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Limited Liability Partnerships (LLP)
Formation and Corporate Restructuring
“
Bombay Chartered Accountants’ Society
Suburban Study Circle Jointly with
Direct Tax Study CircleJuly 5th, 2014
CA Saroj V. ManiarCNK & Associates LLP
1CNK Limited Liability Partnership – A comprehensive overview
LLP- Presentation Outline
Overview of LLP– Features
– LLP Act, 2008 & LLP Rules, 2009
– Comparison with other legal forms
Direct tax Provisions
Conversion to LLP
FEMA Provisions
Debate
2CNK Limited Liability Partnership – A comprehensive overview
LLP – What is LLP
LLP is
- A corporate business vehicle
- Combines and operates in flexible, innovative and efficient manner
- Provides benefits of limited liability
- Allows its members the flexibility for organizing their internal structure as a partnership.
(Source MCA Website – www.llp.gov.in)
Hybrid of
PartnershipCorporate
LLP
3CNK Limited Liability Partnership – A comprehensive overview
LLP – Significant Features
Hybrid between a partnership firm and a company
Is a body corporate to carry on any business
Considered as ‘Firm’ for taxation purposes
Limits liability of partners to the extent of their contribution barring certain circumstances
Various tax advantages as compared to a company
4CNK Limited Liability Partnership – A comprehensive overview
LLP – Features Cont’d
Governed by LLP Act 2008 and LLP Rules 2009
Separate legal existence
Perpetual succession
Partners are agents of LLP and not of other partners
5CNK Limited Liability Partnership – A comprehensive overview
BUSINESS OF LLP
Can carry on any business activity
Practically, NBFC activity cannot be carried on, as RBI not granting approval to RoC
6CNK Limited Liability Partnership – A comprehensive overview
WHO CAN BE A PARTNER ?
• Minimum two partners
• No limit on number of partners
• Individual and/or Body Corporate
• Company, LLP
• Non Resident, Foreign Company
• HUF, Trust, or Partnership Firm ?
• Circular No. 13/2013 dated 02.07.2013
• Karta, Trustee, Partner ?
• Minor or its guardian ?
7CNK Limited Liability Partnership – A comprehensive overview
LIABILITY OF PARTNERS
Limited to the extent of capital contribution
Not liable for the wrongful acts / omissions of other Partners
Unlimited liability of Partners in case of fraud
Any difference in liability of Partners and Designated Partners ?
Liability in case of income tax dues
8CNK Limited Liability Partnership – A comprehensive overview
DESIGNATED PARTNER (DP)
Difference between Partner and Designated Partner
Roles, Functions and Duties
Minimum two DPs
At least one should be resident individual
Can body corporate be DP ?
Residential Status of DP
Consent
DPIN requirements
9CNK Limited Liability Partnership – A comprehensive overview
FIRST SCHEDULE TO LLP ACT
All partners are entitled to share equally in the capital, profitsand losses of the LLP.
The LLP shall indemnify each partner in respect of paymentsmade and personal liabilities incurred by him – in the ordinary and proper conduct of the business of the LLP;
or in or about anything necessarily done for the preservation of
the business of property of the LLP.
Every partner shall indemnify the LLP for any loss caused to it byhis fraud in the conduct of the business of the LLP.
Every partner may take part in the management of the LLP.
No partner shall be entitled to remuneration for acting in thebusiness or management of the LLP.
10CNK Limited Liability Partnership – A comprehensive overview
FIRST SCHEDULE TO LLP ACT…..contd
No person may be introduced as a partner without the consent of all theexisting partners. No change can be made in the nature of business of the LLPwithout consent of all the partners.
All issues shall be decided by a resolution passed by a majority in number ofthe partners, each partner shall have one vote.
All decisions to be minuted within 30 days and maintained at the registeredoffice
Each partner shall render true accounts and full information of all thingsaffecting the LLP to any partner or his legal representatives.
11CNK Limited Liability Partnership – A comprehensive overview
FIRST SCHEDULE TO LLP ACT…..cont’d
If a partner carries on competing business without theconsent of the LLP, all profits to be handed over to the LLP.
