Understanding the Concept of LLP and its Tax Implications

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Understanding the Concept of LLP and its Tax Implications
Sole proprietorship and partnership firms are the simplest formats to conduct business in India. However, their biggest disadvantage persists in the fact that the liability of the sole proprietor and partners in the partnership firms is unlimited. This means, in case of losses or winding up, the stakeholders can proceed against the personal assets of the sole proprietor and partners to recover their dues.
Companies confer the advantage of limited liability. However, the compliances are more as compared to the sole proprietorship and partnership firms. Also, the cost of incorporating and operating a company is higher as compared to the above two formats.

So, what’s the solution then? The answer lies in LLP registration.

Limited Liability Partnerships – An Overview
Limited Liability Partnership (LLP) is a blend of company and partnership firms. It operates as a partnership firm but has the advantage of limited liability. The Ministry of Corporate Affairs (MCA) is the regulator of the limited liability partnerships registration and compliances in India and is governed by the Limited Liability Partnership Act, 2008.
Characteristics of LLP
Following are the characteristics of the LLP that make them a preferred option for the business owners:

  • LLP has a separate legal identity akin to companies and partnership firms. Thus, it can enter into contracts, own the properties, can sue and be sued in its own name.
  • As stated above, the liability of the partners of the LLP is limited and therefore can be discharged from the assets of the LLP alone.
  • LLP has a perpetual succession and can continue to exist until dissolved.
  • LLP shall be mandatorily required to be registered under the LLP act.
  • Only individuals and body corporates can become a partner in LLPs. Therefore, all the other constitution formats like partnership firms, AOP, HUF etc. cannot become partners in LLP.
  • An LLP shall have at least two partners. However, there is no maximum limit as to the number of partners in LLP. However, LLP should have at least 2 Designated Partners who shall be individuals. Further, at least one designated partner should be resident in India.
  • There is no minimum capital contribution required for the LLP incorporation.
  • LLP can be converted easily into a private limited company or an unlisted public company and vice-versa.
  • LLP cannot be created for charitable purposes. Further, now the professionals are also allowed to form multi-disciplinary LLPs which was not possible earlier.

Taxation of LLPs 
Following are the major taxation implications for limited liability partnerships in India:

  • Income Tax: A flat rate of 30% is applicable on LLP. 
  • Surcharge: Surcharge @ 12% shall be applicable in case the total income of LLP exceeds Rs. 1 crore.
  • Health and Education Cess: The tax and surcharge payable by the LLP shall be further increased by the HEC @ 4% calculated on the total of tax and surcharge payable.
  • Alternate Minimum Tax: LLP shall be subject to alternate minimum tax @ 18.5% + Surcharge and HEC applicable on the adjusted total income calculated as per Section 115JC. That means, the LLP shall pay higher of the normal income tax or the alternate minimum tax.

Further, LLP is not eligible to avail of the benefit of presumptive taxation as per Section 44AD and 44ADA. The LLPs can claim a deduction of up to 12% for interest on loans and capital paid to the partners. Further, salary, bonus, remuneration or commission, by whatever name called, paid to a working partner is allowed as a deduction to the LLP up to the following limits:

  • In case of loss or up to first 3 lakhs of book profit
  • Rs. 1,50,000 or 90% of the book profits, whichever is higher
  • On the balance book profit
  • 60% of the balance book profits 

Further, the amount not allowed as a deduction to the LLP shall not be taxable at the hands of the partner. Also, the profits of the LLP distributed among the partners shall be exempt in the hands of the partner under section 10(2A).
LLPs shall file their income tax returns in Form ITR-5. The due date for filing the return is as follows:

  • In case the accounts of LLP are required to be audited, then the audit report shall be submitted till 30th September of the assessment year. Further, the return of income for LLP shall be filed till the 31st of October of the assessment year.
  • In case, the LLP is required to furnish a report in Form No. 3CEB u/s 92E, the LLP shall file its return of income till 30th November of the assessment year.
  • In any other case (i.e., when the audit is not required to be done), the LLP shall file its return till the 31st of July of the assessment year.

Other taxation compliances include deposit of TDS/TCS and filing of the return thereof. LLPs shall also be required to discharge their advance tax liabilities within the applicable due dates. Further, LLP shall ensure compliance with the GST law and file the applicable returns within the due dates.
Frequently Asked Questions
Q: Which form is applicable for limited liability partnership registration and incorporation?

A: Form FiLLiP shall be used for the LLP registration online.
Q: Whether DIN is required for LLP company registration?
A: Designated Partners shall use Designated Partner Identification Number (DPIN) for LLP registration. However, if a partner has already been issued DIN, then he can use DIN for the purpose of LLP. If a partner has both DPIN and DIN, then DPIN shall stand cancelled and DIN shall be used for the purpose of LLP.
Q: Whether foreigners can incorporate LLP?
A: Yes. Foreigners can incorporate LLP. However, it should have at least one designated partner who is resident in India.
Q: What are the mandatory compliances under the LLP Act?
A: LLP shall be required to file LLP Form 11 i.e., Annual Return and LLP Form 8 i.e., Statement of Account and Solvency on an annual basis. Annual Return shall be filed within 60 days after the end of the financial year whereas Statement of Accounts and Solvency shall be filed within 30 days after the expiry of the 6 months from the end of the financial year.

Author : Dipen

Date     : 26-Jun-2022