1. Yoganandh & Ram Chartered Accountants Walk Through Limited Liability Partnerships

2. Yoganandh & Ram Chartered Accountants Concept paper on LLPs in India Based on the recommendations of the NC Gupta committee, and the Irani committee, the Govt had come out with a concept paper and a draft of the LLP bill in late 2005 LLP Bill has been placed before  Lok Sabha on 7 th Dec 2006  Rajya Sabha on 15 th Dec 2006. LLP Bill approved by Lok Sabha on 15 th Dec 2008

3. Yoganandh & Ram Chartered Accountants Concept paper on LLPs in India First LLP in India expected by 1.4.2009 The Constitution (entry 44, List 1 of Seventh Schedule) has put “corporations law” in the Union List:  As LLP’s are to be given an incorporated status, they will fall under this list

4. Yoganandh & Ram Chartered Accountants Concept of LLPs The word “partnership” in LLPs is a misnomer, as the entity is not merely a collective coming together of two persons:  Results into creation of a new entity with its own existence LLPs are a hybrid between a company and a partnership:  Externally, they have all features of a company  Internally, they are run and managed by the members, hence they are like partnerships  The idea is to clothe a partnership with Limited liability Incorporated existence and therefore personality of its own The concept of LLPs has inherent inconsistencies, as it has not had benefit of seasoning over centuries:  US law also relates to 1990s – Delaware model is the most commonly used one.

5. Yoganandh & Ram Chartered Accountants LLP legislation in other countries In UK, LLP law was passed in 2000 The campaign for LLPs was initiated by accounting firms (PwC and E&Y) to limit their liability:  Though UK Companies Act did allow professions to register as companies, accounting firms were reluctant to publish accounts subject to inspections etc The UK move set the ball rolling in other countries too:  Canada (Ontario) introduced LLP law in 1998  Singapore issued consultation paper in 2002, enacted the law in 2005 In UK, the LLP model is available for all businesses; in New York, it is open only for selected professions.

6. Yoganandh & Ram Chartered Accountants 6 Advantages of LLP o Easy to incorporate, very little paper work required o Low cost of incorporation o Lot of flexibility o Very little accountability, in terms of legal compliance o All benefits of a partnership business, though with a new entity o Taxation as general partnerships

7. Yoganandh & Ram Chartered Accountants Overview of the UK LLP law Most obvious feature: the law is very short, very simple:  Just 19 sections, no schedules Owners and managers are the same: one member designated as “designated member”  May be a founding member or may change Unlimited business capacity Principle of agency/principalcy applicable:  Every member is an agent of the LLP Limited liability must always come with protected capital:  The law provides for capital of each partner, but does not restrict drawing Capital or liability not mentioned in incorporation documents

8. Yoganandh & Ram Chartered Accountants Salient features of the LLP Bill - Constitution Indian law seems based on the Singapore law LLP is a body corporate, separate entity, perpetual succession:  To ensure perpetual succession, transferability of membership is a must Persons constituting it are members:  Individuals and corporates may be members: Since body corporate will include an LLP, an LLP may also be a member  At least 2, maximum not specified Existing firms and Companies may convert themselves into LLPs – Schedule 2 (Firm),3(Private Company) and 4(Unlisted Public Company) provide for the same:  Eligibility in case of a company – no charge subsisting on the assets of the company or in force at the time of winding up  No such eligibility condition in case of firms  Partners of newly incorporated LLP comprise only:  Shareholders in case of company  Existing partners in case of partnership firm

9. Yoganandh & Ram Chartered Accountants Management of LLPs The law requires at least two designated partners  Who are individuals  At least one shall be a resident of India  The position of designated partners seems to be the same as in case of directors The designated partner has the ultimate responsibility. He is:  Answerable for all acts matter or things, done or to be done by the LLP, and shall be personally liable for all penalties on the LLP The LLP is liable for only the contravention of this section (appointment of a manager)  This section has serious implications: by not appointing a designated partner, penalty not less than Rs. 10000 but up to Rs. 500000  UK law talks of designated member; if no member is designated, then every member is a designated member