Any benefit derived by partner without the consent of theLLP from any transaction or use of the property, name orany business connection of the LLP to be handed over.
Majority of the partners cannot expel a partner unless byexpress agreement between the partners.
All disputes between the partners arising out of the LLPagreement which cannot be resolved to be referred toarbitration.
12CNK Limited Liability Partnership – A comprehensive overview
CAPITAL CONTRIBUTION
Should every partner contribute to the capital ?
Capital Contribution Ratio vis-à-vis Profit Sharing Ratio
Contribution in the form of tangible, intangible, movable or immovable property or other benefits
Valuation of property
Rule 23 - Disclosure in the books of accounts
Monetary value of contribution - whether necessarily market value?
13CNK Limited Liability Partnership – A comprehensive overview
CESSATION & ASSIGNMENT OF PARTNERSHIP INTEREST
Voluntary retirement
Compulsory cessation
Death
Dissolution of LLP
Declared to be of unsound mind
Adjudged as insolvent
Right to transfer / assign rights in LLP
Absolute Right – cannot be restrained by LLP Agreement
Partial rights or complete rights
Continues as Partner vis-à-vis LLP
14CNK Limited Liability Partnership – A comprehensive overview
ACCOUNTS AND AUDIT
Accrual or Cash method of accounting
Rule 24(1) and Rule 24(2) - Accounting Records Normal books of account
Statement of account and solvency for a financial year tobe filed within 6 months from the year end Statement of Assets and Liabilities Statement of income and expenditure Certification by Auditor
Compulsory audit if turnover exceeds Rs. 40 lakhs or iftotal contribution exceeds Rs. 25 lakhs
Auditors to be appointed by Designated Partners
15CNK Limited Liability Partnership – A comprehensive overview
MERGER
Compromise / Arrangement
LLP and its creditors
LLP and its partners
Consent
Three-Fourths in value
National Company Law Tribunal (NCLT)
Reconstruction / Amalgamation
Report from ROC
16CNK Limited Liability Partnership – A comprehensive overview
DISSOLUTION AND WINDING UP
Limited Liability Partnership (Winding up and Dissolution) Rules2012
Voluntary Winding Up Section 486 to 488 of Companies Act, 2013 apply Resolution Approval of creditors and notice Liquidator
Compulsory Winding Up by NCLT Number of partners reduced below 2 for a period of more than 6
months LLP unable to pay its debts Default in filing Statement of Account & Solvency or Annual
Return for 5 consecutive financial years
17CNK Limited Liability Partnership – A comprehensive overview
Comparison – An overview
Parameters Company LLP Partnership Firm
Status Has a separate legal personality – can ownland, can borrow in its name, sue and be sued in its name etc.
Has a separate legalpersonality – can ownland, can borrow inits name, sue and besued in its name etc.
Not a separate legalentity. Can act onlythrough its partners.
Capital Company limited by shares must have aminimum authorized and paid up share capital. Share capital has to be divided into shares
No mandatory requirement forcapital/contribution. This would be regulated through agreement among LLP Partners.
No mandatoryrequirement for capital in the Act. PartnershipAgreement is the basis for capital contribution/ withdrawal etc.
Profits May pay salaries anddividends fromdistributable profits.
LLP Agreement determines all such issues.
Partnership Agreementdetermines all such issues.
Taking out capital/Drawing
Not permitted generally, though companies may be able to purchase orredeem their own shares subject to provisions of the Act.
Depends on the LLP Agreement
Depends on the Partnership Agreement
18CNK Limited Liability Partnership – A comprehensive overview
Comparison – An overview
Parameters Company LLP Partnership Firm
Management Management through ‘Board of directors’. Private company to have at least two directors, public company to have at least three directors.
At least two Designated Partners are must. One ofDesignated Partners must be resident in India. Subject to this requirement and subject to LLP Agreement, all partners would have equal powers. Companies may also become partners of LLP.
At least two partners are must as per Partnership Act, 1932. Maximum number of membersrestricted to 10 in caseof banking firms and to 20 in case of other firms.
