This article is written by Gautam Badlani, a student at Chanakya National Law University, Patna. This article examines the provisions and judicial decisions relating to Limited Liability Partnership Act, 2008, thereby highlighting salient features of the Act and critically analysing the hurdles in converting to an LLP. This article also points out the impact of the Limited Liability Partnership (Amendment) Act, 2021. 

This article has been published by Sneha Mahawar.

Table of Contents

Introduction

A partnership is usually perceived to be a contract between two individuals for carrying out a business with the objective of profit where the partners have unlimited liability for the acts and omissions of the firm and the other partners. The partnership model was prominent during the medieval period. However, with the advent of the concept of limited liability, the partnership model was regarded as risky and uncertain by businesses. Thus, it became necessary to introduce the concept of limited liability partnerships. 

A limited liability partnership (hereafter LLP) confers limited liability on the partners while at the same time providing them with the flexibility associated with partnership-based business models. The flexible character of an LLP has made it one of the most preferred forms of business in modern times. 

The Limited Liability Partnership Act, 2008 (hereinafter “the Act” provides the provisions relating to the regulation of limited liability partnerships in India. This article highlights the salient features and the amendments to the Act and provides a critical analysis of its effectiveness. 

Limited liability partnership

Section 25 of the Indian Partnership Act, 1932 provides that every partner will be jointly and severally liable for the acts done by the other partners in their capacity as partners. Section 9 of the British Partnership Act, 1890 provides that every partner will be jointly liable for the firm’s contract and jointly and severally liable for the firm’s wrongs. Thus, we see that the position of liability of partners in India is quite different from the liability of partners in England. Businesses involving unlimited and personal liability are usually perceived to be risky, and therefore, the need arises to provide an alternative with limited liability.

A limited liability partnership is a form of business organisation in which the partners can structure their business in the traditional partnership form and enjoy limited liability at the same time. An LLP is a hybrid between a partnership firm and a company.

As per Section 2(m) of the LLP Act, an LLP which is found, incorporated or registered in a foreign country and which sets up business in India is known as a foreign limited liability company. Section 59 of the Act empowers the Central Government to frame rules for regulating the conduct of business by foreign limited liability companies in India. 

Advantage of a Limited liability partnership

An LLP has the following advantages: 

  • Since the internal management in an LLP is regulated by the terms of the Limited Liability Partnership Agreement (hereinafter LLP Agreement), it provides flexibility to the firm to adopt any form of internal organisation.
  • An LLP involves less statutory compliance as compared to a company registered under the Companies Act, 2013
  • There is no ownership management divide in a limited liability partnership as every partner is an agent of the firm but cannot be held liable for the wrongful acts of the other partners. 
  • An LLP has a distinct identity that is separate from its members. Therefore, it is a separate person in the eyes of the law.

Disadvantage of a Limited liability partnership

An LLP has the following disadvantages:

  1. The documents that an LLP files with the Ministry of Corporate Affairs are public documents, and anyone can obtain a copy of these documents by paying a nominal fee. The documents of a general partnership are not public documents and are not available in the public domain.
  2. The Act provides hefty penalties in case of non-compliance. The operation of an LLP involves complex compliance, which can be a hindrance to the growth of the LLP.
  3. The LLPs have a limited range of financing options. Venture capitalists and angel investors do not usually invest in an LLP, and the only options left for the LLP are borrowing from financial institutions or taking a loan from the partners. 

The primary reason why venture capitalists (VCs) do not invest in an LLP is that the LLP Act provides that every shareholder of an LLP is a partner of the LLP, and being a partner entails specific responsibilities that the VCs do not want.

Historical development

The concept of LLP was first emphasised by the Committee on Regulation of Private Companies and Partnerships. The Committee, which was known as the Naresh Chandra Committee, stated in its report that the prospect of being a partner was unattractive due to the unlimited liability attached to it. Businesses based on partnerships of professionals could not grow due to the risk that is associated with unlimited liability. The concept of LLP would increase the competitiveness of the partnerships of professionals and medium and small enterprises. 

