into an LLP Service Tax: For the purpose of Service tax also, an LLP will be treated as partnership firm only. Service Tax Rules,1994hasbeenamendedbytheServiceTax(Amendment)Rules,2012toconsiderLLPasa partnership firm Sales Tax/VAT: Under Sales tax, LLP is treated as body corporate. The definition of Dealer under Central Sales Tax, 1956 includes body corporate also 2016 mgb advisors Strictly Privileged and Confidential 18
Conversion of LLP into Company Section 366 (1) of the Companies Act 2013 allows registration of existing LLP into CompanySection is notified with effect from 01.04.2014. Application has to be made vide Form no. URC-1 This provides a required exit opportunity to promoters from LLP set up who wish toexplore Company form Income Tax applicability will be in line with conversion of partnership into Company Minimum 7 or more members required for conversion into Company File INC-1 for name application and file URC-1 along with INC-7 for incorporation within 60 days Affidavits from all partners/members for dissolution of entity Consent from creditors, if any Particulars of partners/members along with details of shares held by them Declaration by two Directors verifying the particulars of all members/partners Consent by majority of members in case of company limited by shares News paper advertisement in english and vernacular newspaper before conversion Copy of the instrument constituting or regulating the LLP Financials as on the date of conversion to be drawn Certificate from CA/CS/CWA certifying all provisions of Stamp Act is complied All compliance are done under the LLP Act and any other documents requested by registrar 2016 mgb advisors Strictly Privileged and Confidential 19
Conversion of LLP into Company Sr. no. Form No. Purpose of form Time Limit 1 INC-1 Application for reservation of name 2 URC-1 Application byllp for registration as Company File within 60 days of approval of name 3 INC-7, INC-22 and DIR-12 Filing of incorporation forms Need to Draft MOA and AOA and other Documents related for Company Incorporation Comply with all provisions of Companies Act, 2013 Simultaneouslywith URC-1 4 Onsatisfaction Registrar will issue Certificate of Incorporation 2016 mgb advisors Strictly Privileged and Confidential 20
Conversion of Firm into LLP Partners of registered firm may with unanimous approval decide to convert their firm into an LLP by following a process provided in Second Schedule of the LLP Act Cut off date balance sheet is to be drawn They have to apply for name & need to follow the process of formation of LLP In addition to formation process, it has to submit LLP Form No. 17 Registrar will then issue certificate of registration of conversion In LLP Form No. 19 After registration of conversions it is expected to file LLP Form No. 14, however same is not available for filing online Attachments to Form 17: Copy of last acknowledgement of IT return NOC from secured creditors, if any NOC from the statutory body/authorities( If applicable) Statement of assets & liabilities duly certified true & correct by the auditor Statement of partners that all provisions of LLP Act & rules completed and all permission obtained etc 2016 mgb advisors Strictly Privileged and Confidential 21
Conversion of Company into LLP Application for name & need to follow the process of formation of LLP In addition to formation process: LLP Form No. 18 i. e. application to ROC for conversion is required to be filed along with Form2 Intimation to ROC in LLP Form No. 14 (This is not required now. As per notification dated 15th October, 2015 issued by Ministry, Form-14 is not required to be filed in case of conversion of private company/unlisted public company into LLP.) In case of firm converted to LLP, Form-14 is required to be filed in physical form with Registrar of Firms, after approval of Form 17 by Registrar of LLP.) Company before conversion needs to pass Board Resolution and same needs to be attached in all e-forms Make Sure: Total Capital Contribution shall be similar to total paid up capital in the Company and ratio shall be based on shareholding. In case of preference share capital either redeem the same or take the same as capital contribution on conversion No form is pending for payment or processing at Ministry of Corporate Affairs No open charges in Charge Index At least 1 balance sheet and annual return submitted since formation Company with share capital can only be converted Section 25/ 8 company can NOT be converted Attachments to Form 18: Board Resolution Copy of acknowledgement of IT return NOC from secured creditors, if any NOC from the statutory body/authorities( If applicable) Statement of assets & liabilities duly certified true & correct by the auditor. Statement of shareholders stating compliance of all provisions of LLP Act & rules, annual filing completed etc 2016 mgb advisors Strictly Privileged and Confidential 22
