This article is written by Karthikeyan M, pursuing Diploma in Law Firm Practice: Research, Drafting, Briefing and Client Management from LawSikho. The article has been edited by Tanmaya Sharma (Associate, LawSikho) and Ruchika Mohapatra (Associate, LawSikho).
Table of Contents
Introduction
As of June 2021, 50,000 startups have been recognized by DPIIT ( Department for promotion of Industry and Internal Trade). Keeping this in mind, it is important to understand the legal compliance and the suitable legal environment relating to a startup business and the central government has a huge focus on the ease of doing business reforms. The Government wishes to simplify the business-related legal environment, with a motive of structural and financial ease of business.
In order to vitrine this rationale, for the first time, the Limited Liability Partnership Act, 2008 has been amended and the LLP amendment act 2021 has been given President Assent on August 13, 2021, and it is yet to come into force. The main objective beyond this amendment which consists of multiple recommendations from CLC (Company law committee) as stated by the central government is to bolster the business environment to act as an abutment for the startup ecosystem by increasing the ease of doing business in India. According to the Corporate Affairs Ministry, there were more than 2, 13,000 registered LLP’s in India. This article is intended to explain the crucial realities and advantages of the recent amendments which have been done with the recommendations of the company law committee (CLC) in a perspective for startups and to try to elucidate how these strategic amendments will allow this country to flourish as a corporate haven.
Why should startups choose LLP over private companies?
A limited liability partnership firm is a type of partnership firm in which every partner is independent and there is no joint liability created for independent or unauthorized acts of other partners. In other words, according to Section 3 of the LLP Act, 2008, an LLP is defined as a “separate corporate body which is being incorporated under this act and it will be considered as a separate legal entity from that of the partners.
Though incorporation of both companies and LLP seems to be aligned but in terms of the nature and the future pathway in which the founders intended to pursue may actually decide the structure of the business. So in terms of Startups, it may seem beneficial to structure it as a private company for some peculiar instances but structuring it as an LLP is preferably ideal because of certain advantages in terms of nominal incorporation fee, lesser compliance requirements, unrestricted ownership and nominal tax and fines. In spite of such flexibility and fewer formalities, many startups were shying away from choosing LLP structure. Thus in order to facilitate and encourage the entrepreneurs to choose LLP as their business structure the government has introduced significant changes in this act.
Objectives of LLP Amendment Act 2021
Previously there were 81 Sections. As per the newly amended act 2021, 7 new Sections have been inserted, 5 Sections have been substituted and 3 Sections have been omitted.
Introduction of small LLP
A very new concept of small LLP has been created which is similar to that of “Small Companies” in the companies act 2013. According to Section3(f) of the Act 2021, Small LLP is an LLP structure in which the threshold of the partner’s contribution has been revised from 25 lakhs to 5 crores and the turnover size is increased from 40 lakhs to fifty crore rupees.
In other words, if an LLP in which the partner’s individual contribution doesn’t exceed 5 crores and the turnover of the LLP is up to 50 crore rupees then the LLP is said to be a small LLP.
Small LLP in the sense means there is an existing privilege of lesser compliance than normal LLP’s and lesser fees and minimal penalties in cases of default and a drastic reduction in filing fees and exemption from standard audits other than LLP’s involved in the manufacturing sector. Thus it will boost the startups to incorporate their businesses as small LLPs rather than incorporating a company. With certain qualifications, the government can classify some as “Startup LLP”.
This classified and organized Small LLP will galvanize the small unregulated partnerships and other micro-entities to form a simplified and economical legal compliance business structure.
Ex: If A and B enter into a partnership for running a cloth business in the traditional way of entering into a limited liability partnership or perhaps entering into a normal partnership agreement to escape from the legal nuances and compliances of LLP. This Small LLP simplifies the process and illuminates them to enter in a proper, inexpensive and understandable legal exposure and will appraise their business goals. The Central Government can also recognize certain LLPs as startup LLPs through official notifications.
Though the introduction of small LLP would have a positive impact, yet in the perspective of UK companies act there is a further classification of LLP’s into micro ( turnover less than632,00 euros) , small ( annual turnover less than 10.2 million ) and medium-sized LLP ( turn over less than 36 million ) and condition-specific statutory audit relaxations have clearly helped the business structures to comply with the laws and it has been an advantage for such business to gradually develop with their legal compliance requirements and to record to their periodic growth and if such a dense classification will also be a beneficiary inclusion for the Indian startup ecosystem to avail the condition-specific exceptions based on their business growth and other qualifying conditions.
