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Malad Goregaon CPE Study Circle. 1. FORMATION OF LLP. CA.J M TIWARI. Malad Goregaon CPE Study Circle. 2. LIMITED LIABILITY PARTNERSHIP FOLLOWING IS NOT COVERED : 1. CONCEPT OF LIMITED LIABILITY 2. MERGERS, AMALGAMATIONS, WINDING-UP, INSPECTION. 3. TAXATION

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LIMITED LIABILITY PARTNERSHIP

FOLLOWING IS NOT COVERED :

1. CONCEPT OF LIMITED LIABILITY

2. MERGERS, AMALGAMATIONS, WINDING-UP, INSPECTION.

3. TAXATION

4. STAMP DUTY IMPLICATIONS ON LLP

TODAY’S MENU :

[A] BACKGROUND & CONCEPT IN BRIEF

[B] CHARACTERISTICS OF LLP

[C] FACTORS TO BE CONSIDERED FOR CHOOSING LLP FORM

[D] INCORPORATION & REGISTRATION OF LLP

[E] CONVERSION OF FIRM IN LLP

[F] CONVERSION OF COMPANY IN LLP

[G]SOME IMPORTANT PENALTY CLAUSES

[H] SOME IMPORTANT ISSUES

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[A] BACKGROUND & CONCEPT IN BRIEF

LLP form of business is expected to provide much needed Legal Entity status with no limit on number of partners unlike private limited company with a ceiling of 50. It is a hybrid business vehicle between Partnership & Limited Company.

Definition as given on website :

LLP: 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

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[B] Certain Charasteristics of LLP :

1. Legal Entity distinct from its Partners Sec.3(1). It has Perpetual Succession. Sec 3(2)

2. Minimum 2 Partners Sec.6

3. Any Individual or Body Corporate may become a partner.Sec.5

4. Minimum 2 Designated Partners are required and atleast one shall be resident in India. (Resident means a person stayed in India for 182 days or more during immediately preceeding year). Sec.7

5. LLP does not have share capital nor a Board of Directors to manage. Instead LLp has Contribution & Designated Partners.

6. Unlike Company, Control & Membership are not different.

7. Indian Partnership Act, 1932 donot apply to LLP. Sec.4

8. Limited Liability – The Court is entitled to lift the mask of corporate veil where fraud or improper conduct is intended or if it is used for tax evasion. However, the authorities provide little guidance as to the circumstances in which this power is to be exercised

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[C] FACTORS TO BE CONSIDERED FOR CHOOSING LLP FORM

Favourable Factors :

  • 1. Limited Liability of all partners to the extent of capital contribution.
  • 2. Being Body Corporate it can acquire and own properties.
  • 3. It has Perpetual Succession.
  • 4. Partners can lend money to LLP as creditor. [It is not specifically mentioned anywhere whether LLP can lend money to Partners
  • 5. There is no limit on maximum number of partners
  • 6. It is a globally accepted form of business and has a privilege of establishing place of business outside India.
  • 7. As per Rule 24(8) statutory Audit is required if turnover exceeds Rs.40L or if contribution exceed Rs.25 L [This limit should be increase to bring at par with proposed limit of tax audit in Finance Act 2010]
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  • 8. LLP can have other address for service of documents (under intimation to Registrar in Form no.12)
  • 9. LLP is organized and operates on the basis of an agreement.
  • 10. There are many provisions in Rule & Sections, and formats of some forms which makes it very clear the intention of the Govt. to allow FDI in LLP. Like Rule 12 which is reproduced below :

“In case of foreign nationals residing outside India in countries signatory to the Hague Apostile Convention, 1961 and seeking to register a LLP in India, their signatures and address on the incorporation documents and proof of identity, where required, shall be notarized before the notary of the country of their origin and be duly apostillised in accordance with the said Hague Convention.”

However, some clarifications in this regard are expected from RBI.

