A limited liability partnership (LLP) is a body corporate formed and incorporated under the Limited Liability Partnership Act, 2008. It is a legally separated entity from that of its partner.
An LLP is liable to the full extent of its assets but liability of the partners is limited to their agreed contribution in the LLP. Since liability of the partners is limited to their agreed contribution in the LLP, it contains elements of both a corporate structure as well as a partnership firm structure.
LLP registration is done under LLP Act, 2008. As per the LLP law, any two persons can incorporate an LLP by subscribing to the incorporation documents. Once an LLP is formed, the rights and duties of partners are governed by Schedule One of the LLP Act, unless the LLP’s partners or the LLP and partners create an LLP agreement.
An LLP operates like a limited partnership, but in an LLP, each member is protected from personal liability, except to the extent of their capital contribution in the LLP.
Nowadays Incorporation of LLP has been made easy – online application can be done, it includes the following procedure:
- Registration of LLP on the website of Ministry of Corporate Affairs, can be done by professionals by logging into the website of the ministry.
- Obtain Digital Signature Certificate.
- Reservation of name of LLP.
- Once the name is reserved by the Registrar, prepare the necessary documents to be attached with the Form FiLLiP (Form for Incorporation of Limited Liability Partnership). The DIN- Director Identification Number for the designated partners will be allotted at the time of incorporation of an LLP.
- Filing an LLP Agreement (Form-3)
The Registrar, after satisfying himself/herself about compliance with relevant provisions of the LLP Act will register the LLP maximum within 14 days of filing of Form-2. Next, a certificate of incorporation is issued in Form-16. The Registrar of Companies (RoC) shall register and control LLPs too.
Just like any other partnership Agreement, LLP is also require an agreement which needs to be done among the partners.
It is compulsory to execute LLP agreement within 30 days of the incorporation of LLP as per the LLP incorporation document (Form FiLLiP).
A well structured agreement is quite essential for an LLP.
- It creates a foundation for smooth running of the LLP.
- Agreement defines and distinguishes the roles, responsibilities and work of the partners.
- It clarifies the managerial, operational as well administrative outlook and sets well defined methodologies for decision making.
- It mentions the details for adding a new partner and disassociation of existing partner.
LLP Agreements include certain provisions
First and foremost comes the Name of the LLP which should always end with LLP or Limited Liability Partnership. There are a few post registration compliance for LLP to ensure smooth running of an LLP.
Date and Agreement of the partnership and details of the future name changes, initial partners, new partners admission, business activities and their scope, power of LLP, duration, management, accounting, auditing, etc.
Profit, capital and Interest sharing ratio;the contribution ratio of partners in terms of capital, interest on contribution, profit sharing ratio as well as the time period after which the capital can be withdrawn by any of the partners is necessary.
Allocation and Distribution clarifies the method of profit-sharing among partners and distribution including interim distribution or final distribution in the LLP.
Terms and Conditions when partners can disassociate or withdraw from the LLP. The Agreement illustrates the procedure, the rights of existing partners, and rights on assets after disassociation, as well as notice to existing partner.
Partnership Rights which include the admission of a new partner and their rights thereafter. Re-admission or withdrawal of any of the partners, the rights of existing partners, and rights on assets after disassociation, as well as notice to existing partner.
The Agreement Includes the name of the person/partner responsible Management, Meetings of partners, fiduciary duty, etc.
There are several kinds or types of LLP Agreement that exist, namely:
Equal ratio LLP (1:1)
In this type all the partners share equal rights and responsibilities, the contribution of capital, time, profit and loss are equally shared amongst them. The decisions are mutually taken for the business of the LLP.
Differential Rights LLP
In this type the Agreement is drafted which includes the different rights and responsibilities of the partners towards the LLP.
- LLP Agreement wherein rights are in the ratio of contribution and profit-sharing. The level of contribution may decide the level of profit sharing.
- LLP Agreement wherein rights are in the ratio of contribution only, but profit rights differ. Management rights may be equal or in some other ratio.
Absolute Rights in LLP
The agreement is to be drafted in such a way that one person will get all the management as well as the decision-making power.