Raising funds through the issuance of secured non-convertible debenture
Earlier, as per the companies act, a company can raise borrowed funds by both issuance of debentures and by the way of loans however there is a previous restriction for LLP to avail the benefit of issuance of NDC as the company is considered as a separate corporate entity, by following up, as per the recent amendment which has now allow LLP’s to raise capital through issuing secured non-convertible debentures to corporate bodies and trusts who are being regulated by SEBI or RBI.
What is an NCD?
Non-convertible debentures are financial instrument (debt) which is being used by the companies to raise long term capital and the reason it is called non-convertible is that some debentures can be converted into shares at the discretion of the owner after a certain which is not possible if the debenture is NCD. A secured NCD means a debenture that is backed by the company’s assets and in case of failure to repay the investors can claim payment through liquidation of those assets. It may seem to work on the same principle of a bank fixed deposit however there are certain salient features like higher rate of returns, low credit risk, tax-free deduction at source ( TDS) and easy liquidity options that make an NCD more attractive and a viable option of investment.
Why is the issuance of NCD beneficial for startups?
By this amendment, the government intended to boost the debt market in India and at the same time to protect the interest of the investors which in turn create trust in the investors to invest in startups and it will be helpful for certain business-centred startups which require a huge investment and it a safer method rather than applying for loans and in case of failure on the part of the LLP and at the same time with stringent regulation of restricting them with regulated investors can be a hurdle in raising their capital, If the intention of the government is to deepen the strength of debt market in India then by allowing retail investors with such regulated safeguards will definitely boost the startups to consider issuing NCDs while raising capital.
Establishment of special courts
The Act also provides an establishment of special courts for the purpose of speedy trial of offences. According to newly inserted Section67–A the central government for the purpose of speedy trial may establish specific courts as May necessary. The special court comprises:
a) A Sessions Judge or an Additional Sessions Judge for the offence punishable with imprisonment for three years and more.
b) A metropolitan Magistrate or a Judicial Magistrate of the first class in the case of other offences.
The appeal and revision petition shall lie to the high court within which the jurisdiction of the special court is located.
This move would serve the real purpose of providing a speedy trial for the offences under the LLP act.
Accounting and auditing standards
Presently LLPs are required to comply with the accounting standards issued by the institute of Chartered Accountants of India and there is no mandate to follow the standard procedures to comply with and as recommended by the ICAI with the consultation of the National financial reporting authority prescribe the Standards of accounting and Standards of Auditing for a class of LLPs by inserting a new Section of Section34 –A with an intention to bring standardization in the procedures of accounting and auditing.
Punishment for fraud
The amendment has increased the maximum term of imprisonment from 2 years to 5 years in case of fraudulent activity carried out by the partners with the intent to defraud the creditor or any other fraudulent purposes. This stringent approach would be helpful in curbing fraudulent activities to be carried out by the partners.
Compounding of offences
Compounding refers to a process whereby the offender or an entity that defaults will file an application to the concerned compounding authority which indicates the acceptance of the commission of the offence and may plead for remission.
Compounding of offences in Companies Act and its relevance
Section 441 of the Companies Act deals with the compounding of offences and is a mechanism in which the offender is given an option to pay money in lieu of prosecution. Akin with the procedures of the companies act the newly amended LLP act has provided a procedural structure for the better usage of the option of compounding of the offences committed by the partners or any persons associated with. Thus the amendment has now provided that a person who has been appointed by the central government as in the rank of regional director or any officer who is above his/her rank may compound such offences. Previously this has been done by the central government itself under Section39 of the Act but by this amendment in Section39, the provisions for the process of compounding has been made detailed and permeating. In order to prevent reoffending the act has also stated that a similar offence cannot be compounded within a 3 year time period which is identical with the provisions of the Foreign exchange management act FEMA (Section13 and Section14). The application of the compounding of the offence will be carried out by a registrar and will be notified to the regional director or any person who is not below the rank of regional director.
Reduction of additional fees
Previously under Section 69 of the Act prescribed that any document or return filed with the registrar may be filed with a delay up to 300 days from the due date with an additional fee of Rest 100 per day.