10. Yoganandh & Ram Chartered Accountants Preservation of capital One of the most important pillars of the limited liability is definite capital:  Capital is the foundation on which the assets are built The LLP law, limiting liability, leaves the issue of preservation of capital very vague:  Capital is not mentioned in the Incorporation document; hence not disclosed to the public  Capital of partners may be drawn  Sec 65 leaves the issue of contribution on winding up completely open to be provided in the partnership agreement – which is not a public document The Act provides the liability of the partnership to be met solely from the property of the partnership:  Property means, net property, that is, net worth, which is the capital  If there is no capital maintenance clause, the whole concept may be totally flawed The basis of contracting external liabilities is only a declaration of solvency:  Which does not serve the purpose of credit evaluation, as solvency is only as on the date on which it is made In absence of capital maintenance, LLP might be NLP – no liability partnership

11. Yoganandh & Ram Chartered Accountants Preservation of capital or capital insurance UK law requires partners to contribute to the extent of drawings made within 2 years prior to winding up Insolvency rules in India are applicable to only individuals LLPs may be subject to corporate bankruptcy rules:  Undue preference rules may require returning of drawings made 1 year before winding up [sec 531A]

12. Yoganandh & Ram Chartered Accountants Partners and their relationship Initial partners are subscribers to original document Any one can be partner in accordance with agreement:  Individuals and bodies corporate may be partners o Designated partners must at least be two individuals o In case of bodies corporate as partners, at least two individuals to be designated o Insistence comes from the need for individuals to be directors  Partnership interest is not a transferable security but requires agreement with all partners Mutual rights of partners are allowed to be governed by the partnership deed

13. Yoganandh & Ram Chartered Accountants Partners and their relationship Cessation:  Death, etc  Mutual agreement  Resignation by 30 days’ notice  A retiring partner shall be entitled to receive the credit of his capital and share of accumulated profit determined to the date of his cessation: The law should provide – subject to mutual agreement Changes in partners to be notified to the registrar

14. Yoganandh & Ram Chartered Accountants Partnership principle Every partner to be agent of the LLP, not of other partners Partnership interest interestingly split into:  Economic interest  Non economic interest Economic interest means right to share in profits Economic interest assignable, but assignee is not treated as a partner, nor gets any right of participation in management:  Creates interesting situation: Partner may be X, assignee of economic interest may be Y X incurs liabilities, Y has all economic interest, but no obligation, as he does not have any partner status  Companies Act, on the contrary, recognizes no trusts or equities on the shares

15. Yoganandh & Ram Chartered Accountants Transferability of partners’ interest Seems the share of the partner in the capital of the firm, and share in profits, are two separate interests Share in profits a transferable interest: sec 42  This has clearly followed the Singapore model

16. Yoganandh & Ram Chartered Accountants Accounting and reporting LLPs are required to maintain records, but not:  Hold meetings and lay accounts  File accounts  Publish accounts They only make an annual declaration of solvency  To be made within 6 months from end of FY  To be signed by designated partners

17. Yoganandh & Ram Chartered Accountants 17 Taxation In line with UK law, Act provides for taxation of income as in case of general purpose partnerships

18. Yoganandh & Ram Chartered Accountants Inspection and investigation Provisions analogous to sec. 234 and 235/ 237 of Companies Act Prosecution powers to the Central Govt. – Sec 50

19. Yoganandh & Ram Chartered Accountants Winding up Winding up may be either voluntary or mandated by the Tribunal Regulations to be provided Notably, Singapore has a huge set of rules applicable to winding up of LLPs, almost in line with the Companies Act

20. Yoganandh & Ram Chartered Accountants Applicability of Companies Act UK has extended a large chunk of Companies Act provisions to LLPs too:  Power contained in sec. 67 to extend Companies Act provisions: Very likely that several of the administrative provisions may, over time, be extended

21. Yoganandh & Ram Chartered Accountants Penalties and prosecution The power to impose penalties has been granted to the Tribunal