The Naresh Chandra Committee noted that, in view of the restrictions imposed by the regulatory laws, professional firms are prohibited from engaging in any form of business. This was in contrast to trading and manufacturing companies, which can register as private as well as public companies under the Companies Act. 

The objective of the Companies Act, 2013 was to provide provisions for the regulation of companies, and hence it was found that the Companies Act was not suitable for the regulation of LLPs. A need was felt for specific legislation dealing with the incorporation and regulation of LLPs. Binding the internal management of an LLP with the provisions of the Companies Act would have deprived it of its flexible character. 

The need for specific legislation dealing with the LLP was emphasised by the Committee on New Company Law, 2005. The Committee was headed by Dr. J.J. Irani, the former director of Tata Sons. While the Naresh Chandra committee had recommended that the concept of LLP should be introduced for the service sector, the Irani Committee emphasised the need for the application of this concept to small enterprises too. The committee recommended that the formation of LLP would help small enterprises to form agreements and joint ventures and get access to new technology, and that would help them to face the intense global competition. 

Objective of the Limited Liability Partnership Act, 2008

The object of the Act is to make provisions relating to the formation and regulation of limited liability partnerships. It also lays down the provisions for matters which are incidental or connected with the formation and regulation of limited liability partnerships. The concept of LLP provides opportunities for growth for small enterprises as well as incentivises professionals having expertise in different fields to form a partnership. At the time when the LLP Act, 2008 was enacted, the Companies Act, 1956 was in force, and Section 11 of the Act provided that a partnership could have a maximum of 20 partners. Thus, one of the primary objectives of the LLP Act was to dilute the upper limit of 20 partners in a partnership. Currently, Section 464 of the Companies Act, 2013 provides that there can be a maximum of. hundred partners in a partnership firm. 

Nature and salient features of a limited liability partnership 

Chapter 2 of the Act deals with the nature of a Limited Liability Partnership. An LLP has the following salient features: 

  • Section 3 of the Act provides that an LLP has a separate legal identity separate from its partners. It has the capacity to own, acquire, and hold property in its name and to sue and be sued in its name. 
  • LLP enjoys perpetual succession, and a change in the partners does not affect the rights and liabilities of an LLP. This means that an LLP continues even if any partner dies or retires or becomes insolvent or insane. 
  • Section 4 of the Act exempts LLP from the application of the provisions of the Partnership Act, 1932. 
  • Partners in an LLP are the agents of the LLP but are not the agents of the other partners. Thus, a partner cannot be held liable for other wrongful acts or omissions of other partners. The property of the LLP will be used to settle any liabilities of the organisation if it fails to discharge its obligations. 
  • An LLP cannot be held liable for any unauthorised act of its partners provided that the claiming party was aware that the partner was acting in an unauthorised manner.
  • The liability of a partner is limited to the liability that he owes as a partner of the organisation and does not extend to his individual or personal liability. 
  • The rights of a partner, such as the share of profit or loss, are partially as well as fully transferable. However, the mere transfer of rights would not entitle the transferee to participate in the management of the LLP.
  • An LLP is required to maintain annual accounts and file annual statements of solvency with the Registrar. The accounts of the LLP will also be subjected to scrutiny.
  • If the government feels that the name of an LLP is closely resembling the name of any other incorporated LLP or any other body corporate or the name of the concerned LLP is undesirable, then the government can direct the LLP to alter its name. Furthermore, a limited liability partnership is mandated by the Act to add “LLP” at the end of its name. 
  • There can be two ways leading to the winding up of an LLP. The first is where the partners of an LLP voluntarily decide to dissolve the LLP. The second is where the National Company Law Tribunal orders the winding up of the LLP. 

