Let’s Understand the Concept of Limited Liability Partnership LLP and its tax Implications


Limited Liability Partnership LLP

The LLP Act was implemented in India on 1st April 2009. However, the LLP structure never became as popular as was expected earlier. Nevertheless, after the enactment of the Companies Act, there has been a new impetus to the LLP structure.

To explore the possibility and benefits of conversion to Limited Liability Partnership are highly solicited from both new businesses who intend to take an informed decision about setting themselves up as a Private Limited Company or LLP or from existing companies to explore the possibility and advantages of Conversion into LLP.


Primary characteristics of Limited Liability Partnership

  • LLP is a corporate and legal entity unique from its partners. LLP has continuous succession. All the partners of the Limited Liability Partnership should act as the agent of the LLP but not of the other partners. It has the potential to enter into contracts and hold properties in its own name.
  • LLP is handled according to the Limited Liability Partnership agreement and within the framework provided by the LLP act, 2008. In the absence of the LLP agreement as to any matter, liabilities of partners, execution of mutual rights should define
the partner remuneration and interest on the capital to be beneficiary of deduction in income tax
  • Limited Liability Partnership registration is necessary under the act. The incorporation certificate is decisive proof of its formation. All partners will have to acquire DSC and DIN (Form-7) , take the approval for Limited Liability Partnership name (form-1), submit for incorporation (Form-2), achieve incorporation certificate, submit for LLP agreement (Form-3) and submit for partner consent (Form-4). Stamp duty on the Limited Liability Partnership agreement has to be paid wisely to the state stamp act.
  • Only a body or individual can turn into a partner in Limited Liability Partnership. A HUF or firm is neither a body corporate or an individual, and thus they are not allowed to be a partner in LLP. There is no upper limit on a maximum number of partners in Limited Liability Partnership, but it requires a minimum of two partners.
  • LLP is compelled to cultivate proper books of accountants at its registered office. They are compelled to submit a statement of account and solvency within one month from the end of six months from the closure of FY via form-11. The audit is mandatory only if your turnover goes beyond Rs. Forty lacs and contribution of Rs. twenty-five lakhs, unlike a company that is obliged to audit even if there is no transaction. Also, unlike a company, they can follow either a mercantile system or cash system.
  • The minimum capital contribution Rs. One correlates to a Private Limited Company, in which the minimum paid-up capital has to be Rs. 1 Lac. However, LLP cannot boost money from the public
  • Private company, a firm or an unlisted public company can convert into LLP as per the provision of Limited Liability Partnership Act, 2008. On such conversion, from the date of the certificate of registration issued in this behalf by the Registrar, the conversion effect as specified in the LLP Act, 2008, all tangible (movable and immovable) and intangible assets, all assets, liabilities, interests, rights The privileges, obligations relating to the firm or company are to be transferred and without any act/deed and the company or firm should be deemed to be dissolved and removed from the records of the Registrar.
  • LLP is not allowed to be formed for charitable purposes. It can be established only to earn profit as a profession or business. Professionals
can form multidisciplinary professional LLPs, which was not possible earlier.
  •   The LLP Act is straightforward as compared to the Companies Act and does not have limitations like accepting deposits, party transactions, granting loans to directors, making loans and investments, corporate social responsibility and so forth.
  • Unlike a company, it is not mandatory to file a charge. This may be the most significant barrier to loans from banks and FIs, and there is some resistance to authorize

Taxation in LLP

A partnership formed under the LLP Act, 2008 will be treated as a partnership firm similar to a partnership formed under the Indian Partnership Act, 1932. As per Income Tax, 1961, the terms partner, partnership and firm should include Limited Liability Partnership, partner of Limited Liability Partnership, and Limited Liability Partnership. They can also get deduction of interest on loan and capital up to 12% on salary, PA, bonus commission, royalty or remuneration from both the partners, whichever the working partner can deduct up to the following limit. a) on the first Rs.three lakhs of the book profit or in case of loss Rs. 1.5 lakh or 90% of the book profit, whichever is earlier. b) on the balance of book profits at the rate of 60% of such book profits above Rs. 1.5 lakh (Section 40(b)). and such interest, remuneration shall be chargeable as business profit in the hands of a partner. Partner’s share of profit from Limited Liability Partnership/firm is exempt u/s 10(2A). This is the reason why Limited Liability Partnership is a corporate body, but its taxation is similar to that of a firm. The only difference is that while section 44AD is applicable to a firm, it is not applicable to Limited Liability Partnership.

Specific aspects related to LLP Taxation

Introduction of capital asset into partnership

As per section 45(3) of Income Tax, capital gain to the partner shall be computed by taking into account the sale consideration at which it is booked in the books by the Limited Liability Partnership/Partnership. However, as per rule 23 of the LLP Rules, 2009. When a

partner introduces contribution through non-cash means, the same has to be valued accordingly in the books of CA and Limited Liability Partnership

Capital Withdrawal

As per section 45(4), the FMV on the date of such transfer shall be deemed to be the aggregate value of the consideration on distribution of the capital asset by the firm, whether on dissolution or otherwise.

  • Capital gains tax is exempted on conversion of a firm into LLP if there is no change in the rights and liabilities of the partners and there is no transfer of liabilities or assets after the conversion
  • As per section 47, the conversion of a private limited company or unlisted public company into LLP shall not be treated as transfer in the hands of the company or the shareholders if certain conditions in the Act are fulfilled.
  • Carry forward and set off of losses on conversion of the company into LLP; As per section 72A, loss can be carried forward subject to complying with the provisions of section 47. However, carry forward of MAT tax credit is not allowed to take forward.
  • Distinction in Taxation with a corporation. The company is compelled to pay MAT (minimum alternate tax), whereas the LLP is obliged to pay AMT (alternate minimum tax).

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