22. Yoganandh & Ram Chartered Accountants Comparing LLPs and private limited companies – Similarities Incorporated Personality Perpetual existence, winding up by law Plurality of owners Limitation of contributory liability Limits on trading powers

23. Yoganandh & Ram Chartered Accountants Nature of Difference LLP’s Private Limited Companies Segregation of management and ownership Indian law requires designated partners; Designated partners generally liable for all compliances Law does not lay down powers of designated partners Directors are different from shareholders; different powers are vested Agency principlePartners represent the LLPShareholders are distinct Transferability Partnership is transferable only by agreement Shares are transferable securities Fixity of capitalLLPs need not have fixed capital Limited liability companies need to have a minimum capital Reporting, audit, meetingsNo requirementsElaborate requirements Comparing LLPs and private limited companies – Differences

24. Yoganandh & Ram Chartered Accountants Separation of management and ownership One of the key features of LLPs is that there is no separation of ownership and management:  Hence, the foundations of corporate law, with the owners reposing trust in the management do not apply Much of the reporting and accountability structure of corporate law arises out of this separation UK LLP law does not provide for separation of management:  In fact, there is a “designated member” who will be answerable to the regulators

25. Yoganandh & Ram Chartered Accountants Administrative authorities Incorporation, striking of defunct LLPs: Registrar of Companies Registry record keeping, inspections, etc:  Registrar of companies Compromise, arrangement, etc  Central Government Rule making powers; powers to notify Companies Act to be applicable Winding up  Tribunal Prosecution for offences:  Lower courts

26. Yoganandh & Ram Chartered Accountants Legal Compliance DPIN for designated partners Particulars of designated partners are to filed Incorporation – by filing incorporation document with the ROC Reservation of name, change of name, etc – provisions similar to Companies Act Partnership agreement and changes therein to be filed with the ROC:  Surprisingly, the partnership deed is not one of the documents available for inspection u/s 35  While the basic rights of the partners are defined in the document Registration of changes in partnership (names of partners) Filing of annual accounts and declaration of solvency Audit of accounts Filing of annual return Powers of the registrar to call for information, inspection and investigation largely the same as in case of companies Compromise, arrangements etc as per rules to be made by Central govt.

27. Yoganandh & Ram Chartered Accountants What may the LLP hold LLPs may hold any property, tangible or intangible Interestingly, partners may transfer, either as contribution or otherwise, properties in kind also Unlike in case of companies, no fetters on transfer of property in kind or a separate disclosure:  Valuation of the property not given the seriousness it deserves

28. Yoganandh & Ram Chartered Accountants Liberties that the LLP enjoys Accounting:  May write books on either cash or accrual basis Might lead to a considerable tax advantage Clear conflicts with the audit requirements – cash basis cannot reflect true and fair value of the state of affairs  Accounting standards not applicable Limitation of liability:  Best of both the worlds – limited liability and flexible capital No minimum capital requirements Audit:  While auditing is mandatory, there is no substantive detailing in the law Rules are much more liberal than for companies Borrowings:  No restriction on borrowing from partners, or to partners The act puts amounts owned to partners at par with amounts owned to others  No need to create charges Not in the best interest of lenders

29. Yoganandh & Ram Chartered Accountants Ultravires, agency rule and LLPs The doctrine of ultravires is not applicable to LLPs  Since the objects are not required to be specified in the incorporation document At the same time, the partners are supposed to be agent of the LLP:  Partner exceeding his authority does not bind the LLP In other words, the LLP escapes liability for anything done in excess of the assigned authority  Authority of LLPs contained in partnership document  Those dealing with the LLP cannot get partnership document as it is not one of the docs that may be inspected This leaves those dealing with the LLP at a great risk

30. Yoganandh & Ram Chartered Accountants Conversion into LLPs Firms, private companies and unlisted public companies may convert Firms:  All partners to continue  Amount to dissolution of the firm  Transfer of property by way of vestation – may be stamp duty may be escaped Private companies:  There is no security interest on the property  All members of the private company continued as partners  There is no need to seek sanction of the lenders, etc Public unlisted companies:  Same as in case of private companies