DecisionMakingmechanism
Majority rule prevails in directors meetings. In case of shareholders, there can be ordinaryresolution (majority rule) or there can be special resolution (not less than 75% majority)
LLP Agreement to decide decision taking mechanism. According to First Schedule, except for a few decisions on which unanimous approval of partners is required, majority rule would prevail.
“PartnershipAgreement” decidesdecision makingmechanism. In theabsence of any agreement, provisions of the Partnership Act,1932 are applicable
19CNK Limited Liability Partnership – A comprehensive overview
Comparison – An overview
Parameters Company LLP Partnership Firm
WrittenResolutions
Decisions are taken by way of written Resolutions
Decisions taken to be recorded in accordance with First schedule
No suchrequirement
Disclosures Accounts to be filed with ROC. Annual Return and other timely disclosuresrequired to be filed with ROC
Provisions similar to companies would beapplicable for LLP. Thoughnumber/nature of disclosures is lesser/lessstringent
No requirement of filing of accounts
Audit Mandatory for all companies
Exemptions for smaller LLPs are provided
Audit not provided under the Partnership Act.
Taxation Company taxable as a separate entity
From tax angle, LLP is treated as Firm
“Partnership Firm” is taxable as a separate entity.
Registrationas a Non forProfitOrganisation
Possible forcompanies undersec 25 of theCompanies Act
Not permitted Not permitted
20CNK Limited Liability Partnership – A comprehensive overview
Comparison – An overview
Parameters Company LLP Partnership Firm
StatutoryFramework
Companies Act, 1956 LLP Act, 2008 Partnership Act,1932
Liability ofMembers/Partners
Limited to amounts unpaid on shares
Limited to amount of capital agreed to becontributed, according to LLP Agreement
Liability is unlimited; jointly as well as severally
Constitution Memorandum of Association (MOA) and Articles of Association (AOA) are the basicdocuments under which a company would regulate its affairs. Filing of MOA and AOA and any change there in must with ROC.
Agreement betweenMembers recommended but not essential. In case of no agreement, defaultprovisions as per schedule I to the Bill would be applicable
Partnership Agreement between membersrecommended but not essential. Registration of a firm under thePartnership Act isoptional
Meetings At least one Annual General Meeting(AGM) of members required. Board of directors to meet atleast four times in a year
No such requirement No such requirement
21CNK Limited Liability Partnership – A comprehensive overview
LLP – Direct Tax Implications
Firm includes LLP, Partner includes partner of LLP and Partnership includes LLP
Income of LLP taxable at flat rate of 30% (plus 10% surcharge if total income exceeds Rs. 1 crore plus 3% education cess )
MAT u/s 115JB not applicable but Alternate Minimum Tax (AMT) u/s 115JC may apply. Rate of AMT – 18.5% (plus 10% surcharge if total income exceeds Rs. 1 crore plus 3% education cess in all cases) of Adjusted Total Income
ROI to be signed by DP. In the absence of DP, due to unavoidable reasons, any partner can sign ROI
If tax due from LLP is not recoverable , jointly and several liability of partners of that year unless such partner proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of LLP
Section 44AD (presumptive scheme of taxation) is not applicable
22CNK Limited Liability Partnership – A comprehensive overview
LLP - Tax Implications (Contd.)
Particulars Section Applicable
LTCG & STCG taxable Sec. 112 & sec. 111A
Resident Partners - Remuneration & Interest paid by LLP to partners allowed (Remuneration - 90% of first Rs.300,000 of book profits or Rs. 150,000 whichever is higher and 60% of balance book profits) (Interest - the limit of 12% per annum would also apply to such interest)
Sec. 40(b)
Share of profit received by partner exempt Sec. 10(2A)
Non-Resident Partners - No specific exemption for such payment of remuneration and interest
Sec. 195 and provisions of DTAA
Remuneration and Interest received by partner taxable Sec. 28(v)
Retirement or Death of Partner - ,losses proportionate to the share of the retired or deceased partner are not available for carry forward and set off
Sec. 78(1)
23CNK Limited Liability Partnership – A comprehensive overview
Procedure for Conversion to LLP
Conversion of Firm to LLP
Statutory – Sec. 55, Second Schedule
All the firm partners to become partners in LLP& no one else. Subsequently, change ispermissible
Incorporation document to be filed withregistrar. If satisfied, it will issue certificate ofincorporation
On registration, all assets and liabilities of thefirm shall be transferred to and vest in the LLP
Firm shall be dissolved and removed from therecords maintained under the Partnership Act
Proceedings pending in any court against thefirm and all existing contracts of the firmcontinue by or against the LLP
Every partner of firm shall continue to bepersonally liable for obligations of the firmincurred prior to the conversion
Ensure that for a period of twelve monthscommencing not later than fourteen days afterthe date of registration, every officialcorrespondence of the LLP bears a statement
• from the date of registration converted froma firm into an LLP
• name and registration of the firm fromwhich it was converted.