Partner of a limited liability partnership

As per Section 5 of the Act, any person or body corporate can become a partner in an LLP. Thus, both natural as well as legal persons, can be partners in an LLP. Section 5 provides the conditions upon which a person may be disqualified from being a partner in an LLP. If a person becomes insolvent or a court of competent jurisdiction declares him to be of unsound mind, then such a person will be disqualified from becoming a partner in an LLP. 

Section 6 provides the conditions under which a partner can be held personally liable for the obligations of the LLP. An LLP must have a minimum of two partners. If at any time the number of partners is reduced to 2 and the business continues for a period extending to 6 months with only one partner, the single partner can be held personally liable for the obligations of the company that were incurred during this period. However, it is necessary for the single partner to have knowledge that the partnership firm has only one partner. 

As per Section 22, the persons who subscribe to the incorporation document at the time of the registration of the LLP are regarded as the partners of the LLP. The relationship between the partners and the LLP and the relations among the partners of the LLP are regulated by virtue of the LLP agreement. 

Section 25 provides that a partner has to inform the LLP about any change in his name or address within 15 days of the change and a notice of such change has to be subsequently sent to the Registrar. 

Designated partner

Section 7 of the Act provides that an LLP must have a minimum of two designated partners, of which one must be a resident of India. It is essential that both the designated partners must be natural persons and not body corporate. If all the members of the LLP are body corporates, then the nominees of the body corporates will serve as the designated partners. 

The explanation of Section 7 provides that a resident of India is a person who has stayed in the territory of India for a minimum of 182 days in the preceding year. 

The following persons are ineligible to be appointed as designated partners:

  1. Minor
  2. Any person declared bankrupt in the preceding 5 years
  3. Any individual who has been imprisoned for a period extending 6 months
  4. Any person having a history of credited false in the preceding 5 year

Any vacancy for the post of a designated partner has to be filled within 30 days from the day on which the vacancy arrives. If the vacancies are not filled or if there is only one designated partner in the LLP, then, as per Section 9, all the partners will be deemed to be designated partners. Section 10 expressly provides that in case of violation of the mandate of Section 7, the LLP and all the partners will be liable to punishment of a fine, up to 5 lakh rupees. 

Role and duties of a designated partner 

The LLP agreement specifies the duties of a designated partner. An LLP agreement is an agreement that is entered into by the partners and the LLP.  A designated partner is responsible for ensuring compliance with all the provisions of the Act. Every designated partner is required to get a Designated Partner’s Identification Number (DPIN).

Section 35 of the Act provides that a designated partner is responsible for ensuring that an LLP files its annual return within 60 days of its financial year closure in such form as may be prescribed. This Section further provides that if the LLP fails to file the return within 60 days, the designated partner can be punished with a fine of up to Rupees 1 lakh. 

Under Section 47, it is the duty of a designated partner to provide all assistance to the inspector appointed under Chapter IX for the purpose of investigating the affairs of the LLP. 

Resignation or cessation of partnership 

Section 24 lays down the procedure for the resignation of a partner. A partner willing to resign has to give a 30-day notice to the other partners expressing his intention to resign. 

A person ceases to be a partner of an LLP upon his death or if he is declared insolvent or of unsound mind by a court of competent jurisdiction. Where an individual ceases to be a partner of LLP, such former partner or any person entitled to receive his share upon his insolvency or death, will receive the share of accumulated profit and the capital contribution made by the former partner. 

However, the former partner or the person entitled to his share will not enjoy the right to participate in the management of the LLP.

Incorporation of a limited liability partnership

In order to start an LLP, it is essential to register the establishment under the Limited Liability Partnership Act, 2008. 

The following steps must be followed to register an LLP:

  • Section 11 provides that an LLP is incorporated by filing the incorporation document with the Registrar of the State in which the LLP plans to establish its registered office.
  • Such an incorporation document must be subscribed to by at least two persons who are associated with the purpose of carrying on a lawful business with the object of earning profit. 
  • A statement acknowledging that all the provisions of the Act have been complied with is required to be submitted along with the incorporation document. Such a statement can be prepared by a chartered or cost accountant, a company secretary, or an advocate involved in the LLP’s formation, along with any person who has subscribed to the incorporation document. 

