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Financial Advisory

FA Alert
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22 October 2008 Volume: FA 4/2008

Introduction of the Limited Liability Partnership Bill, 2008 [LLP Bill]

Government of India has, on 21 October 2008, introduced a LLP Bill in the Upper House of the Parliament. With the growth of Indian economy, the role played by its entrepreneurs as well as its technical and professional manpower has been acknowledged internationally. In this background, a need was felt for a new corporate form that would provide an alternative to the traditional partnership which exposes its partners to unlimited personal liability and a statute based governance structure of limited liability companies. Limited Liability Partnership (LLP) is viewed as an alternative corporate business vehicle that provides the benefits of the limited liability but allows its members the flexibility of organizing their internal structure as a partnership based on a mutually arrived agreement. The LLP form is expected to enable entrepreneurs, professionals and enterprises providing services of any kind or engaged in scientific and technical disciplines, to form commercially efficient vehicles suited to their requirements. Salient features of LLP Bill are as under: LLP will be a "body corporate" and a legal entity separate from its partners, having perpetual succession. Any individual or a body corporate can be a partner in a LLP. A "body corporate" is defined to mean a company formed under the Companies Act, 1956 and includes a LLP registered under this Act, a LLP

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incorporated outside India and a company incorporated outside India. LLP shall have at least 2 partners. LLP must have at least 2 "designated partners" who are individuals, and at least 1 of them shall be a resident in India. If one or more of the partners of a LLP are bodies corporate, at least 2 individuals who are partners of such LLP or nominees of such bodies corporate shall act as "designated partners". "Designated partners" will be responsible for ensuring that the LLP complies with the provisions of this Act. Every "designated partner" must obtain Designated Partner Identification Number (DPIN) from the Central Government in the same manner as Director Identification Number (DIN) is to be obtained by a director as per the provisions of the Companies Act, 1956. Name of every LLP must end with the words "Limited Liability Partnership" or "LLP". LLP will be issued a certificate of incorporation by the Registrar of Companies (ROC) of the State in which the registered office of the LLP is to be situated. The mutual rights and duties of partners of an LLP inter se and those of the LLP and its partners shall be governed by an agreement between the partners, or between the LLP and its partners. In absence of any such agreements, the mutual rights and duties shall be governed by the LLP Bill. Every partner of a LLP is, for the purpose of the business of LLP, the agent of LLP, but not of other partners. LLP, being a separate legal entity, shall be liable to the full extent of its assets where as the liability of the LLP partners shall be limited to their agreed contribution in the LLP. No partner would be liable on account of the independent or unauthorized actions of other partners or their misconduct. The liability of the LLP and partners who are found to have acted with intent to defraud creditors or for any fraudulent purpose shall be unlimited for all or any of the debts or other liabilities of the LLP. The rights of a partner to a share of the profits and losses of the LLP and to receive distribution in accordance with the LLP

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agreement are transferable, either wholly or in part, without by itself causing disassociation of the partner or a dissolution and winding up of the LLP. Such transfer of right, shall not, by itself entitle, the assignee or the transferee to participate in the management or conduct of the activities of the LLP or access information concerning the transactions of the LLP. LLP shall maintain the prescribed books of accounts relating to its affairs on cash or accrual basis and according to the double entry system of accounting. The accounts of LLP shall be audited as per the rules as may be prescribed. Central Government may exempt certain class of LLPs from requirement of a compulsory audit. LLP shall file with the ROC, Statement of Account and Solvency and an Annual return every year. Central government shall be empowered to make rules for provisions in relation to establishment of place of business by foreign LLPs in India. Provisions have been made in the LLP Bill for allowing a compromise and arrangement including mergers and amalgamations, winding up and dissolution. Central government shall have powers to investigate the affairs of LLP. Provisions have been made for the conversion of a firm, private company, unlisted public company to LLP. Upon such conversion on and from the date specified in the certificate of registration issued by the ROC, all tangible and intangible property, liabilities, interest, obligation etc. relating to the firm or company and the whole of the undertaking of the firm or company shall be transferred to and shall vest in LLP without further assurance, act or deed and the firm or company shall be deemed to be dissolved and removed from the records of the Registrar of Firms or ROC, as the case may be. Unless specifically provided, the provisions of the Indian

Partnership Act, 1932 shall not be applicable to LLPs. Central government would be empowered to apply any of the provisions of the Companies Act, 1956 to LLPs with suitable changes or modification.

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Tax issues of LLP shall be addressed under the Income Tax Act, 1961 separately.

Documents relating to formation, Statement of Accounts and Solvency, Annual Return, appointment of partners etc. are to be filed with the ROC.

The Alert summarizes the important provisions of the LLP Bill 2008 placed before the Parliament. The proposals are, of course, subject to further amendments, if any, as the LLP Bill passes through Parliament. Source: Press Release dated 21 October 2008 issued by Ministry of Corporate Affairs and LLP Bill as introduced in Rajya Sabha (Upper House of the Parliament).

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