Get the LLP advantage

GURGAON, INDIA: Businesses have been booming in India and to give them a fillip the government recently announced the implementation of Limited Liability Partnership (LLP). Till recently businesses in India had but two options to run their operations. These two formats were corporate business and partnership.

But in April this year, LLP was implemented. According to Government of India, Ministry of Corporate Affairs, LLP is a corporate business vehicle that enables professional expertise and entrepreneurial initiative to combine and operate in flexible, innovative and efficient manner, providing benefits of limited liability while allowing its members the flexibility for organizing their internal structure as a partnership.

Being a fairly new concept, LLP has not yet caught up in the business circles in India. But seeing that the number of businesses is burgeoning here, this format is all set to grow in popularity. Not only does LLP provide partners the benefits of limited liability, it also allows its members to organize and create a partnership based on mutually arrived agreements. The partners are liable for their agreed contribution in the LLP. One partner is not liable for the actions of the other partner(s), hence limited liability. This clause protects partners from sharing the liability created by another partner’s wrong actions or conduct.

Explaining the concept further, Sharda Balaji, Founder, NovoJuris Services, a legal consulting company specializing in corporate, technology, investment advisory and capital markets, said, “LLP is a body corporate and combines the advantages of general partnership firm under the Indian Partnership Act and the Companies Act. It contains both features of a company – like limited liability, perpetual succession, separate legal status from that of its partners, and the features of a partnership firm where the partners have the right to manage the business directly, rights and duties of partners being governed by the agreement between partners, and the the flexibility for partners to devise the agreement as per their choice. The interesting feature is that one partner is not responsible or liable for another partner’s misconduct or negligence.”

A few examples of successful LLPs are Deloitte LLP and Ernst & Young LLP, although both are examples of LLPs in the US. Delhi-based legal consultants Handoo and Handoo were the first LLP firm of India.  The implications of LLPs vary from country to country.

Sharda explained that the differences are largely in the status accorded to the LLP and taxation.

“Most countries like the UK, Singapore and Japan are tax-transparent, i.e. taxation here has been accorded the status of pass-through entity and income is taxed in the hands of the partners. In many countries, an LLP can be formed for any purpose. However, in China, an LLP can be formed only for knowledge-based professions and technical services industry. In India, an LLP can be formed only as a 'for-profit' business,” said Sharda.

Benefits of LLP



One of the factors SIs can look forward to in an LLP is benefit in tax returns. Income taxes in an LLP are passed through the business and reflected on the partners’ individual tax returns. So while an LLP gives the benefits of limited liability, it also provides many of the tax advantages of a sole trader partnership.

On the tax procedure in an LLP, Balaji shared, “LLP is now taxed like the general partnership firm under the Indian Partnership Act, 1932  ie the entity is taxed and income is exempted from tax in the hands of the partners. Whereas in a company, the income is taxed at the entity level and again bear the tax on the dividend paid to the shareholders. The industry was hoping that LLP would be a pass-through entity for taxation, like many other countries.”

She added that the Venture Capital and Private Equity firms would be a happier lot had the LLP been allowed as a pass-through to taxation at the entity level. Other benefits of LLP are that there are designated members for running the day-to-day operations of the LLP, so the management is more streamlined than in a corporation.

In an LLP there is also flexibility in splitting partnership profits and losses. LLPs are also said to be beneficial for small and medium enterprises in general and for the enterprises in services sector in particular.

“An LLP is indeed advantageous because of comparatively lower costs of formation, lesser compliance requirements, easy to manage and run and also easy to wind-up and dissolve, no requirement of minimum capital contributions, partners are not liable for the acts of the other partners and importantly no minimum alternate tax (as of date). But, LLP cannot raise money from the public,” stated Balaji, adding, “One other factor that is interesting is that, books of accounts have to be audited if the contribution is above Rs 25 lakh or if annual turnover is above Rs 40 lakh.”

According to Saket Kapur of New Delhi-based Green Vision, “The announcement is good news because breaking of partnerships shall not be just a Dissolution Deed away. I think existing partnership firms will surely will for this in their own interest. Hence you may find lot of channel partners in this new avatar. It makes great sense for partnership firms to switch to LLP.”