Conversion has been defined as being the transfer of the property, assets, interest, rights,privileges, liabilities, obligations, and the undertakings of the firm, private company or unlistedpublic company to the LLP in accordance with the respective Schedule.
24CNK Limited Liability Partnership – A comprehensive overview
Conversion to LLP
Conversion of Company to LLP
Statutory – Sec. 56, Third Schedule (Conversionof Private Company)
Sec. 57, Fourth Schedule (Conversion ofUnlisted Public Company)
All shareholders become partners & no oneelse. Restriction applicable until theincorporation of LLP.
Incorporation document to be filed withregistrar. If satisfied, it will issue certificate ofincorporation
No security interest subsisting in assets of thecompany at the time of making an application
On registration, all assets and liabilities of thecompany shall be transferred to and vest in theLLP
The company shall be deemed to be dissolvedand removed from the records of the RoC
Proceedings pending in any court and allexisting contracts shall be enforceable by oragainst the LLP
Ensure that for a period of twelve monthscommencing not later than fourteen days afterthe date of registration, every officialcorrespondence of the LLP bears a statement
• from the date of registration converted fromcompany into an LLP
• name and registration of the company fromwhich it was converted.
25CNK Limited Liability Partnership – A comprehensive overview
Stamp Duty Implications
Company having immovable property converted into LLP – whether there is liability for payment of stamp duty?
As per Section 58 of LLP Act, 2008, all the assets and liabilities vests into LLP. There is no transfer of assets and liabilities
MCA FAQ:
26CNK Limited Liability Partnership – A comprehensive overview
Chartered Accountants in Practice vis a vis LLP
Can form a new LLP or convert existing firm to LLP
Section 226(3)(a) of the Companies Act, 1956 provides that a body corporate will not qualify for appointment as Auditor of a company
LLP being a body corporate could not become the Auditor of a Company
The Ministry of Corporate Affairs have issued clarification vide General Circular No. 30A/2011 on 26/05/2011 that LLP of Chartered
Accountants will not be treated as body corporate for the limited purpose of Section 226(3)(a) of the Companies Act,1956
27CNK Limited Liability Partnership – A comprehensive overview
Chartered Accountants in Practice vis a vis LLP (Contd.)
Statutory Compliances
• Section 55 of LLP Act, 2008
• Second Schedule of LLP Act, 2008
• Provisions of Chartered Accountants Act, 1949
• Chartered Accountant Regulations, 1988
• Code of Ethics issued by ICAI
Circular 09/2013 of MCA– If a CA Firm, being an auditor in a company under Companies Act, 1956 is converted into LLP , the LLP is deemed to be the auditor.
Auditee company to take note of change in status
28CNK Limited Liability Partnership – A comprehensive overview
CONVERSION OF FIRM TO LLP – TAX IMPLICATIONS
Continues to remain a partnership firm
Explanatory Memorandum to Finance (No.2) Bill 2009:
“As an LLP and a general partnership is being treated as equivalent (except for recovery purposes) in the Act, the conversion from a general partnership firm to an LLP will have no tax implications if the rights and obligations of the partners remain the same after conversion and if there is no transfer of any asset or liability after conversion. If there is a violation of these conditions, the provisions of section 45 shall apply.”
