In this blogpost, Abhay Singh, Student of Amity University, Rajasthan and the Diploma in Entrepreneurship Administration and Business Laws by NUJS, writes about What is  an LLP, features and advantages of LLP, Tax liability of an LLP and the procedure of conversion of an LLP into a company.

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A new trend that has been observed of late is that people are now switching to LLP (Limited Liability Partnership).

LLP emerged from Limited Liability Organisations i.e. Companies and Unlimited Liability i.e. Partnership/Proprietorship. With growing impact of service sector, there was a need to bring in existence hybrid of these two types i.e. Companies and Partnership/Proprietorship.

In Companies the liability of the owners are limited as compared to Partnership/Proprietorship which is easy to form. Hence, it led to the emergence of Limited Liability Partnership (LLP) which would provide benefit to both Companies and Partnership form of organisation. This was emerged with the need of bringing the midway out of these two already existing form of organisation.

Understanding of Limited Liability Partnership (LLP) as form of Organisation

It is a form of Organisation that enables the expertise of the business organisation to operate in a flexible and efficient manner with the benefit of limited liability and operation can be done i.e. internal structure can be managed as Partnership form of organisation. It is governed by Limited Liability Partnership Act,2008 which includes 81 Sections and 4 Schedules.

Features of LLP

  • Separate Legal Entity- LLP has its own separate legal entity apart from its members, this basically mean LLP can enter into any agreement with its own name and can sue and be sued.
  • Two Partners- For starting an LLP form of the organisation only 2 partners are needed. However no limit for a maximum number of partners.
  • Capital- No minimum requirement for capital contribution.

Advantages of LLP

  • No minimum capital contribution is required.
  • Easy to form.
  • Liabilities of the partners are limited.
  • Having separate legal entity means LLP can sue and be sued in its own name.

Disadvantage of LLP

  • It cannot raise funds from public as companies do.

Taxation of LLP in India

The government of India has notified that LLP would be taxed in the same manner as Partnership form of organisation i.e. tax will be charged on LLP and not on partners or members.

No tax would be levied on conversion of Partnership into LLP.

This was the basic introduction about what LLP is and how it has emerged over the country. Basically, introduction part deals with brief information about the LLP its merits and demerits so as to provide information regarding how it is different from Company form of organisation and Partnership form of organisation.

Conversion of Company into LLP

Under the Companies Act 2013 which came into effect on 1st April 2014 there are many compliances which were cost effective for small enterprise so they decided to convert from Companies to Limited Liability Partnership (LLP).

A registered Company in India has to go through much complex formalities which lead to the adding up of overhead cost for managing affairs and mandatory boards meetings , maintenance of statutory records,  filling of form with Ministry of Corporate Affairs (MCA) etc.

Therefore, the need was felt by the small business enterprise to for LLP. As in Limited Liability Partnership (LLP) there is no such mandate which is to be fulfilled for the commencement of business.

In India LLP is governed by the Limited Liability partnership Act 2008 and is exclusively governed by the rules and regulations given in the LLP Act 2008 and LLP Rules 2009.

The bodies that are directly concerned with registration of LLP are :-

  • Ministry of Corporate Affairs (MCA)
  • Government Of India
  • Its well-established web portal for registration of Limited Liability Partnership (LLP).

Decisions related to conversion of a company into LLP

For the conversion of a company into LLP, various factors are being considered such as ‘Cost’ ‘Compliance’ and other requirements which these organisation needs to follow.

Before conversion of a Private Limited Company into Limited Liability Partnership (LLP) Cost Benefit Analysis is being made so as look out how much cost is to be incurred and how much cost will be saved if conversion is made from company to LLP.

Benefits under Income Tax

  • There is no provision of Division Distribution Tax in LLP.
  • Since LLP don’t give credit to MAT (Minimum Alternate Tax), therefore there is a saving of MAT tax.
  • Saving of Income Tax as remuneration and interest payable to partners as salary.

Few doubts were still left which lead to the roadblock to the conversion of the company into LLP as the loopholes were there in the Finance Act, 2009 but with Finance Bill , 2010 these loopholes were overcome and these amendments took effect from the assessment year 2011-2012.

Liability on account of capital gains tax on transfer of assets and liability in a company on conversion into LLP

Finance Act, 2010 has inserted new clause in section 47 which includes following conditions are to be satisfied not consider it as transfer they are:-

  • Turnover limit– It shall not exceed sixty lakhs.
  • Shareholders– All the shareholders should be partners in the same proportion as they were in the company.
  • Capital contribution– Capital contribution of the shareholders must be in the same ratio.
  • Assets and Liabilities- All assets and liabilities of the company become assets and liabilities of LLP.
  • Accumulated Profit- No accumulated profit is to be paid for a period of 3 years from the date of conversion.

If the all the above conditions are being fulfilled then, conversion shall not attract capital gain tax from the company and nor its successor LLP.

 Cost of conversion

  • Unabsorbed depreciation and accumulated loss not carried over if all the conditions under section 47A(4)are not satisfied.
  • Stamp Duty on the transfer of immovable assets.
  • The cost of transfer of brand name, patent
  • For the purpose of conversion cost of LLP (Limited Liability Partnership)

Conclusion

Hence, conversion of the company into LLP can be made with the formalities being mentioned above and the conditions which are to be fulfilled. Conversion into LLP is one of the most costs effective form of organisation i.e. it doesn’t require huge cost for setup though it cost effective too. As in the case of a company much compliance are there but in the case of LLP not very much compliances are there. It basically emerged for the small business man who had problems in handling company form of organisations.

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