Legislative ambiguities hinder formation of LLPs

Individuals who wish to get Limited Liability Partnership (LLP) status are having a tough time dealing with compliance issues. The LLP Act, passed in 2008, has only seen 426 registrations so far. 

Although applicants can register and download their forms from the LLP portal, the required Designated Partner Identification Number (DPIN) can only be received from the Central government in New Delhi.
 
An individual has to make an application electronically via Form 7 (available on the LLP website) to the Central government for obtaining a DPIN upon which a provisional DPIN is issued. After receiving this provisional DPIN, an application to the Central government has to be made within 60 days along with the requisite fees to obtain a regular DPIN.
 
“There are certain compliance norms which can only be completed in New Delhi. If the process is decentralised, then it would be much easier and faster (to register an LLP). Moreover, people are not aware of the newly-amended law and its implications,” said Siddhartha Shah, of Siddhartha Shah & Associates.                                                                         
 
“A chartered accountant’s firm cannot convert into an LLP unless the Institute of Chartered Accountants of India (ICAI) gives its permission. When the Chartered Accountancy Act was enacted in 1949, there was no concept of an LLP. There is no provision in that law for CAs to be a part of an LLP,” said Ameet Patel, partner, Sudit Parekh & Company.  
 
“Tax clarifications have only come recently. There are still lurking doubts about the law. There is negligible demand from individuals opting for an LLP,” adds Mr Patel.
 
“Approval of a name for an LLP is proving to be a tough task, given that the concerned registrar conducts a search of the Trademark Registry’s database in India (for allotting a name). So, if the proposed name is in existence, say, in the UK, the registrar may not allow the proposed name,” said Sharada Balaji, founder of NovoJuris Services.
 
An LLP is taxed like a general partnership firm under the Indian Partnership Act, 1932. The entity is taxed, and the income in the hands of the partners is exempt from tax. However, in a company, the income is taxed at the entity level and tax is again paid on the dividend given to shareholders.
 
“The industry was hoping that the LLP would be a pass-through entity for taxation, like many other countries. Venture capital and private equity firms would have been a happier lot had the LLP been allowed as a pass-through to taxation at the entity level,” added Ms Balaji.
 
Currently, minimum alternate tax (MAT) is not applicable to LLPs.
 
The advantage of forming an LLP is that an individual’s liability is limited to the extent of the capital contribution. Only two members are required for forming an LLP and there is no upper limit on the number of members.
 
LLP can be useful for small and medium enterprises because the cost of forming an LLP is lower, and there is no requirement for minimum capital contributions. Partners are not liable for the acts of other partners in the LLP and the entity can be easily dissolved. The maximum cost of registering an LLP is only Rs7,000.
 
Moreover, books of accounts of an LLP have to be audited only if the contribution is above Rs25 lakh or if annual turnover exceeds Rs40 lakh. However, an LLP cannot raise money from the public.

 

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