AUTHOR’S NOTE: AN INSIGHT INTO THE PAPER

“A partner is not personally liable, directly or indirectly, by way of contribution or otherwise, for such an obligation solely by reason of being or so acting as a partner.”

-  Section 306(c) of the Revised Uniform Partnership Act (1997)

Limited Liability Partnership (LLP) is a new legal vehicle created to carry on business transactions. LLP is a new corporate form that enables professional expertise and entrepreneurial initiative to combine, organize and operate in an innovative and efficient manner. It is a structure which is half way between a traditional partnership firm and a limited liability company.

Though legally this structure has been give a legislative form in the last decade or so, but in practice, it has been a part of trade and commerce from the times of the Romans. The head of the family, in the Roman law, was liable for the torts committed by his child or slave but he had an option of turning over the offending family member or slave which, in the current scenario, operates as an effective ceiling on damages and at least in theory, if not in practice, is functionally equivalent of limited liability. Therefore, limiting of liability was possible centuries before the creation of the corporations.

Limited Liability Partnership can be broadly defined as a body corporate having a separated legal entity with a perpetual succession. The concept of separate legal entity ensures that the partners are not personally liable for the acts done by the firm. As can be seen by the definition, the LLP combines the features of both the limited liability of a company by way of having separate legal entity from that of the partners and incorporates the flexibility of a partnership in a single organisation.

In the course of this paper, an attempt has been made to show that in several ways, an LLP serves as convenient business machinery for medium and small size organizations that are constrained by several limitations like finances. Therefore, the primary incentives to form an LLP are that, unlike a partnership, in the normal course of business there is no personal liability of partners; and unlike a company, an LLP is taxed only at one level as long as the partners are Indians. The present paper shall provide an insight as to the need for LLP Act, its advantages and disadvantages compared to the other forms of business. The paper will critically analyze the existing tax provisions across various jurisdictions with special focus on India, United States of America and United

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Kingdom. The researcher shall also highlight the taxation issues arising out of conversion of limited liability partnership into and from other forms of business. The paper will also bring forward the lacunae existing in the current statutes and make recommendations to overcome the same.

RESEARCH PROBLEM

Tax is the chief source of revenue for any government and the legal framework as to taxation is vital for any organisation to plan the future. The regime of Limited Liability Partnership is still at its nascent stage and therefore still requires continuous monitoring and modifications. Tax is also every changing in nature and has to adapt according to the requirement of the economy and the new development in the methods of transactions. Globalisation has also made a major impact on how the government imposes tax. Especially from Indian perspective, due to the recent implementation of the Act, there is still a need to discover this arena.

Hence the research questions addressed in this paper are whether LLP adversely affects the revenue generation of the country, and how taxes are imposed on LLPs under different political system.

PRIMARY AIMS AND OBJECTIVES OF THE RESEARCH

The research objective of the present dissertation can be divided into the following folds:

a) To understand and compare the tax regime relating to LLP across various jurisdiction with special regards to India, United Kingdom and United State of America.

b) To study the tax implications with regards to conversion from and to LLP.

c) To analyze and compare various forms of business structure and determine whether LLP really is required and holds advantage over other forms of business.

HYPOTHESIS

Formulation of a hypothesis is not only the crux of a thesis but also has great significance in the doctrinal method of research. Hence the final

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hypothesis is: Limited Liability Partnership with regards to taxation is like an empty blackboard that the government across various jurisdictions and especially India are attempting to fill according to experience and issues being raised by the firms.

METHODOLOGY

A doctrinal study shall be made to prepare the dissertation. I have gone through various articles to acquire an understanding of the subject and identify the issues that need to be addressed. Further, thorough online research has been conducted to understand the tax regimes across various jurisdictions. A significant amount of research shall also be done to identify the major challenges and future growth of LLP in countries like USA and UK. All efforts shall be made to incorporate the latest policy initiatives taken by the government in relation to LLP and the measures that still need to be undertaken.

REVIEW OF LITERATURE

Primarily, for the sake of authenticity, literature available on official websites of Government organisations is used. Author has also relied on various books and journals available in the library as well as articles and reports available on internet.