If the person making the statement knows that the statement is false or is unsure about its truth, then such a person may be punished with up to 2 years of imprisonment and a fine of up to Rupees 5 lakh. 

  • The incorporation document must specify the name and registered office of the LLP, the names and addresses of all the partners, including the designated partners, and the proposed business of the LLP. 
  • Once the conditions imposed by Section 11 are fulfilled within the prescribed time limit, the Registrar will register the incorporation document and issue the certificate of incorporation to the LLP.

Conversion to a limited liability partnership 

Chapter X of the Act envisages three types of conversion to a limited liability partnership. Conversion can be defined as a process of transfer of assets, liabilities, privileges, interests and obligations of the firm or company to the LLP.

Conversion of a partnership firm to an LLP

Section 55 and Schedule 2  lay down the procedure for the conversion of a partnership firm to an LLP. The conversion to an LLP will not affect the existing agreements that the partnership firm may have entered into, and it would be deemed that the LLP was a party to such contracts. 

Conversion of a private company to a Limited Liability Partnership

Schedule III to the Act provides that a private company may be converted into an LLP if no security interest is involved in its assets and if the partners of the proposed LLP comprise only the shareholders of the private company.

It is pertinent to note that a private company seeking to convert to an LLP must submit to the registrar a statement signed by all its shareholders specifying the name and registration number of the company and the date on which it was incorporated. Moreover, the statement and incorporation document as laid down under Section 11 have to be submitted to the Registrar. 

Thereafter, the Registrar can issue the certificate of registration or can refuse to register the LLP. The decision of the Registrar to refuse to register the LLP can be challenged before the Tribunal. 

Conversion of a Public Listed Company to an LLP

Section 57 read with the 4th Schedule lays down the procedure for the conversion of an unlisted public company to an LLP. In order to be eligible to be converted into an LLP, there should be no security interest subsisting in the assets of the company at the time of the application. 

Upon being registered, the LLP is required to inform the Registrar of Firms in the case of conversion from a partnership firm or the Registrar of Companies in the case of conversion from a private company or an unlisted public company, within a time period of 15 days from the date of registration. Upon registration, holders of the private or public company become the partners of the LLP and are bound by the provisions of the Act. 

Hurdles in conversion 

There are certain costs and risks associated with conversion to an LLP. It is also a very complex process as it requires the consent of all the partners or members, including the minority shareholders. The company that converts to an LLP will be deemed to have been dissolved and will be subsequently removed from the records of the registrar. 

Moreover, one of the key conditions for conversion is that no security interest should be subsisting on any asset of the company at the time when the company or firm makes the application for conversion. However, in today’s world, it is very rare for a company to have all its assets free from any security interest. 

Conversion to an LLP is a one-way process and any erring company cannot convert back to a partnership firm or a public or private company. 

Investigation of a Limited Liability Partnership

Chapter IX of the Act deals with the investigation. 

Under Section 43, the Central Government is empowered to appoint inspectors for the purpose of carrying out an investigation into the affairs of an LLP. The Central Government can also appoint inspectors if it is of the opinion that the affairs of the LLP are being conducted in a manner that violates the provisions of the Act. Section 45 of the Act provides that a body corporate or firm cannot be appointed as inspectors.

The central government can also exercise this power when a court or tribunal declares that the affairs of the LLP need to be investigated. The tribunal can make such a declaration suo motu or upon receiving an application from not less than 20% of the partners of the LLP. When the partners of an LLP make an application for an investigation into the affairs of the LLP, they must also submit supporting evidence and must make a security deposit with the Central Government. 

Section 49 of the Act provides that the inspector will submit a report of his investigation to the Central Government and the Central Government will provide a copy of the report to the LLP. Such a report will be admissible as evidence in any legal proceeding before a court or tribunal. 

