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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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