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  • 11. Provides flexibility without imposing detailed legal and procedural requirements
  • 12. There is no provision to create any Charge on assets of the LLP.

However, information about any charge on properties are required to be mentioned in Form No.8 at the time of Annual Reporting.

  • 13. Enables professional/technical expertise and initiative to combine with financial risk taking capacity in an innovative and efficient manner
  • 14 Easy exit rout is provided for Striking off name of LLP (Form 24)
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[C] FACTORS TO BE CONSIDERED FOR CHOOSING LLP FORM

Unfavourable Factors :

  • Heavy penalties for various offences & omissions.
  • Uncomfortable provisions of Section 17 & 18 :

If any entity finds that any LLP is formed with name similar to its name, it may apply to ROC for change of name within 24 months of registration and LLP is required to change its name within 3 months of the order.

  • Disclosure of information in Annual Return, Balance Sheet & statement of accounts & solvency.
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[D] INCORPORATION & REGISTRATION OF LLP

Steps in brief :

1A. REGISTER with website llp.gov.in

  • 1. Get Proof of ID & Proof of Residence of ALL Partners.
  • 2. Get DSC for ALL DPs.
  • 3. Get DPIN for ALL DPs
  • 4. Register DSC for at least One DP
  • 5. Get consent of all partners
  • 6. Get consent of all DPs in Form 9
  • 7. Apply for Name in Form 1
  • 8. Get Proof of Address for LLP
  • 9. Prepare & File Form 2 : Incorporation Document
  • 10. Prepare LLP Agreement on stamp paper ( stamp value depends on Contribution)
  • 11. Within 30 days of incorporation Prepare & file Form 3 : Application for Information regarding LLP Agreement and Form 4 : Notice of appointment of Partners & DPs
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1. Partners :

  • Any individual or body corporate may be a partner (Sec.5). There has to be minimum Two partners (Sec.6 )
  • Get Consent of each Partner alongwith proof of identification & proof of address.
  • Also get Subscription Sheet duly signed by all Partners in their own handwriting. ( required for clause 12 of Form 2)
  • There is no clarity with regard to a minor as a partner. Further, in case of Non-Resident Partners, there is no concept of alternate partner [unlike Company in which we can have Alternate Director]
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2. Designated Partner :

  • Select any Two individuals as Designated Partner from the proposed partners, and al least one of them should be resident in India i.e. a person who stayed in India for 182 days or more during immediately preceeding year (Sec.7). In case of body corporate individual nominees can be selected as DP.
  • Get the Consent from DP in Form 9.

3. Get Digital Signaturefor ALL Designated Partner.

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4. Get DPIN [DESIGNATED PARTNER IDENTIFICATION NUMBER] :

  • Same as DIN in case of Company, DPIN is required for all designated partners.
  • Apply ONLINE in Form No.7 , Fees Rs.100/-.
  • Get provisional DPIN which is valid for 60 Days Rule 10.
  • ALL FEES WERE REQUIRED TO BE PAID THRU CREDIT CARD ONLY. Now payment thru ICICI Bank net banking is also activated.
  • Photo to be attached on the online form should be in JPEG format and size of the same should not be above 10kb.
  • Certified copy of Proof of Identity, Proof of Residence is required to be attached.
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  • Photo on plain paper with two signature is also required. Format is given hereunder :

Designated Partner Photo Certifiedaffix photo

NAME : Mr xyzI

FATHER’S NAME : Shri pqr

NATIONALITY : INDIAN

CATEGORY : RESIDENT, INDIVIDUAL

PAN : AAABB1234C

DATE OF BIRTH : 09.11.1989

OCCUPATION : BUSINESS

PERMANENT ADDRESS : 7, SEETA MAHAL,

BOMANJI PETIT LANE, HAJI ALI

MUMBAI 400 036

EMAIL : hah@zcare.com

Signature 1 ____________

Signature 2 ____________

Hard copy may be sent to Office of Registrar, Ministry of Corporate Affairs, 3rd Floor, “Paryavaran Bhawan”, CGO Complex, Lodhi Road, New Delhi-110003

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  • For any changes in DPIN particulars, file form No.10 within 30 Days and also intimate the same to LLP.