If, in LLP, there are only two partners and one person is appointed as the nominee or only as the investor.
Managed LLP; Partner Managed, Board Managed and Manager managed
In Partner Managed LLP there are multiple partners, one can be an investor or a nominee while others have administrative, management and operational powers that needs to be mentioned in the LLP Agreement. This is somewhat similar to the differential rights LLP.
Board Managed LLP – the day-to-day managerial, operational activity and decision-making power lies in the hands of the Board/Committee of partners. While the overall control rests in the hands of all the partners.
Manager Managed LLP – In this, the partners appoint the manager and give him/her specific powers related to the administration, management, operational. In this multi-partnership LLP, the role of a partner is as an investor and they do not have any decision making right on day to day activities of the company.
Husband and Wife LLP
Husband and wife can be designated partners in an LLP. There is a special agreement pertaining to tax liability that can be made so as to minimize the family tax liability. Besides, they can choose any of the above-mentioned types of LLP according to their convenience and need.
Stated above are all the details of what LLP is and different types of LLP that exists and who performs all the functions.
Advantages of LLP
- Separate legal entity: Like a company, LLP also has a separate legal entity. So the partners and the LLP stays distinct from each other. This is like a company where directors are different from the company.
- No requirement of minimum capital: In the case of companies there should be a minimum amount of capital that should be brought by the members or owners. But to start an LLP, there is no such requirement of minimum capital.
- No requirement of compulsory audit: All the companies, whether private or public, irrespective of their share capital, are required to get their accounts audited. But in case of LLP, there is no such mandatory requirement. A limited liability partnership is required to get the audit done only if:
- the contributors of LLP exceeds ₹25 lakhs or
- the annual turnover of the LLP exceeds ₹40 lakhs
- Flexibility in organizing the internal structure of LLP to organize the internal structure, a company is more complex as compared to LLP.
- No maximum Limit of partners in a private limited company shareholders are limited to a number of 200 but not in the case of LLP.
- Exemption from DTT; The profit distributed in the hands of partners are already after deduction of taxes hence partners are not liable to pay taxes on it.
- Payment of Remuneration to a non-working partner will not be allowed as a deduction.
LLP Agreement and Taxation
In India, for all purposes of taxation (service tax or any other stipulated tax payment), an LLP is treated like any other Partnership firm. To avail the tax benefit under Income Tax Act, a clear, defined, concrete LLP agreement must be an instrument. It shall contain all the details related to partnership, their share, and contribution.
- Flat rate of 30% on the total income after deduction of interest and remuneration to partners/designated partners at the specified rates + surcharge of 12% if;
- Total Income exceeds ₹1 Crore and will be further increased by education cess, secondary and higher education cess @ 3% on Income-tax (W.e.f A.Y. 2019-20 health and education cess @ 4% shall be levied in lieu of education cess secondary and higher education cess @ 3%).
- Once the tax is paid by the firm, no tax will be payable by the partners on share of income from the firm.
- Amount of interest and/or remuneration etc.received by a partner will be taxed in his hands as ‘Business or Professional Income’, excluding the amount disallowed in the hands of the firm being in excess of limits laid down in Sec. 40(b).
- The share of the partner (including a minor admitted for the benefit of the firm), in the income of the firm is not included in computing total income i.e.; share in the total income of the firm shall be exempt from tax under section 10(2A) of the Act.
Due dates for filing of returns of partners
- 30th September, where accounts of the LLP are required to be audited under Income- tax Act or under any other law for the time being in force.
- 31st July in any other case. 30th September in case of an LLP working partner of a firm (whether or not he is entitled to remuneration) where due date for filing return of firm is 30th September.
Refer compliance calendar 2019 for more details on filing dates.
In order to avail tax benefits, following consideration may be taken into account while drafting LLP agreements are:
- Adding provision of Interest on capital contribution that will be deducted from LLP income within the overall limit.
- The LLP agreement must clarify the working partners and the remuneration payable to them so as to reduce the LLP income and hence the tax liability. Remember to include partners’ name as well as define them as “working partner” in the LLP agreement to avail this benefit.