If the Central Government is of the opinion, on the basis of the report of the inspector, that the LLP or any person or entity associated with the LLP who has been investigated has committed the offence for which the investigation was carried out, then the government can initiate the prosecution and it will be the duty of the partners, designated partners, as well as the employees and agents of the company to provide all reasonable assistance to the government. 

Powers of the inspectors

The inspectors have the power to investigate any entity which is either presently associated with the concerned LLP or was associated with the LLP in the past. 

Similarly, the inspector can also investigate any former or current partner of the LLP subject to the prior approval of the central government. The Central Government will grant such approval only after providing an opportunity to the concerned partner or designated partner to explain why such approval should be rejected. 

If the inspector is of the opinion that any document relating to the LLP or its associated entity or any of its partners may be destroyed, altered or secreted, then we can make an application to the Judicial Magistrate of the First Class or the Metropolitan Magistrate for the seizure of such documents. 

The Magistrate will consider the application and grant permission to the inspector to enter the place where the documents are kept and seize the same. The inspector can keep the documents for such a period as he considers necessary until the conclusion of the investigation. The Section also provides that no document can be seized for a period of more than 6 months. The inspector has to return the documents to such person or entity from whose custody they were seized.  

Limited Liability Partnership (Amendment) Act, 2021

Start-up LLP and Small LLP

The Limited Liability Partnership (Amendment) Act, 2021, introduced the concept of small limited liability partnerships. The newly inserted Section 2(ta) defines a small LLP as an LLP whose contribution is less than 25 lakhs or whose contribution is less than a higher prescribed amount which is less than 5 crores and whose turnover is less than 40 lakh Rupees or less than a higher prescribed amount which is less than 50 crores. The small LLP should also meet any other prescribed criteria and conditions.

The Amendment also introduced the concept of start-up LLP. The term start-up LLP has been defined in the newly inserted Section 76(A). A start-up LLP is an LLP that is incorporated under the 2008 Act and is recognised as a start-up LLP by the Central Government. 

The primary objective behind introducing the concept of start-up and small LLPs is to provide an edge over other LLPs. The Amendment specifies that in the event of a default, a small or start-up LLP would be liable only to half of the penalty that is prescribed for a general LLP. The special benefit is conferred on start-up and small LLPs as well as the partners and designated partners of such LLPs. A maximum penalty of Rupees 1 lakh can be imposed on such an LLP and a maximum penalty of Rupees 5 lakh can be imposed on the partner or any other member of such an LLP.

Resident of India 

The Amendment also modifies the definition of the expression ‘resident of India’ provided under Section 7 of the principal Act. Subsequent to the Amendment, a resident of India, for the purpose of the Act, would be a person who has lived within the territory of India for a minimum of 120 days in the preceding financial year. 

Punishment 

Section 30 of the LLP Act, 2008 provided that in the event of any fraud committed by the LLP or its partners, the LLP, as well as the partners of the firm who acted fraudulently, would bear unlimited liability. Every person who acted fraudulently or was involved in the fraud will be liable for imprisonment for up to 2 years along with a fine which may extend up to Rupees 5 lakh. 

However, the Amendment increases the term of imprisonment from 2 years to 5 years. 

As per Section 21 of the Act, an LLP that fails to specify its name, registration number and address of the registered office in its official correspondence and invoices would be liable to a fine that may extend up to Rupees 25,000. The Amendment enhances the limit of this fine to Rupees 10,000. 

Change in the name of LLP 

The Amendment also empowers the Central Government to direct an LLP, whose name is identical to an existing LLP or trademark, to change its name within 3 months. Where the LLP fails to change its name within the prescribed time limit, the Central Government is empowered to allot a name to the LLP. 

