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Posted by on Feb 8, 2014 in LLP Act |

Critical Analysis of LLP Act 2008

Key Issues

  • Taxation – The act doesn’t specify how LLP will be taxed. The Private Limited companies are taxed on their incomes and income they distributed to their shareholders taxed again. The Partnerships and Proprietorships are not taxed separately, it means income is distributed to partners and taxed as Personal Income. In US and UK, LLPs are taxed like partnerships.  
  • Capital Gains Tax – if a Partnership or Proprietorship is converted into a Private Ltd. Company then transfer of assets is not treated as capital gains (clause 47 (xiii) and (xiv) of Income Tax Act 1961). But nothing is specified in case of conversion from firm or partnership or company to an LLP whether capital gain tax shall be waived or not.
  • Stamp Duty – Also bill doesn’t specify whether stamp duty shall be applicable or not on transfer of property in case of conversion from company or partnership into LLP. In UK LLP act 2000, there is no stamp duty on transfer of property in process of conversion of a partnership into LLP.
  • Number of Partners – The clause 11(2) of the Companies Act (1956) specifies that no company or partnership or association consisting of > 20 members shall be formed unless registered as a company under this act. It is not clear whether this limit is applied to LLP or not.
  • Conversion from LLP – If you are converted from a Partnership or a company into an LLP then after that there is no U turn. It means no provision to convert back into partnership or company from LLP.
  • Concern of Lenders – While converting into LLP from Company or Partnership, the concern of lenders are neglected as no consent of lenders or negotiations with lenders are required while conversion.
  • One Person LLP – The minimum number of members are two under this act to form LLP, so still we need a provision to allow one person company or one person LLP which already exists in many countries.
  • Insurance – there is no provision for minimum or compulsory insurance of LLP which undermine the credibility of LLPs.
  • Consent of all Partners – while introducing a new member, the consent of all existing partners is required. it means unanimous decision is required but it seems impossible in case of larger LLPs.
  • The application of other laws not debarred and LLP act in addition of provisions of other laws for time being in force. It can create confusion.
  • The Act states that all partners of LLP shall comprise of all partners of firm. But if existing firm has partners other than Individual or body corporate and apply for conversion, what will be the consequence as Section 5 of LLP act says that only individual or body corporate can form LLP.

Suggestions

  • There shall be a provision of compulsory insurance to protect interest of persons who might have claim against LLP, as exist in UK law.
  • The LLP and Income Tax Act shall be amended to provide necessary waive off in capital gains tax and stamp duty to encourage model of LLP as provided under UK laws.
  • There shall be a suitable way to convert back from LLPs to company or partnership as case may be.
  • While introducing new member, the consent of majority of members such as 2/3rd or 3/4th shall be substituted rather than unanimous decision.

Note :- However besides flaws or issues, the LLP act is a positive legislation for entrepreneurs and fill or remove the gulf which exist b/w traditional company under companies act 1956 and partnership firm under partnership act 1932.

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