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Limited liability, unlimited scope
December, 25th 2006

Have an idea and capital scarce? Heres probably an answer to the thousands like you impelled to be subservient to the owners of capital and ipso facto circumscribed in the full bloom of his/her entrepreneurial urge or creative/intellectual verve.

A few days ago, the government introduced the Limited Liability Partnership Bill in the Parliament, which according to the proponents of the Bill, will usher in a hybrid structure for running businesses with the twin benefit of the internal governance flexibility of partnership firms and the limited liability of companies. Says Anurag Goel, secretary, ministry of company affairs:

The Bill envisages that LLPs will be formed according to an agreement among the partners in which the contribution of each partner would be quantified in monetary terms before the firm is incorporated. This means that irrespective of the form or the kind of the contribution capital, land or other assets or intellectual/entrepreneurial contribution its value would be pre-determined. This will ensure that each partner will get rewards commensurate with his contribution, the value of which is quantified beforehand.

Another major advantage of the LLP structure is that the partners liability will be limited to the extent of his contribution. However, an LLP will be liable to the full extent of its assets. Ones liability would be only to the extent of ones own actions. One wont have to take the burden of wrong decisions/doings or the malfeasance of ones partners in the LLP.

This removes a major irritant that has impeded the growth of the existing partnership firms and proliferation of such firms as a viable vehicle for running businesses. In partnerships, the number of partners is capped at 20 at present, each partner becomes susceptible to the results, including adverse, of others doings. LLP is envisaged to have any number of partners but each partner will be free from the unwanted encumbrance of being liable to the other persons misdeeds. He can be at peace.

This is one reason why, as the LLP Bill was discussed in the Cabinet before it was introduced in the Upper House, prime minister Manmohan Singh described it as a path-breaking legislation.

The Bill provides for existing unlisted companies and partnership firms to convert themselves to LLPs. Companies can also be partners in LLPs with their contributions defined and quantified. Which means both individuals and companies can enlarge their business operations by getting involved in conducive LLPs. Says Kamlesh S Vikamsey, former president of the Institute of Chartered Accountants of India, the rigours of being subjected to then vastness of Companies Act are too much for the professionals.

At the same time, in a rapidly globalising world, professionals cannot restrict themselves to the 20-member partnership firms. There was a need for multi-disciplinary partnership firms with unhindered cooperation with foreign counterparts, Mr Vikamsey said. He added ICAIs governing council has already approved an amendments to the ICAI Act to allow accounting professionals to forge alliance with professionals of other disciplines like law and business consultancy.

The LLP Bill, which is described to be self-content, also has the provision for extending various provisions of the Companies Act such as those relating to winding up, amalgamation, etc to LLPs with necessary modifications. Says VS Wahi, former Company Law Board member and a practising lawyer, despite abundance of talent, Indian professionals are currently at a disadvantage vis-a-vis their counterparts in international advisory services.

At a time when the Indian corporates are going in for acquisition of companies and assets abroad and foreign private equity funds increasingly becoming strategic investors in Indian companies, LLP structure would indeed be a shot in the arm for Indian professionals. According to Mr Vikamsey, small and medium enterprises and privately held companies run largely on professional contributions would find LLP an attractive garb.

Under the World Trade Organization, the member countries are obligated to open up their services sector as per a request-offer methodology on various modes of service delivery. Although the WTO talks are in a limbo at present, India had previously shown its intent to bind its autonomous liberalisation as on a specified date in retrospect. There is pressure on the Indian government to open up a slew of other services like legal, audit and accounting. In this context, the LLP structure would enable Indian professionals to grow in a fashion compatible with their foreign counterparts, besides facilitating mutual cooperation and engagement.

An important question the LLP Bill has skipped pertains to taxation of LLPs. The issue of whether LLPs will be taxed like companies or like partnership firms or in a manner different from the two, has been left to revenue department to decide separately.

There are many ideas floating around as regards taxation of LLPs. One is that profit-making activities of an LLP and its assets would be deemed as activities/assets of the partners, instead of the LLPs. That is, the partner will be taxed for his capital gains as the assets are treated as his investment. The idea is that if the ownership of the asset is imparted to the partner, he will be free to dispose of the assets and exist the LLP, without necessitating dissolution of the firm as such.

A second option is to treat the assets as that of the firm and tax it accordingly.LLPs legal compliance requirements are much easier than that of companies. This mainly because of the flexibility of internal governance norms. If there is a proper agreement among the partners, then the government will almost entirely refrain from interfering with its internal affairs. Chapter VII of the Bill prescribes various disclosure requirements pertaining to maintenance of books of accounts and audits.

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