One interesting aspect of the Union Budget announcement this year was the laying of the tax structure for limited liability partnerships (LLP). When LLPs were introduced in 2008, it was aimed more at helping professionals like chartered accountants or lawyers to start business without going for the traditional partnership model and instead have a more corporate structure. But it has its resonance for the channel business as well.

In an LLP, no single partner is responsible for another partner's misconduct or negligence and each have limited liability for the other individual's protection within the partnership. This
ensures that if one partner in the alliance is responsible for errors, omissions, incompetence, or negligence, then the other partner's liability for the same is limited.

Now why is this interesting news for solution providers?
Typically most channel organizations are family owned businesses where the entrepreneurs are hesitant to have outsiders as partners, fearing that the latter might engage in inappropriate
activity which would become a liability for the entire organization. But with the LLP each partner's liability is limited to his stake in the company and the others are shielded from the liability of his wrongful acts.

This means that partners can go ahead with more partnerships, as an LLP does not have a limit to the number of partners who can be on board. This in turn will lead to infusion of funds and also help in expanding the business with the inclusion of several players.

.Till the Budget announcement, the taxation laws did not permit several professionals to carry business only through partnership firms as the income tax law did not recognise an LLP. Also there was a chance of double taxation if an LLP registered in India decided to spread its business to other countries.

In the UK and most European nations, the tax liability in LLPs falls on individual partners. In the US, a flexible system exists where partners decide whether they or the firm will be taxed.

Now the Union Budget has decreed that LLPs will be treated similar to general partnerships under the Indian Partnership Act, 1932. This means that the profits and losses of the outfit would not pass through in the hands of the partners but would be assessable in the hands of the LLP.

There are a few partners I had the opportunity of speaking to recently who were very enthused about this development and are going through the fine print to see how they can now invite more people to partner with them in an LLP. And given that LLPs are easy to set up as compared to the legal procedures of setting up a company, and as easy to dissolve, would this finally lead to more consolidated within the channel community?

Vinita Bhatia
vinitavs@cybermedia.co.in

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