5. Register DSC for related DPIN.

6. Name Reservation for LLP :

  • Apply in Form 1 , Fees Rs.200/-. Six Names can be furnished and Two resubmissions are allowed
  • While applying for name one should keep in mind Emblems and Names Act,1950, Rule 18(2) wherein 16 categories of names are Reserved.
  • If applicable, prior approval of Council / Authority required under Rule 18(3).
  • Name so allotted shall be reserved for 3 months.
  • Foreign LLPs may apply in Form No.25 with a fees of Rs.10000/- for reserving their existing name for 3 years Rule 18(5).
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7. Drafting of LLP Agreement :

  • In the meantime LLP Agreement can be prepared and finalized on stamp paper. Value of Stamp is to be decided based on capital contribution.
  • Note : The date of LLP agreement can be after approval of Form 2 or it can be before incorporation but in case the agreement is made before the incorporation, the LLP Agreement is required to be ratified by all partners as well as by Designated Partner on its behalf to bind them as required under section 23(3).

8. Incorporation Documents

  • Form 2 : Incorporation Documents
  • Form 3 : Information with regard to LLP Agreement
  • Form 4 : Notice of appointment, cessation, change in name / address / designation of partner / designated partner, intimation of DPIN and consent to become a partner/designated partner
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After name approval, Incorporation Document in Form No.2 can be filled.

Form 2 : Incorporation Documents

Contents are :

  • Name & Address of LLP
  • Proposed Business / Profession
  • Name & Address of each DP & Partner
  • Monetary Value of Contribution. ( The subscription clause is required to be signed by all the partners specifying obligation and forms of contribution undertaken )
  • Name, Address & Signature of Partners & witness in their own hand
  • Code of related business activity as per list of NIC-2004 codes.(easily available from www.mospi.gov.in.)
  • (optional) NAME & CIN of the Company in which a partner is a Director.
  • Any false declaration may attract minimum penalty of Rs.10,000/-
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  • Registration fees are based on amount of Contribution.
  • Contribution upto Fees for Form 2
  • Rs.1 Lakh 500/-
  • Rs.5 Lakhs 2000/-
  • Rs.10 L 4000/-
  • More than 10 L 5000/-
  • Formation of LLP is cheaper as compared to formation of Company.
  • Filing fees of various documents and forms are as under :
  • Contribution upto Filing Fees
  • Rs.1 Lakh 50/-
  • Rs.5 Lakhs 100/-
  • Rs.10 L 150/-
  • More than 10 L 200/-
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  • Contribution is defined under sec.32 of the Act. It may consist of tangible, intangible, movable, immovable assets or contract for service. LLP Act, 2008 nowhere intends to include accumulated profit to be part of Contribution.

Attachment to form 2 are :

1. If Partner is a Body Corporate, Resolution on letterhead duly certified by Director.

2. Proof of Address of Registered Office.

3. Subscriber Sheet in the format given in clause 12.

Once the form 2 is approved, LLP is formed. A unique number i.e. LLPIN is allotted.

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Form 3 : Information with regard to LLP Agreement

  • Form 3 can be filed after incorporation of LLP but within 30 days of formation of LLP alongwith form 4.

Contents are :

  • Information with regard to various clauses of LLP Agreement.