Another reason for LLP being a fairly attractive option is the limited liability of the partners, bundled with easy exit and entry for old and new partners. “Moreover, at present partnership firms call for writing of new deeds and a lot of ensuing paperwork and intimations. In view of recent developments, partnership firm will finally die its own death,” shared Kapur.

Winding up a partnership

Another benefit of LLP is that it is easier to dissolve than a Pvt Ltd. However, that has raised some doubts among partners. After a 12-year partnership with another partner, PK Harikrishnan, CEO of Alltime Power Technologies, Cochin had decided to float a new company early this year.

The reason for his decision was the lack of support his partner was offering to the partnership. In such a situation one would think that had Alltime Power Technologies been an LLP it would have been easier for Harikrishnan to get out of the sticky situation and start afresh. While he did make a fresh start he is still struggling to dissolve the old company and fighting a legal case against his partner.

But Harikrishnan felt that despite the fact that Pvt Ltds are a “major headache” to dissolve, it is to be expected when running a company.“People should have commitment to a business and not think of running away. A partner will want to run away when he does not want to own responsibility,” said Harikrishnan, while adding that a business should be started by people with money and time and who are genuinely interested in running a business. “ In addition, every partner should be liable, then only can they do business together,” he mentioned.

In an LLP, dissolving the company is easy. The board members can declare that the directors have made full inquiry into the affairs of the company and either the company has no debt or the debts would be cleared by selling its assets. If the company is unable to pay its debts, or has acted fraudulently, it necessitates a tribunal which is also needed if the company has defaulted in filing its financial statements, annual reports or other statutory statements.

SP reaction



But while this format may seem ideal for Indian entrepreneurs the fact is that many of them are actually wary of entering such an agreement. In the channel space there has been a number of notable M&As involving SPs who were either looking at expanding their portfolios or reach globally.

The list included Phoebus Technologies with Vintech Electronic Systems, Allied Digital with En Pointe Technologies India and Sunfire Technologies with Concept Information Technologies, among others. All these SPs were looking at the inorganic route to grow their businesses.

Most SPs we spoke to were not aware of this new format, but showed keen interest in knowing more about it. Contrary to how India Inc seems to have taken the news of the new format, SPs were rather skeptical about the deal. According to PN Prasad of Puducherry-based Microplus Computers, “The reality is that you can have any form of business and still when you go to the bank you will need a guarantor and collateral. However, LLP will protect a company in adverse situations.”

Prasad added that the channel community would not prefer to opt for LLP since they would prefer the Pvt Ltd tag or want to run their own companies for fear of losing their identities.

“Most people running businesses keep it within the family so I don't see the concept seeing much uptake,” shared Prasad.

Asked if he would consider a partnership Prasad averred, “Yes I would. Today,  in one region we have 10 guys giving quotations to one customers. If we come together in partnerships we can improve our efficiency. Under a partnership we can share responsibilities, whereas we are just wasting time now.”

Comparing Pvt Ltd to LLP, Prasad commented that the former was predefined while there were too many gray areas in LLP. “At the end of the day if you don't follow rules then there are bound to be problems.  Pvt Ltd is difficult to start whereas I can start an LLP tomorrow. But only if things are made mandatory will people get serious about their business,” expressed Prasad.

On the other hand, Kapur felt that LLPs were a welcome move for micro, small and medium enterprises.

“LLP shall finally turn out to be the most sought after form of business organization after sole proprietorship. It has all the advantages of existing Proprietor and Pvt Ltd companies. At the same time it trims the overhead of a Pvt Ltd and has the distinct advantage of lower tax slab. We may not opt for this option at this time but certainly when more clarity comes in we may change from Pvt Ltd to LLP, keeping in mind the cost effectiveness and lower overhead of the latter,” concluded Kapur.

Despite being a success in other countries, the initial euphoria seems to be lacking in the SP segment currently. But this should pick up once awareness spreads.