Foreign Direct Investment in LLP s Withaviewtoboosttheease ofdoingbusinessinindiaandtofurtherpromote'makeinindia'and 'Startup India' initiatives, the Government published a Press Note on November 24, 2015 outlining significant reforms in the Foreign Direct Investment ('FDI') Policy. The reforms are aimed at attracting more foreign investments through further easing, rationalizing and simplifying the process of foreign investments in the country and putting more FDI proposals under the automatic route FDI in Limited Liability Partnership s as per DIPP policy 100% FDI is now permitted under automatic route in LLPs operating in sectors/ activities where 100% FDI is allowed under automatic route, and there are no FDI-linked performance conditions LLPs having foreign investment will be permitted to make downstream investment in another companyorllpinsectorsinwhich100%fdiisallowedundertheautomaticroute,andthereareno FDI-linked performance conditions However, DIPP Policy shall take effect once FEMA regulations is amended by RBI. DIPP policy cannot be exercised as of today and all LLP s shall go only through the Government approval route for Foreign Direct Investment or Downstream investment till further clarification LLPs are still not permitted to avail external commercial borrowings route for raising loan from outside India 2016 mgb advisors Strictly Privileged and Confidential 23
Overseas Direct Investment by LLP s As per RBI ODI Regulations, LLP is an Indian Party and can make investment/financial commitment overseas under automatic route upto 400% of its networth and not exceeding USD 1 billion similar toacompany LLP may invest/make financial commitment subject to LLP has required net worth as per Master Circular on Direct Investments by Residents in Joint Venture / Wholly Owned Subsidiary abroad or under Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2000. As per RBI Regulations an Indian Party can make Financial Commitment / Investment overseas not exceeding400%ofitsnetworthasperlastauditedbalancesheet LLP if not eligible to audit will require to get its financial audited for purpose of calculation of networth LLP will require to file Annual Performance Report every year with RBI by 30 th June for investment madeinwos 2016 mgb advisors Strictly Privileged and Confidential 24
Some Questions worth asking Whether a Partner will be able to give loan to or transact other commercial transactions with LLP? What will be his rights and obligations in this regard? A partner may lend money to and transact other business with the LLP Partner shall have the same rights and obligations with respect to the loan or other transactions as a person who is not a partner Whether a partner would be able to transfer his economic rights? A partner s economic rights (i.e. rights of a partner to a share of the profits and losses of the LLP and to receive distribution at the time of winding up) in the LLP shall be transferable However, such a transfer shall not by itself cause the partner s disassociation or a dissolution and winding up of the LLP Such transfer of economic rights shall not entitle the transferee or assignee to participate in the management or conduct of the LLP s activities Whether an entity with charitable objects would be allowed to form LLP? No. The essential requirement for forming LLP is carrying on lawful business with a view to profit 2016 mgb advisors Strictly Privileged and Confidential 25
Some Questions worth asking Whether LLP Act has provision to register charges? No, this may effect bankers confidence Whether two partnership firm can be converted into LLP? No, there is no provisions as such to convert two firms into LLP neither Registrar allows the same Whether LLP can carry out NBFC business? Yes as there is no restriction in LLP Act, however while name application Registrar ask for NOC from Reserve Bank if name contains the word finance, investment etc. Furthermore as per RBI Act-1934 NBFC are those Companieswhich are registered under the Companies Act, 1956/2013 and registered in terms of Section 45-IA of the RBI Act, 1934. Further only companies which have more than 50% of Income / Assets from financial assets required to be registered with RBI under NBFC Regulations. It means Partnership Firm and LLP are not registered under the Companies Act and they cannot be registered as NBFC Whether there is any provisions for oppression and mismanagement? No, there are no provisions for oppression and mismanagement under LLP Act 2016 mgb advisors Strictly Privileged and Confidential 26
Some Questions worth asking Whether HUF can become Partner in LLP? As per section 5 of LLP Act, 2008 only an individual or body corporate may be a partner in a Limited Liability Partnership. A HUF cannot be treated as a body corporate for the purposes of LLP Act, 2008. Therefore, a HUF or its Karta can not become designated partner in LLP. Under General Circular No. 13/2013 Since the notification is silent about partner and speaks only of Designated partner. A query was pointed out by a stakeholder: Reference was invited to General Circular No. 13/2013 wherein, the clarification inadvertently does not mention partner in the last sentence of the paragraph quoted above which has been pointed out by a stakeholder. It is hereby clarified that a HUF or its Karta cannot become partner or designated partner in LLP Whether there is any provision for contribution held in trust for beneficiary? The partner cannot hold shares/contribution in trust for other except in case of Real Estate Investment Trust or Trust set under SEBI regulations Whether there is any provision for ESOP in LLP? No, there is no provision for ESOP in LLP and this may not encourage start ups to go for LLP 2016 mgb advisors Strictly Privileged and Confidential 27
THANK YOU mgb MUMBAI OFFICE: Peninsula Business Park, Tower B, 19th Floor, Lower Parel, Mumbai - 400013 T: +91-22-6124-6124 Email: mjawadwala@mgbco.com DELHI OFFICE: 21, Shankar Vihar, Vikash Marg, New Delhi 110 092 Phone : 011 4244 0490 Fax: 2250 8300 Email: ljain@mgbco.com JAIPUR OFFICE: 'First Floor', B-144A, Mangal Marg, Bapu Nagar, Jaipur-302015. Phone :0141-4050920 Fax :0141-4050921 Email: sandeep.jhanwar@mgbco.com 2016 mgb advisors Strictly Privileged and Confidential 28