PROPOSED CHAPTERIZATION

1. Introduction.

Limited Liability Partnership can be broadly defined as a body corporate having a separated legal entity with a perpetual succession. The concept of separate legal entity ensures that the partners are not personally liable for the acts done by the firm. As can be seen by the definition, the LLP combines the features of both the limited liability of a company by way of having separate

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legal entity from that of the partners and incorporates the flexibility of a partnership in a single organisation.

In this chapter mainly the legal frameworks created for the functioning and growth of LLPs are discussed.

2. Taxation of LLP in United Kingdom.

In the United Kingdom, the taxation of the Limited Liability Partnership is in accordance with the Limited Liability Partnership Act, 2000 (“LLP Act”). For UK tax purposes, a LLP is fiscally transparent where each partner will be assessed to tax on their share of the LLP's income or gains as if they were partners of a 'normal' partnership. 

For the purposes of the Tax Acts, a trade, profession or business carried on by a limited liability partnership with a view to profit shall be treated as carried on in partnership by its members (and not by the limited liability partnership as such); and, accordingly, the property of the limited liability partnership shall be treated for those purposes as partnership property.1 This situation is applicable only when no business, trade or profession is carried out with or within the United Kingdom and the partners are located outside of the UK then UK LLPs have no liability for UK taxation.

3. Taxation of LLP in Singapore.

The Indian Limited Liability Partnership Act, 2008 has its foundation in the Singapore Limited Liability Partnership Act, 2005 (“LLP Act, 2005”). A bare reading of the provisions would indicate that most of the provisions in its application have the same effect in India as in Singapore. Therefore, it becomes important to understand the tax structure of LLP in Singapore.

4. Taxation of LLP in India.

The Finance (No. 2) Act, 2009, provides for taxation of LLP. In the definition of the term “Firm” and “Partnership” in section 2 (23) of the Income tax Act, it is stated that the term “Firm” or “Partnership” will include any LLP w.e.f. 1.4.2009. Further, the definition of a “Partner” will include a partner of LLP. Therefore, all

1 Section 118ZA, Income and Corporation Taxes Act 1988.

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the provisions for taxation of “Firm” will apply to LLP. The tax will be payable by the LLP at 30 per cent plus Education Cess. Chapter X of the Limited Liability Partnership Act, 2008 deals with the taxation aspect of LLP in India. It provides that the partners of an LLP which is carrying on a business with a view to profit are treated for the purposes of income tax and capital gains tax as if they were partners carrying on a business in partnership, despite the fact that an LLP is a body corporate. It also provides that the property of the LLP shall be treated for those purposes as property of its partners. This ensures that partners will be individually liable to tax on their share of the profits of the trade, profession or business carried on by the LLP. Further, the assets of the LLP shall be treated as assets held by the partners for the purpose of taxing capital gains. This ensures that the partners of the LLP, rather than the LLP itself, will be liable to tax for capital gains on the disposal of LLP assets. The chapter brings LLPs in line with the approach adopted for partnerships, which similarly treats assets as held by the partners rather than by the partnership.

5. Global comparision.

In this chapter the functioning of LLPs in various political systems is compared.

6. Conclusion.

In this final chapter the author has concluded his final arguments.

WORKING BIBLIOGRAPHY

ARTICLES

Alex Newman, Junior Partners gear up to make capital contributions as new LLP rules kicks in, 27 February, 2014.

CA P.N. Shah, Limited Liability Partnership Act and Some Tax Issues, The Chartered Accountant, Page 314, August 2010.

CA Chandrashekhar V. Chitale, Conversion of Partnership Firms and Private Limited Companies to LLP’s- Tax Issues.

COMMITTEE REPORTS

The Abid Husain Expert Committee Report on Small Scale Industries 1997.

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Naresh Chandra Committee Report on Regulation of Private Companies and Partnerships, 2003.

Peter Gerangelos, The Separation of Powers and Legislative Interference in Judicial Process, Constitutional Principles and Limitation, (2009), Hart Publishing.

STATUTES

Limited Liability Partnership Act, 2008 (India). Limited Liability Partnership Act, 2000 (United Kingdom). Uniform Partnership Act/Revised Uniform Partnership Act (United

States of America). Limited Liability Partnership Act, 2005 (Singapore).

JOURNALS

All India Reporter (AIR) Supreme Court Cases (SCC) Supreme Court Reporter. (SCR)

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