Limited Liability Partnerships (LLPs)

In News

• The ministry of corporate affairs (MCA) is planning to bring out a set of new accounting and auditing standards tailor-made for limited liability partnerships (LLPs) that will seek more disclosures.

Proposed Amendments

• Aim of the move
  • The move is aimed at improving the quality of the financial statements of LLPs.
  • Select accounting standards and auditing standards for LLPs would mean more disclosures and qualitative improvement in their financial statements.
• Two considerations about governing LLPs
  • These involve improving ease of doing business on the one hand and scaling up the disclosure and transparency requirements on the other.
• Disclosure of the ultimate natural person
  • Certain provisions applicable to companies, such as disclosure of the ultimate natural person behind the entity, are also being made applicable to LLPs.
• Accounting and auditing standards for LLPs
  • There is also a plan to prescribe accounting and auditing standards for LLPs as part of the governance architecture of this legal form.
• It decriminalizes procedural lapses and technical defaults.
• Decriminalizing Offences
  • Of the 24 penal provisions in the Act, one would be omitted and a total of 12 cognisable offences were being decriminalized under the Limited Liability Act, 2008 which deal with procedural and technical violations. 
• New Definition of small LLPs
  • The amendments also include a new definition for small LLPs. LLPs with contribution less than or equal to Rs. 25 lakh and turnover less than Rs. 40 lakh are treated as small LLPs. Now, Rs. 25 lakhs will go over to Rs. 5 crores and the turnover size will be treated as Rs. 50 crores.

Significance of Amendments

• It is a preferred form of incorporation of business
  • Especially in the services sector, and offers certain flexibility and a simplified compliance regime compared to that of a company.
• The government has decriminalized the LLP Act to improve the ease of doing business.
• The idea is that a soft touch regulatory framework meant to reduce the rigours of compliance will work better with heightened transparency in the affairs of the business.
• The number of LLPs is growing steadily. Making accounting standards applicable to them will make the financial statements of different LLPs comparable.
  • This is likely to be done in phases, applying select accounting standards to certain classes of large or systemically important entities.
• The government notifies accounting standards scripted by the Institute of Chartered Accountants of India (ICAI) for different entities from time to time.
• There are more than 230,000 active LLPs in the country and many businesses are being converted from company to LLP format, a legal form introduced in India in 2008.

What is Limited Liability Partnership?

• It is a partnership in which some or all partners have limited liability. It therefore exhibits elements of partnerships and corporations.
• It allows for a partnership structure where each partner’s liabilities are limited to the amount they put into the business. 
• An LLP is a corporate body and legal entity separate from its partners. It has perpetual succession.
• In an LLP, one partner is not responsible or liable for another partner’s misconduct or negligence.
• Limited liability means that if the partnership fails, then creditors cannot go after a partner’s personal assets or income. 
• LLPs are common in professional business like law firms, accounting firms and wealth managers.
• Being the separate legislation (i.e. LLP Act, 2008), the provisions of Indian Partnership Act, 1932 are not applicable to an LLP and it is regulated by the contractual agreement between the partners.

Benefits of Limited Liability Partnership

• Pooling Resources for Better Growth: Most LLPs are created and managed by a group of professionals who have a lot of experience and clients among them. By pooling resources, the partners lower the costs of doing business while increasing the LLP’s capacity for growth. 
• Increased Profits: Most important, reducing costs allows the partners to realize more profits from their activities than they could individually.
• Attracts Good Workers: The partners in an LLP may also have a number of junior partners in the firm who work for them in the hopes of someday making full partners. These junior partners are paid a salary and often have no stake or liability in the partnership. 
• More Focus on Business: The LLPs help the partners scale their operations. Junior partners and employees take away the detail work and free up the partners to focus on bringing in new business.
• Liability Protection: The personal assets as a partner are protected from legal action. Basically, the liability is limited in the sense that one may lose assets in the partnership, but not those outside of it (i.e. personal assets). LLPs protect individual partners from the negligence of any other partner.
• Flexibility: It has the ability to bring partners in and let partners out. The LLP can always add partners who bring existing business with them. Overall, it is the flexibility of an LLP for a certain type of professional that makes it a superior option to an LLC or other corporate entity. 

Way Forward

• The rising popularity of the LLP form justifies making the accounting and auditing standards applicable for them.
• A lot of changes are being made in the Companies Act, decriminalizing many sections and improving ease of doing business for companies. A similar treatment had to be given for LLPs.
• Now, LLPs will have the benefit of either simplified regulation or ease of practice under proprietorship.

Source: LM