Appeal from the order of the National Company Law Tribunal

The Amendment Act provides that a person aggrieved by the order of the National Company Law Tribunal (NCLT) can prefer an appeal before the National Company Law Appellate Tribunal within 60 days from the order of the NCLT. Where the order of the NCLT was passed based on the consent of the parties, no appeal can be preferred against such an order. The NCLAT will provide an opportunity to the parties to be heard and thereafter pass an order modifying, upholding or setting aside the order of the NCLT. 

Special Courts

One of the most remarkable changes brought about by the Amendment Act is the modification of Section 77. Section 77 of the principal Act provides that the Judicial Magistrate of the first class or the Metropolitan Magistrate will have the jurisdiction to try an offence under the LLP Act 2008. 

The Amendment Act, however, provides for the setting up of special courts to try the offences under the Act. The newly inserted Section 77A specifies that the special courts will have exclusive jurisdiction to try the offences under the Act. The only exception is where the Registrar or any person of a higher rank than that of the Registrar makes a complaint in writing. 

Whether LLP can be a partner in a partnership firm

There has been a difference in the opinions of the different High Courts on the issue of whether an LLP can enter into a partnership with an individual.  

M/S Diamond Nation v. Deputy State Tax Commissioner (2019)

Facts:

In the case of M/S Diamond Nation v. Deputy State Tax Commissioner (2019), the Registrar of Firms had refused to register Go Green Diamonds LLP as a partner in the firm of the petitioners. The reason stated by the Registrar of Firms for the rejection of the application by the petitioners was that an LLP cannot become a partner in a partnership firm. 

Arguments by the petitioners 

The petitioners contended that Section 4 of the Indian Partnership Act provides that a legal person can be a partner of a partnership firm. Section 2(d) of the LLP Act provides that an LLP shall be a body corporate and have a separate identity distinct from its members. Thus, an LLP can be a partner in a partnership firm. 

Arguments by the respondents

The respondents contended that a joint reading of Sections 25 and 49 of the Indian Partnership Act makes it clear that all the partners of a partnership are jointly and severally liable. However, the partners of an LLP, by virtue of the LLP Act, enjoy limited liability. Furthermore, a partnership firm does not have any identity separate from its members, while an LLP enjoys a separate legal personality. Thus, admitting an LLP as a partner of a partnership firm would lead to ambiguities.

The issue before the Court

Whether an LLP can be admitted as a partner of the partnership firm.

Judgment

The Court primarily referred to the judgment of Dulichand Laxminaraya v. Commissioner of Income Tax (1956), where an individual, three firms, and a joint family wanted to enter into a partnership, and the Court had held that since a firm is not a person, it cannot enter into a partnership. 

The Court held that permitting an LLP to be a partner in a partnership firm would frustrate Sections 25 and 49 of the Partnership Act. The limited liability of the partners of an LLP runs against the purpose of Section 25 of the Partnership Act. A body of persons cannot be a partner. 

The Court thus concluded that there is cohesiveness between the provisions of the LLP Act and the provisions of the Partnership Act and the Registrar had rightly refused to register the LLP as a partner.

Jayamma Xavier v. Registrar of Firms (2021)

Facts

In the case of Jayama Xavier v. Registrar of Firms (2021), an LLP had entered into a partnership with an individual. Subsequently, the registrar of forms refused to register the partnership on the ground that an LLP cannot be a partner. 

Arguments by the petitioner 

The petitioners contended that the Partnership Act does not prohibit entering into a partnership with an LLP. The LLB enjoys perpetual succession and is regarded as a separate legal person in the eyes of the law. It is a body corporate capable of suing and being sued in its name. 

Arguments by the respondents

The respondents contended that some provisions of the Indian Partnership Act, namely Sections 25, 26 and 49, are inconsistent with the provisions of the LLP Act, 2008. Thus, an LLP cannot be allowed to enter into a partnership.

The issue before the Court

Whether an LLP can be treated as a person or enter into a partnership with an individual.

Judgment 

The Court held that a partnership can be created by two individual persons and, as per the definition of person under Section 3(42) of the General Clauses Act, 1897, a body corporate is regarded as a person in the eyes of the law. Since an LLP is a body corporate as per the provisions of the LLP Act, 2008, there is no inconsistency in permitting an LLP to be a partner in a partnership firm. 