Attachments to Form 3:

  • LLP Agreement
  • Draft LLP Agreement will be mailed to our group members.
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  • Form 4 : Notice of appointment, cessation, change in name / address / designation of partner / designated partner, intimation of DPIN and consent to become a partner/designated partner
  • Attachments are :
  • (a) Consent of each Partner
  • (b) Proof of ID & Residence of all partners
  • (c) Form 9 [Consent of DPs]
  • (d) Power of Attorney (optional)
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9. SOME IMPORTANT MATTERS TO BE NOTED :

  • Annual Filing
  • Creation, Modification or Satisfaction of Charge
  • Audit of LLP
  • Ratification of LLP Agreement after formation
  • Publication of name of LLP in all official correspondence
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Conversion IN LLP

  • Act provides for conversion of firm, private company or unlisted public company only. There is no provision to convert sole proprietorship company, listed public company or trust.
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[E] CONVERSION OF FIRM IN LLP

Act provides for conversion of firm, private company or unlisted public company only. There is no provision to convert sole proprietorship company, listed public company or trust.

After name approval, Application for Conversion of Firm is to be made in Form 17 online.

Following attachements are required :

  • 1. Statement of partners of the firm
  • 2. Incorporation Document Form 2
  • 3. Statement of Assets & Liab of firm.
  • 4. Approval of Council [if required]
  • 5. Approval of any other Regulatory Authority
  • 6. Authorization of other partners – for signing the declarations
  • 7. Any other declarations, Pending proceedings, etc.
  • If all documents are in order, Registrar will issue Certificate of Registration.
  • LLP shall give intimation to Registrar within 15 days of registration in form 14.
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[F] CONVERSION OF COMPANY IN LLP

After name approval, Application for Conversion of Company is to be made in Form 18 online.

Following attachements are required :

  • 1. Statement of shareholders of the Company
  • 2. Incorporation Document Form 2
  • 3. Latest Statement of Assets & Liabilities of the Company
  • 4. Approval of Council [if required]
  • 5. Approval of any other Regulatory Authority
  • 6. Authorization of other directors & shareholders – for signing the declarations
  • 7. Any other declarations, Pending proceedings, etc.
  • If all documents are in order, Registrar will issue Certificate of Registration.
  • LLP shall give intimation to Registrar within 15 days of registration in form 14.
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  • [G] SOME IMPORTANT PENALTY CLAUSES UNDER LLP ACT, 2008 :
  • Failure to file Consent of DP or failure to file change in DP within 30 days of appointment Sec7(4) - Rs.10K to Rs.1L
  • Failure to appoint minimum 2 Sec.10 - Rs.10K to Rs.5L
  • DPsFalse statement in Incorporation Doc Sec.11(3) – 10K to 5L (with / without imprisonment)
  • Failure to file notice of change in registered office within 30 days - 2K to 25K
  • Default of printing Name, etc as reqd u/s.21(1) - 2K to 25K
  • Failure to maintain books, auditing, filing statement of account & declaration of solvency within 30 days from 6 months of close of year – Form 8 - 25k to 5L & every DP shall be punishable with fine 10k to 1L
  • Failure to file Annual Return within 60 days of close of its financial year – Form 11 – Rs.100/- per day & every DP shall be punishable with fine 10k to 1L
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[H] Some important issues :

1. FDI Regulation currently does not recognize LLP form of business. Hence, some clarifications from RBI are required in this regard.

2. CA Act do not allow to practice under LLP form of business. It may be in the benefit of SME CAs at large.

3. IS THE LIABILITY REALLY LIMITED :

  • Refer to Chapter V sec.26 to sec.30.
  • a. Liability of LLP to Secured Creditiors ?
  • b. Liability of LLP to Unsecured Creditiors ?
  • c. Liability of Designated partners to LLP ?
  • As per Sec.8 Designated partners are (i) responsible for any compliance of the provisions of LLP Act, (ii) liable as may be specified in the LLP agreement and (iii) liable for all penalties.
  • d. Liability of Designated partners to Third Party ?
  • e. Liability of Non-designated partners to LLP ?
  • f. Liability of Non-designated partners to Third Party ?
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THANK YOU

j_m_tiwari@yahoo.co.in 9820496297