Also automatic vesting by Operation of Law
29CNK Limited Liability Partnership – A comprehensive overview
LLP - Tax Implications (Conversion of Company to LLP)
Section 47(xiiib) – Capital gains exempt on transfer of capital assets, intangible assets ,shares on conversion of company to LLP subject to following conditions:
• All assets & liabilities of company are taken over by LLP
• All shareholders of company become partners of LLP and their CCR & PSR in LLP are insame proportion as their shareholding in company
• Shareholders of company do not receive any consideration on conversion other thanshare in Profit & Capital Contribution in LLP
• Aggregate of PSR of Shareholders of company, in LLP should not fall below 50% for 5consecutive years from conversion date
• Total sales, Turnover or Gross Receipts of company should not have exceeded Rs. 60lakhs in any of 3 years preceding year of conversion
• Partners are not paid any amount from accumulated profits of company for 3 yearsfrom conversion date
If any of above conditions are not satisfied subsequently, such conversion shall bechargeable to tax in hands of LLP in year of non-compliance
30CNK Limited Liability Partnership – A comprehensive overview
LLP - Tax Implications (Conversion of Company to LLP - Contd.)
Particulars Section Applicable
B/f losses and depreciation of the predecessor company - deemed to be current year losses and depreciation of LLPCondition – Shareholders of the company need to hold 50% PSR in LLP for 5 years from date of succession
Sec. 72A
MAT credit available in hands of company not allowed to LLP Sec. 115JAA
Depreciation to be apportioned between Company and LLP in the ratio of no. of days for which assets were used
Sec. 32
Expenditure on voluntary retirement incurred by Company to be amortized in hands of LLP
Sec. 35DDA
COA of asset to LLP = COA to company + COI by company and LLP Sec. 49(1)
Holding period of company to be considered to determine nature of CG
Sec. 2(42A)
31CNK Limited Liability Partnership – A comprehensive overview
Aravali Polymers LLP vs. JCIT (ITAT Kolkata)
Aravali Polymers LLP was formed on conversion of the company into LLP
Post conversion but in the same year,
• the assessee gave interest free loans to its partners in the profit sharing ratio partiallyout of the accumulated profits standing in the accounts of the company on the date ofconversion
• the assessee sold the shares held in a listed company which vested with it uponconversion and earned capital gains.
As per one of the conditions mentioned in Section 47(xiiib) (specific provision whichexempts capital gains arising to a company and its shareholders, on account ofconversion of company into LLP pursuant to provisions of LLP) no amount to be paid,either directly or indirectly, to any partner out of the balance of accumulated profitstanding in the company’s accounts on the date of conversion for a period of three yearsfrom the date of conversion
Tribunal's ruling:
• The grant of interest-free loan to partners in the profit-sharing ratio partially out ofaccumulated profits existing on the date of conversion resulted in breach of one of theexemption conditions
32CNK Limited Liability Partnership – A comprehensive overview
Aravali Polymers LLP vs. JCIT (ITAT Kolkata)
Tribunal's ruling (contd.):
• the breach took place in the same year as conversion by virtue of which theexemption was never available to the assessee
• AO computed capital gains by adopting the market value of the shares on the date ofconversion as per section 47A(4). Sec. 47A(4) applies to a case where the exemptionu/s 47(xiiib) is available and the conditions laid down in the proviso are not compliedwith. However, the AY under consideration is the same in which conversion took placeand conditions were violated. Under sec. 45, the market value of the asset transferredcannot be deemed to be the ‘consideration’. Capital gains cannot be computed on thebasis of market value of assets on the date of conversion but should be computed onthe basis of actual value at which assets are transferred
• The Tribunal gave a direction to the Tax Authority to compute capital gains byadopting the figure at which assets of predecessor company were actually acquired
33CNK Limited Liability Partnership – A comprehensive overview
LLP – FEMA Provisions
FDI in LLP with prior approval of FIPB permitted in 2011 without correspondingamendments in FEMA.