This Section has been amended and it provides that such document or return shall be filed after the due date of filing without prejudice to any other action or liability and there is a prescription of different fees or additional fees for different classes of limited liability partnerships or the different documents or returns to be filed as required. The reduction in the fee and no further legal complexity and condition specified fee will lead to reducing the compliance pressure on the Startup LLPs.
Change in name of the LLP
The LLP Act 2008 states that the central government can direct an LLP to change its name on certain conditions such as it violates the conditions or provisions of Indian trademarks act 1999 or the name is being undesirable or being identical to a trademark pending registration and if any LLP within the prescribed time limit failed to comply with Section 17 is punishable with a fine ranging from 10,000 to 5, 00,000 Rupees.
Under the Amendment Act 2021, Section 17 has removed some of the grounds under the change of name of LLP and it prescribes that the name of the LLP should not contravene the provisions laid down under the Trademarks Act, 1999 and the Section also empowers the central government to direct an LLP to change its name when it is found to be identical to an existing LLP or registered trademarks within a period of 3 months under Section17(1). If an LLP defaults in compliance with subSection (1), the central government in order to slick the procedural requirements and to reduce the real-time compliance consequences the central government can allot a new name to the LLP.
Role of Appellate Tribunal
The amendment in Section72 of the Act provides that the appeals against the order of the tribunal will lie to the National company law tribunal from an order made by the tribunal with the consent of the parties. Further, the appeal must be filed within 60 days and for sufficient cause the time frame can be extended for a further period of 60 days if the appellate tribunal is satisfied with the prevented cause from filing the appeal within the specified period.
Relaxation in “Residency”
There is a prerequisite that for each LLP at least 2 partners should be present and one of them should be a resident of India. Previously if a partner was considered as a resident of India, if he stayed in India for at least 182 days or more than that in immediately preceding 1 year. The Amendment bill has reduced the term of stay to 120 during a financial year and this reduction period would encourage and pave an easier way for foreign resident individuals to be a partner in an Indian LLP.
Decriminalization of certain offences
This Act has converted certain offences into civil defaults and decriminalized some offences which were essentially related to minor offences and has converted the nature of punishment provided from criminal punishment to monetary penalties.
The Act has proposed to decriminalize 12 offences. These offences will be shifted through an in-house adjudication Mechanism instead of being considered as a criminal offence with an intention to reduce the burden of the partners and to save the resources and time of the partners in the business.
Conclusion
The amendments were instilled in a way to boost the confidence and a standard practical governance practice will create a certitude among the innovators to adopt LLP as a viable business structure. Though this act has lacked unfulfilled expectations in certain areas like lack of clarity of merger of LPP with a private company, lack of detailed regulatory approach in carrying out a manufacturing industry by an LLP and the non-reduction of residential days in other acts like FEMA and IT act which indirectly mandates and increase the time period of stay in order to qualify as a resident. Other than above-listed reasons, this amendment has been with a primary agenda of decriminalization of offences and the direct contribution of the ease of doing business but in reality, the benefits of the amendments were deep and more obliging for invigorating the startup sector and with those reformative amendments the act has provided a most workable and flexible environment for a business to thrive and enjoy the privilege of a company without being curbing them with complex compliances of a company. Thus, these amendments seem to be providing a promising environment for startups to choose their business structure and thrive easily.
References
1. Pallavi Mishra/Trisha Shreyashi, Will amended LLP Act give start-ups a boost?, The Hindu Business line (Sep. 8,2021 ), https://www.thehindubusinessline.com/opinion/will-amended-llp-act-give-start-ups-a-boost/article36365791.ece
2. RBSA advisors, Limited Liability partnership act 2021,( Aug. 2021), https://rbsa.in/TT_Alerts/RBSA-TT-Alert-Limited-Liability-Partnership-(Amendment)-Act-2021.pdf
3. CS Jaya Sharma, Nuts and Bolts of LLP amendment act 2021,( Sep. 8,2021), https://taxguru.in/company-law/nuts-bolts-llp-amendment-bill-2021.html
4.Ashish M saji, Parliament passes the LLP amendment bill, Enterslice learning ( Aug. 11,2021)
5.Taxwink team, Key Features of Limited Liability Partnership (Amendment) Act, 2021,Tax wink, (Aug. 14,2021), https://www.taxwink.com/blog/limited-liability-partnership-amendment-act-2021
6. The Limited liability partnership amendment act, 2021, No.31, Acts of Parliament , 2021 (India)
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