| A further review makes one wonder whether even the Companies Act will become largely redundant, except in relation to listed companies. |
| In 2003, the Naresh Chandra Committee had recommended the LLP structure, as in an increasingly litigious market environment unlimited liability was risky and unattractive "" particularly for professional services "" with exposure to cross-border transactions with potentially high-liability risks. Most professionals precluded from practicing as companies, some viable alternative was needed. The JJ Irani Report concurred and recommended the extension of LLPs to small private enterprises. |
| Interestingly, the Bill goes the whole hog, and "business" includes every trade, profession and occupation. Effectively, this means that an LLP, unlike a company, can carry on a combination of unrelated businesses, restricted by its main object clause and having to revert to the Registrar of Companies for any major change. |
| The LLP does not have board or capital structures and requires only two members, to subscribe to an Incorporation Document and a partnership agreement, to kickstart its operations. As no share capital is envisaged, no minimum capitalisation norms procedures for increase are insisted upon. |
| Therefore, legally, an LLP can start out with a kitty of Rs 1,000 and engage in diverse capital intensive industries, such as heavy engineering, construction and automobile manufacture in one shot. |
| In terms of carrying on its business(es), the LLP enjoys informality and flexibility in decision making. The partnership agreement is the AoA equivalent which addresses the basics of the structure and understandings, such as partners' powers, areas and scope of expertise/decision making, dispute resolution, exit route, shares in profit distribution. |
| But it is not clear how an acceptable authorisation for any act or deed will be delegated by the LLP to the partners or any employee "" what will be the acceptable substitute to a board or general body resolution. Or, will all these be the responsibility of the Designated Partner (DP)? |
| A DP is a subscriber to the Incorporation Document, quite similar to a company promoter, but is somewhat like the hapless "Occupier" under the Factories' Act "" the fall guy "" answerable for all acts, matters, to be done by the LLP by way of compliances and for payment of penalties imposed. And the penalties for contravention, unlike the compliances, are steep, ranging from Rs 2000 to Rs 5 lakh with two-year jail terms in some cases. |
| Otherwise, the LLP partners are not liable to each other or the LLP, and filings and disclosures are minimal being restricted to annual returns and accounts, changes in membership and registered office, totalling to a mere 14. |
| From the tax perspective as well, LLPs are in a win-win situation, as they do not have to pay minimum alternate tax (MAT) and dividend distribution tax, unlike a company. Partners in the LLP can be paid a maximum interest of 12 percent of the total income for their investments in the firm. The LLP pays tax on its profits after deduction of business expenditure remuneration and interest to partners at 30 percent, while the partners pay tax only on salary and interest incomes. |
| Is the LLP then the perfect structure "" deregulated, transparent, flexible, tax friendly? The stings are hidden yet palpable "" while the Bill proposes to make only the DP liable, in case of fraud, all partners are liable, and various penal provisions refer to "any person' or "the LLP and every partner". The penal provisions are usually onerous, far more than is rated for 14 filings. There is considerable misgiving on this, as there is on the ROC being made the regulator. |
| All in all, it's a good mix: but the Bill should not go into hibernation as most corporate law proposals have, since 2002. |
| Kumkum Sen is a Partner at Rajinder Narain & Co |
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