Businesses have been booming in India and to give them a fillip the government recently announced the implementation of Limited Liability Partnership (LLP). Till recently businesses in India had but two options to run their operations. These two formats were corporate business and partnership.

But in April this year, LLP was implemented. According to Government of India, Ministry of Corporate Affairs, LLP is a corporate business vehicle that enables professional expertise and entrepreneurial initiative to combine and operate in flexible, innovative and efficient manner, providing benefits of limited liability while allowing its members the flexibility for organizing their internal structure as a partnership.

Being a fairly new concept, LLP has not yet caught up in the business circles in India. But seeing that the number of businesses is burgeoning here, this format is all set to grow in popularity. Not only does LLP provide partners the benefits of limited liability, it also allows its members to organize and create a partnership based on mutually arrived agreements. The partners are liable for their agreed contribution in the LLP. One partner is not liable for the actions of the other partner(s), hence limited liability. This clause protects partners from sharing the liability created by another partner's wrong actions or conduct.

Explaining the concept further, Sharda Balaji, Founder, NovoJuris Services, a legal consulting company specializing in corporate, technology, investment advisory and capital markets, said, “LLP is a body corporate and combines the advantages of general partnership firm under the Indian Partnership Act and the Companies Act. It contains both features of a company – like limited liability, perpetual succession, separate legal status from that of its partners, and the features of a partnership firm where the partners have the right to manage the business directly, rights and duties of partners being governed by the agreement between partners, and the the flexibility for partners to devise the agreement as per their choice. The interesting feature is that one partner is not responsible or liable for another partner's misconduct or negligence.”

A few examples of successful LLPs are Deloitte LLP and Ernst & Young LLP, although both are examples of LLPs in the US. Delhi-based legal consultants Handoo and Handoo were the first LLP firm of India. The implications of LLPs vary from country to country. Sharda explained that the differences are largely in the status accorded to the LLP and taxation. “Most countries like the UK, Singapore and Japan are tax-transparent, i.e. taxation here has been accorded the status of pass-through entity and income is taxed in the hands of the partners. In many countries, an LLP can be formed for any purpose. However, in China, an LLP can be formed only for knowledge-based professions and technical services industry. In India, an LLP can be formed only as a 'for-profit' business,” said Sharda.

Benefits of LLP
One of the factors SIs can look forward to in an LLP is benefit in tax returns. Income taxes in an LLP are passed through the business and reflected on the partners' individual tax returns. So while an LLP gives the benefits of limited liability, it also provides many of the tax advantages of a sole trader partnership.

On the tax procedure in an LLP, Balaji shared, “LLP is now taxed like the general partnership firm under the Indian Partnership Act, 1932 ie the entity is taxed and income is exempted from tax in the hands of the partners. Whereas in a company, the income is taxed at the entity level and again bear the tax on the dividend paid to the shareholders. The industry was hoping that LLP would be a pass-through entity for taxation, like many other countries.”

She added that the Venture Capital and Private Equity firms would be a happier lot had the LLP been allowed as a pass-through to taxation at the entity level. Other benefits of LLP are that there are designated members for running the day-to-day operations of the LLP, so the management is more streamlined than in a corporation. In an LLP there is also flexibility in splitting partnership profits and losses. LLPs are also said to be beneficial for small and medium enterprises in general and for the enterprises in services sector in particular.

“An LLP is indeed advantageous because of comparatively lower costs of formation, lesser compliance requirements, easy to manage and run and also easy to wind-up and dissolve, no requirement of minimum capital contributions, partners are not liable for the acts of the other partners and importantly no minimum alternate tax (as of date). But, LLP cannot raise money from the public,” stated Balaji, adding, “One other factor that is interesting is that, books of accounts have to be audited if the contribution is above Rs 25 lakh or if annual turnover is above Rs 40 lakh.”

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