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Particulars Page No.

Key Features 3

Advantages 5

Difference Between Companies, Partnership and LLP

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Process of Incorporation 9

Case Study 10

Limited Liability Partnership (LLP) is an alternative corporate business form

that gives the benefits of limited liability of a company and the flexibility of

a partnership

The LLP can continue its existence irrespective of changes in partners. It

has perpetual succession. It is capable of entering into contracts and

holding property in its own name

The LLP is a separate legal entity, is liable to the full extent of its assets

but liability of the partners is limited to their agreed contribution in the LLP

No partner is liable on account of the independent or un-authorized actions

of other partners, thus individual partners are shielded from joint liability

created by another partner’s wrongful business decisions or misconduct

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Mutual rights and duties of the partners within a LLP are

governed by an agreement between the partners or between

the partners and the LLP as the case may be. The LLP,

however, is not relieved of the liability for its other

obligations as a separate entity

LLP shall maintain annual accounts. However, audit of the

accounts is required only if the contribution exceeds Rs. 25

lakhs or annual turnover exceeds Rs.40 lakhs

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Limited liability protection: Partners are not held personally responsible for business debts and liabilities

Tax advantages: No Dividend Distribution Tax and Alternate Minimum Tax provision’s scope very narrower

Fund movement: Free movement of funds between the LLP and Partner

Conversion from general partnership: LLPs typically offer easier conversion from a general partnership to an LLP than to a LLC or corporation

Flexible management: Partners have more flexibility in management structure and can determine which partners are responsible for the day-to-day operations

Few formal requirements: LLPs have fewer formal requirements and annual paperwork than corporations

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Features Company Partnership firm LLP

Registration

Compulsory registration required with the ROC, Certificate of Incorporation is conclusive evidence

Not compulsory, Unregistered Partnership Firm will not have the ability to sue

Compulsory registration required with the ROC

Name

Name of a public company to end with the word “limited” and a private company with the words “private limited” No guidelines

Name to end with “LLP” Limited Liability Partnership”

Capital contribution

Private company should have a minimum paid up capital of Rs. 1 lakh and Rs.5 lakhs for a public company Not specified Not specified

Legal entity status Is a separate legal entityNot a separate legal entity

Is a separate legal entity

LiabilityLimited to the extent of unpaid capital

Unlimited, can extend to the personal assets of the partners

Limited to the extent of the contribution to the LLP

No. of shareholders / Partners

Minimum of 2. In a private company, maximum of 50 shareholders 2- 20 partners

Minimum of 2. No maximum

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Features Company Partnership firm LLPForeign Nationals as shareholder / Partner

Foreign nationals can be shareholders

Foreign nationals cannot form partnership firm

Foreign nationals can be partners

TaxabilityThe income is taxed at 30% + surcharge+cess

The income is taxed at 30% + surcharge+cess

The income is taxed at 30% + surcharge+cess

Meetings

Quarterly Board of Directors meeting, annual shareholding meeting is mandatory Not required Not required

Annual Return

Annual Accounts and Annual Return to be filed with ROC

No returns to be filed with the Registrar of Firms

Annual statement of accounts and solvency & Annual Return has to be filed with ROC

Audit

Compulsory, irrespective of share capital and turnover

Only Tax Audit in case the turnover is above Rs. 60 Lacs

Required, if the contribution is above Rs.25 lakhs or if annual turnover is above Rs. 40 lakhs

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Features Company Partnership firm LLP

How do the bankers view

High creditworthiness, due to stringent compliances and disclosures required

Creditworthiness depends on goodwill and credit worthiness of the partners

Perception is higher compared to that of a partnership but lesser than a company

Dissolution

Very procedural, Voluntary or by Order of National Company Law Tribunal

By agreement of the partners, insolvency or by Court Order

Less procedural compared to company, Voluntary or by Order of National Company Law Tribunal

Minimum Alternate Tax (MAT) Applicable @ 18.5% Not Applicable

Alternate Minimum Tax applicable @ 18.5% but the scope is much narrower as compared to MAT

Dividend Distribution Tax Applicable @ 17.5% Not Applicable Not Applicable

Movement of Funds amongst Promoters / Partners Restricted

Free movement of funds amongst Partners

Free movement of funds amongst Partners 8

The Registrar of Companies (ROC) is the authority having jurisdiction over the incorporation. The steps required are:

Decide on the Partners and the Designated Partners

Obtain Designated Partner Identification Number (DPIN) and a digital signature certificate

Decide on the name of the LLP and check whether it is available

Draft the LLP agreement

File the LLP Agreement, incorporation documents and obtain the Certificate of Incorporation

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M/s XYZ Pvt Ltd is a Promoter Holding Company mainly holding Shares of a listed company and is owned by Mr. X, a promoter and his family members.

The balance sheet of the company as on date is as follows:

If XYZ Pvt. Ltd. decides to sell its holding (Listed Co. Shares) at the market price of Rs. 2,00,000/-, the company will earn a Long Term Capital Gain of Rs. 1,40,000/-.

Liabilities Amount (Rs)

Assets Amount(Rs)

Capital (Paid up) Reserves & Surplus

10,000 1,00,000

Fixed Deposits Investments( Shares of Listed Co., holding period more than one year)

50,000 60,000

1,10,000

1,10,000

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In the given example tax implication will be as follows:

Maximum Alternate Tax (MAT):

• Long term Capital Gain(LTCG) on sale of listed securities through a

recognized stock exchange is exempt income in hands of any person.

• However, while calculating MAT the said LTCG is considered as a part

of book profit and accordingly MAT @ 18.5% will be applicable on the

LTCG, amounting to Rs. 25,900/-

Dividend Distribution Tax(DDT):

• If the company then decides to issue dividend to make funds

available to Mr. X, it will also attract DDT @ 17.5% which will amount

to Rs. 16,993/- [ (1,40,000-25,900)*17.5/117.5]

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Amount in Mr. X’s hand:

After deducting MAT and DDT the net amount in Mr. X’s hand will

be Rs. 97,106/-. Losing an amount of Rs. 42,893/- (1,40,000-

97,106) i.e. losing around 31% of the gain due to tax

implications.

Particulars Amount (Rs)

LTCG(-) MAT(-) DDT  Net amount in Mr. X’s hand

1,40,000(25,900)(16,993)

97,106

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However, this loss can be saved and Mr. X can very well proceed with his decision of selling his stake in the listed companies, by using the merits of a new form of business entity i.e. Limited Liability Partnership (LLP) to the best of his advantage.

The following are the two major merits of LLP which leaves a room for Mr. X to save the tax of 31% on the gain due to MAT and DDT:

There is no MAT, instead there is Alternate Minimum Tax (AMT) applicable to the LLP. However in AMT unlike MAT, while calculating book profit LTCG is considered as exempt.

LLP is not liable to pay DDT and can freely distribute its profit to its partners.

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