Understanding the concept of LLP and its tax implications

In India, the LLP act was introduced on 1st April 2009. Nonetheless, the LLP structure never achieved the level of fame that had been anticipated. Nonetheless, since the introduction of the companies act, there has been a huge rise in the LLP structure.

There is a significant level of interest from new businesses inquiring to make an informed decision about whether to incorporate as a private limited company or a limited liability partnership, as well as from existing companies seeking to examine the possibilities and benefits of conversion to LLP.

Primary Characteristics of LLP

• A limited liability partnership is a separate legal and corporate entity from its partners. LLP's has continuous succession. All of the LLP's partners should act as the LLP's agent, but not as the agents of the other partners. It is capable of entering into contracts and holding properties in its own name.
• The LLP is managed in accordance with the terms of the LLP agreement and within the framework established by the LLP Act, 2008. In the absence of an LLP agreement, all matters concerning partners' liabilities and the execution of mutual rights should be determined or managed under the specified provisions contained in Schedule I to the LLP act. The LLP agreement should specify the partner compensation and interest on capital eligible for income tax deductions.
• The act requires that an LLP be registered. The certificate of incorporation provides conclusive evidence of the business's formation. All partners must obtain a DSC and DIN (form-7), obtain approval for the LLP name (form-1), file for incorporation (form-2), obtain an incorporation certificate, file for the LLP agreement (form-3), and obtain partner consent (form-4). The LLP agreement must be stamped in accordance with the state stamp act.
• In an LLP, only a corporation or an individual may become a partner. Because a HUF or firm is neither a corporation nor an individual, it is not permitted to be a partner in an LLP. There is no upper limit to the number of partners in an LLP, but it must have a minimum of two partners.
• A limited liability partnership is required to keep accurate books of accounts at its registered office. They are required to file a statement of account and solvency with the Registrar within one month of the end of the six-month period after the financial year's close through form-8 and an annual return with the Registrar within two months of the financial year's closure via form-11.
• A limited liability partnership is required to keep accurate books of accounts at its registered office. They must file a statement of account and solvency with the Registrar within one month of the end of the six-month period after the financial year's close through form-8, and an annual return with the Registrar within two months of the financial year's closure via form-11. Unlike a company that is required to audit regardless of whether there is a transaction, the audit is mandatory if your turnover exceeds Rs. Forty lacs, and your contribution exceeds Rs. Twenty-five lacs. Additionally, unlike companies, they can operate on a mercantile or cash basis.
• The minimum capital investment is Rs. 1 as compared to Rs. 1 lac for a private limited company. However, LLP is unable to raise funds from the general public.
• A private company, a firm, or an unlisted public company may convert to an LLP according to the LLP Act, 2008. On such conversion, all tangible (movable and immovable) and intangible property, all assets, liabilities, interests, rights, privileges, and obligations of the firm or company should be transferred to and vest in the LLP without further act/deed.
• A limited liability partnership is not permitted to be formed for charitable reasons. It might be established only for the purpose of profit as a profession or business. Professionals can now form multidisciplinary professional limited liability companies, which was previously not possible.
• The LLP act is more straightforward than the companies act and does not impose restrictions on deposit taking, party transactions, lending to directors, making loans and investments, and corporate social responsibility.
• Unlike a company, charges are not required to be registered. It could be the major hindrance to obtaining loans from banks and financial institutions, and there is some resistance to authorizing loans to LLP.

Tax Structure of LLP

A partnership established under the LLP Act, 2008 will be treated as a partnership firm in the same way an Indian partnership formed under the Indian partnership act 1932, would've been treated. According to income tax legislation passed in 1961, the terms partner, partnership, and firm shall include LLP, LLP partner, and LLP. Both of them can deduct interest on loans and capital from partners up to 12% on salary, profit sharing, bonus commissions, royalties, or any other kind of remuneration paid to a working partner up to the maximum specified limit -

1. On the first Rs. Three lacs in book profit or, in the event of a loss, Rs. 1.5 lacs or 90% of book profit, whichever comes first.
2. On the balance of book profit at a rate of 60% on any book profit over Rs. 1.5 lacs (section 40(b)). And in the hands of a partner, such interest and remuneration will be chargeable as business profit. Section 10 (2A) exempts a partner's profit share from the LLP/firm. That is why, while an LLP is a body corporate, its taxes are similar to that of a firm. The only distinction is that whereas section 44AD applies to a firm, it does not apply to a limited liability partnership.

Specific aspects related to LLP Taxation

Introduction of capital asset into partnership

According to section 45(3) of the income tax, capital gain to a partner is computed by determining the sale consideration to be the value at which the LLP/partnership records it in its books. Nonetheless, according to Rule 23 of the 2009 LLP rules, when a partner makes a non-cash contribution, the contribution must be properly valued by the CA in the LLP's records.

Capital withdrawal

Section 45(4) defines FMV on the date of such transfer as the whole value of the consideration received on the firm's distribution of capital assets, whether upon dissolution or otherwise.

1. Capital gains tax is not payable on the conversion of a firm into an LLP if there is no change in the partners' rights and obligations and no transfer of liabilities or assets after the conversion.
2. According to section 47, converting a private limited company or an unlisted public company into an LLP will not be regarded as a transfer in the hands of the firm or its shareholders if certain specified requirements are met.
3. Taxation in a way different from that of a corporate. The company is required to pay MAT (minimal alternate tax), whereas the limited liability partnership is required to pay AMT (alternate minimum tax).