Amendments have now been made to incorporate changes in FDI in LLP vide Circular No.123 dated April 16, 2014
Definition Amendments
Eligible Investor
A person resident/ incorporated outside India other than citizen/ entity of Pakistan and Bangladesh and SEBI registered FII, FVCI, QFI, RFPI
Eligibility of LLP for accepting FI
•Activities where 100% FDI is allowed under automatic route would be eligible to receive FDI (eg. Housing and Real Estate, Films etc.)•Activities where 100% FDI under automatic route available but are subject to FDI-linked performance conditions would not be allowed•Government approval required in all cases
34CNK Limited Liability Partnership – A comprehensive overview
LLP – FEMA Provisions
Definition Amendments
Eligible Investment
•Contribution to capital of LLP must be in cash only•Investment by way of profit share will fall under category of reinvestment of earnings
Pricing Guidelines
•FDI in LLP, in any form, would have to be more than or equal to fair price as worked out with any valuation internally accepted. Valuation needs to be supported by CA certificate•In case of transfer of capital contribution/ profit share from: From R to NR: Consideration should be more than/ equal to Fair Price
valuation From NR to R: Consideration should be less than/ equal to Fair Price
valuation
Reporting Particulars Time Limit Form
Disinvestment/ Transfer of Capital Contribution or Profit Share between R and NR or vice versa
Within 60 days from date of receipt of funds
FDI-LLP (II)
35CNK Limited Liability Partnership – A comprehensive overview
LLP – FEMA Provisions
Definition Amendments
Reporting to RBI
Particulars Time Limit Form
Details of receipt of consideration for capital contribution/ profit shares along with following documents:•Valuation certificate•Copies of FIRC•KYC report on NR investor
Within 30 days of date of receipt
Form FDI-LLP(I)
•LLP’s which have received FI between 20 May 2010 till date of issuance of notification
Within 30 or 60 days from date of issuance of notification
In the above applicable forms
36CNK Limited Liability Partnership – A comprehensive overview
LLP – FEMA Provisions (Contd.)
Definition Amendments
Downstream Investment
•An Indian company, having FI can make downstream investment in LLP only if company as well as LLP are operating in sectors where 100% FDI is permitted under automatic route•LLP with FDI is not eligible to make any downstream investments in any entity in India
Other Conditions
•The DP in an LLP with FDI can be a nominee of a body corporate i.e. only a company if the body corporate is registered in India•No other body like a LLP or trust can be a DP•DP is responsible for all conditions and penalties imposed•Conversion of company with FDI to LLP is allowed only if all conditions except mode of payment is satisfied•LLPs` is not permitted to avail ECB
37CNK Limited Liability Partnership – A comprehensive overview
LLP – FEMA Provisions (Contd.)
Circular 131/2014 – Regulation 2 of Foreign Exchange Management (Transfer orIssue of Any Foreign Security) (Amendment) Regulations, 2004 has beenamended and accordingly the definition of "Indian Party" now includes an LLPalso.
Accordingly, LLP can make direct investment in a Joint Venture or Wholly OwnedSubsidiary outside India.
The total financial commitment of the Indian party in Joint Ventures/WhollyOwned Subsidiaries shall not exceed 100% of the net worth of the Indian Partyas on the date of the last audited balance sheet
38CNK Limited Liability Partnership – A comprehensive overview
Debate!
Can a Minor become a partner/
designated partner?
Can a Non resident
become a designated
partner?
Should remuneration
to partner from LLP be considered
for Tax Audit Limits?
Is a new PAN required in
case a firm / company gets converted to
LLP?
39CNK Limited Liability Partnership – A comprehensive overview
Debate!
Stamp Duty on agreement of conversion?
Stamp Duty on immovable property?
Should every partner
contribute to the capital?
Should preference
shareholding be considered for satisfying the
criteria of proportion of shareholding?
Can a partner get share of profit without any/
minimum contribution to
capital?
40CNK Limited Liability Partnership – A comprehensive overview
Debate!
Can multiple firms convert into
1 firm?
Can the property of partnership
firm be transferred to
name of LLP on conversion?
Do Companies have to still hold
AGM for year ending 31st
March, when they converted to
LLP in April?
Would the same Power of
Authority in the name of CA Firm be valid for CA
LLP?
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