THE government plans to amend the Limited Liability Partnership Act, 2008, a move triggered by the increasing number of cases where companies are taking the LLP route to escape the tough accountability measures of the Companies Act.
“The (LLP) Act was essentially to promote small business and professionals like chartered accountants and company secretaries,” a senior official told The Indian Express.
“But we have seen that many companies converted into LLPs to escape the accountability that the Companies Act required.”
The Act was envisaged as a means to boost the services sector but over the last six years, while the number of LLPs from the services sector is low, entities from sectors like manufacturing are forming LLPs to reap the benefits of a structure that offers flexibility of both partnership and company.
The LLP provision was aimed at helping professionals gain size and strength enjoyed by the Big Four audit firms — KPMG, Deloitte, PwC and EY — at a global level.
The official added that although the LLP Act itself allowed the conversion to promote the concept, it is time to now limit the benefit to only those sectors which require partnership-like flexibility to organise internal management while also provide the benefit of limited liability of a company. In 2013, some 9,683 LLPs were registered as per the ministry of corporate affairs data.
“We are working on excluding a few sectors like real estate, manufacturing so that only a small list of businesses is allowed to form LLPs. As such internationally too LLPs are usually vehicles for service industry and professionals,” the official said, adding that it would stop the misuse of the provision to escape compliance.
The LLP form does not impose lengthy legal and procedural requirements intended for large and widely-held companies.
The LLP Act was enacted in 2009 by the UPA government as an alternative corporate business vehicle as recommended by various committees and expert Groups since 1979.
The Abid Hussain committee in 1997 had recommended the legislation for small scale industries while the Naresh Chandra committee had suggested it for regulating private companies and partnerships in 200.
The JJ Irani committee set up for revamping the new companies law had also recommended in 2005 for separate LLP legislation.
As per the act, the LLP is a separate legal entity like a company with its liability limited to the extent of its assets.
The liability of its partners is limited to their stake and no partner is liable on account of the unauthorised actions of other partners, contrary to the Partnership Act.
The LLP has perpetual succession, is taxed like a partnership and has no cap on number of partners. Winding up and dissolutions of LLPs is much easier than companies.
LLPs, especially those engaged in the services or technology-based sectors, are allowed to provide services globally.
Countries like the UK, the US, Australia, Singapore already have had the structure in place for a large range of business activities including those of professionals, service sector, small-scale enterprises, and venture capital.