The Court held that when an LLP enters into a partnership, it would be covered by the provisions of the Partnership Act and, therefore, the liabilities of the partners of the LLP under the LLP Act, 2008 would be irrelevant. The liability of the LLP would be independent of the liability of its individual partners. 

Based on this analogy, the Court set aside the order of the registrar of firms and held that there is no express prohibition for an LLP to enter into a partnership with an individual. 

Conclusion 

The applicability of the LLP Act is not only limited to professional enterprises, and thus, it can be held that the Act gives primacy to the suggestions of the Irani Committee over the Naresh Chandra Committee. 

The 2021 Amendment brings the Act up to par with contemporary economic conditions. The introduction of concepts such as start-up LLP and small LLP is in line with the government’s economic policy of promoting and incentivising small enterprises and startups. The setting up of special courts will result in the speedy disposal of cases and will improve the ease of doing business in India. 

There is an urgent need for the Supreme Court to clarify its judicial stand on the issue of whether an LLP can enter into a partnership or not. 

Frequently Asked Questions (FAQs)

What are the laws governing LLP in foreign countries?

In the United States, the Uniform Partnership Act, 1996, is a federal statute containing provisions relating to the regulation of LLPs. However, the different states have passed their own revised versions of the 1996 Act. While most state statutes provide that a partner cannot be held personally liable for the wrongs committed by the firm in tort, contract or other fields of law, some states provide that this protection is only partial in nature and a partner can be held personally liable for contractual and tortious claims brought against the company. 

In the United Kingdom, the Limited Liability Partnership Act, 2000 governs limited liability partnerships. In the United Kingdom, a remarkable distinction between a general partnership and a limited liability partnership is that a general partnership may or may not have a separate existence independent of its members, but a limited liability partnership has a separate and distinct existence from its members. 

Based on the statute of the United Kingdom, Singapore passed its Limited Liability Partnership Act, 2005. The Act provides that, for the purposes of taxation, a limited liability partnership would be treated the same as a general partnership, and it would be the partners who would be subject to taxation and not the partnership. The Indian model of LLPs is also similar to the model adopted by the United Kingdom and Singapore. The only aspect in which the Indian model differs from its UK and Singapore counterparts is the taxation mechanism. 

The concept of LLPs was introduced in Japan in the year 2006. LLPs in Japan can be formed only for a specific objective, which has to be expressly provided for in the partnership agreement. An LLP is treated as a contractual obligation where each partner must play an active role. However, the liability of the partners in an LLP is limited.

What are the provisions relating to the taxation of an LLP?

The LLP Act of 2008 does not provide provisions for the taxation of LLPs. The provisions in this regard were provided in the Finance Bill, 2009. The LLPs are provided with similar treatment as a general partnership, and it is the partnership that is liable to taxation and not the partners. The Bill also provided that the income tax return of the partnership must be signed by the designated partner, and where the designated partner is unable to do so or where the post of the designated partner is vacant, the partner shall sign the return. 

The Naresh Chandra Committee had recommended that an LLP should be given a “pass-through” treatment and that it should be the partners who should be taxed and not the firm. This was based on the analogy that a partnership firm is presumed to be operated by the partners for the purpose of profit and the property of the firm is partnership property. Thus, the profit is the profit of the partners, and it is the partners who should be taxed. However, this mechanism has not been adopted and it is the LLP that is taxed and not the profit in the hands of the partners. 

Where the LLP liquidates, all the partners of the firm are jointly and severally liable for the tax liabilities of the firm. However, where the partner proves that the non-recovery of the tax was not by virtue of a breach or neglect of duty on his part, the partner can be exempted from the liability.

In case of a violation of any provision of the Finance Bill, 2009, the firm would be liable to punishment as provided under the Income Tax Act, 2009. 

References


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