Unlimited issues limiting benefits of LLP

Written by Parthiv Kamdar | Shripal Lakdawala | Updated: Nov 23 2009, 03:16am hrs
In India, businesses mainly operate as companies, sole proprietorships and partnerships, each subject to different regulatory and tax regimes. Introducing Limited Liability Partnerships (LLP) as a new business structure is considered to be a path breaking reform initiative, providing the much needed flexibility, especially to small and medium sized entrepreneurs. This is evident from the fact that approximately 300 LLP have been formed so far. The Limited Liability Partnership Act, 2008 (LLP Act) and the LLP Rules details the regulations for operation and management of LLPs. The Act, inter-alia, provides for conversion of a partnership firm and company into a LLP, contribution in kind by the partners to the LLP, compromise or arrangement between a LLP and its partners/ creditors or amongst two or more LLPs, reconstruction of LLP, etc. LLP is hence emerging to be the new generation business structure.

It would be interesting to know the history of the origin of an LLP as a business enterprise. LLP as a business model first emerged in USA in early nineties. With the passage of time LLP gained popularity and was adopted as a business structure in many countries across the globe including Australia, Japan, Singapore, China and UK. After discussing and deliberating the same for over a decade, the LLP Act in India was made effective on 31 March, 2009. Bearing a taste of the law in UK, the LLP Act has various provisions similar to the ones stated in the Limited Partnership Act, 2000 UK (UK LLP Act) and the regulations made thereunder. However, it is important to note that with the advent of the UK LLP Act, requisite amendments in other laws and regulations were made simultaneously. For example, amendments in the Income and Corporation Taxes Act, 1988, Taxation of Chargeable Gains Act, 1992, Companies Act, 1985, Inheritance Tax Act, 1984, laws pertaining to stamp duty were effected to incorporate the concept of LLP. Having said so, it is essential to evaluate the implications of the LLP Act in India and the supporting legislations.

With the onset of the LLP Act, consequential clarifications/amendments in other legislations such as the Income Tax Act, FEMA (including the FDI policy), SEBI, Companies Act, etc were expectedsome amendments have been provided while many are still awaited.

The Finance Act, 2009 has brought to rest the ambiguity with regards to taxation of LLP wherein provisions of payment of Minimum Alternate Tax and Dividend Distribution Tax are made not applicable to an LLP. Even the proposed Direct Taxes Code has provided for similar tax treatments thus which by far popularising the LLP as a preferred vehicle for business and professional purposes.

However, as with any nubile legislation, there still remain various apprehensions in respect of the provisions to be made in all the relevant acts, rules, regulations, etc.

To start with, one of the conditions that SEBI (Issue of Capital and Disclosure Requirements), Regulations (Regulations) provide for a company to be eligible for an initial public offer is that the said company should have a track record of distributable profits in the three immediately preceding years. The Regulation further explains that in case an issuer has been a partnership firm, the track record of distributable profits of the partnership firm will also be considered. However, such an explanation with respect to a LLP has not been inserted in the revised Regulations. Thus, as it stands today, the track record as LLP will not be considered for determining the eligibility to list the shares of the successor company.

Although there are provisions in the LLP Act for conversion of partnerships/private companies/unlisted companies into a LLP, there are no provisions for vice-versa. The LLP Act and for that matter the Companies Act and the Companies Bill, 2008 is silent on conversion of a LLP into a company. However, a view may be taken that under provisions of Part IX of the Companies Act, a LLP can be converted into a company.

Coming to stamp duty liability, unlike in the case of partnership firms wherein the Indian Stamp Act and relevant State Acts have specified entries for stamp duty liability pertaining to partnerships, there are no similar entries for LLP. Further, there are specific entries in the Stamp Acts levying duty on orders passed by the jurisdictional High Court under Sections 391-394 of the Companies Act. However, no insertion has been yet made for orders passed pursuant to Sections 60 to 62 of the LLP Act.

Currently the FDI Policy and FEMA do not expressly permit a foreign investment in to a LLP. It is not even clear whether NRIs can invest in an LLP on non-repatriation basis. Clarifications/amendments are expected in this regards in the near future.

The aforesaid issues are just a few instances arising from introduction of LLP Act. In order to propel the concept of LLP as the most attractive vehicle for a business enterprise, a holistic review be carried out for various amendments required in other legislations.

Shripal Lakdawala, Senior Manager and Parthiv Kamdar, Assistant Manager, PricewaterhouseCoopers