In the Indian context, businesses are typically structured or organized as sole proprietor concerns, partnership firms or companies (either public or private limited). These types of business organizations have their individual advantages and disadvantages. For example, a partnership firm provides flexibility in internal organization, right to participate in the management, with no public disclosures, whereas in the case of a company, the advantages include liability of shareholders being limited, perpetual succession and unlimited members. In view of the international experiences of countries such as the UK and the US, and the recommendations of the various corporate law reforms committees (Naresh Chandra Committee in 2003 and the J.J. Irani Expert Committee on Company Law in 2005), the eagerly awaited Limited Liability Partnership Bill, (Llp) 2008, has been passed by Parliament.

Limited Llp concept was introduced in order to adopt a corporate form, which combines the organizational flexibility of a partnership firm coupled with the advantage of limited liability for its partners. Certain key provisions of the Llp Act are as follows.

* The Llp shall be a body corporate and a legal entity separate from its partners.

* Any two or more individual or body corporates can form an Llp; however, the Llp can have unlimited number of partners.

*The Llp would have a perpetual succession.

*The mutual rights and duties of partners of an Llp inter se and those of the Llp and its partners shall be governed by an agreement between the partners, or between the Llp and the partners, subject to the provisions of the proposed legislation.

*The capital contribution of the partners can be in the form of tangible or intangible property or of any other nature.

*The Llp will be liable to the full extent of its assets, with the liability of the partners being limited to their agreed contribution in the Llp. No partner would be liable on account of the independent or unauthorized actions of other partners or their misconduct.

*The provisions of the Indian Partnership Act, 1932, shall not apply to Llps.

*The Llp Act contains provisions for converting other entities, such as partnership firms, unlisted companies and private companies, into an Llp.

Also Read Ketan Dalal’s earlier columns

Why an Llp?

The key features of the Llp such as a separate legal entity with unlimited number of partners, no partner being liable on account of the independent or unauthorized actions of other partner(s), liability of partners being limited to the respective stake of each partner in the Llp, are a distinct advantage over other forms of organizations. The Llp is a kind of a hybrid entity which combines the advantages of a partnership firm and a limited company. Such distinct features would be the key drivers for forming Llps, rather than companies, for planning different structures (for example, undertaking large infrastructure and real estate development projects). Another major reason for conversion of a firm/company into an Llp is on the tax front. Currently, the Income-tax Act, 1961, provides for payment of minimum alternate tax (MAT) as also for payment of dividend distribution tax (DDT) by companies. An Llp, which is not a company, should not be liable to pay MAT or DDT, considering the legislative intent.

Methodology of Conversion into an Llp

It is important to note that on conversion, all the partners/shareholders of the partnership firm/unlisted company/private company shall become the partners of the Llp. It is provided that no other person would become partner/shareholder on conversion into an Llp (i.e. at conversion, it should be a mirror image).

On conversion, all the tangible (movable and immovable) property and the intangible property, all assets, interest, rights, privileges, liabilities, obligations of the firm/company shall stand transferred to, and vest in, the Llp. Also, the firm/company so converted into an Llp shall cease to exist upon conversion.

Every partner of the partnership firm that is converted into an Llp shall continue to be personally liable (jointly and severally) for the liabilities and obligations of the partnership which were incurred prior to the conversion or which arose before the conversion. Such provisions are not applicable in the case of conversion of a company into an Llp, presumably since liability of shareholders in a company is anyway limited.

Taxation of Llps

The Llp Bill does not provide for taxation of Llps. The concept paper on Llps issued in 2006 does contain guidance in relation to taxability of Llps by recommending the same to be a flow-through entity. This means that the income of the Llp liable to be taxed will be taxed in the hands of the partners of the Llp to the extent of their share in the profits, and not in the hands of the Llp.

Another methodology of taxation prevalent in other countries is that of rendering flexibility by giving an option to the Llp to offer to tax the income either in the hands of the Llp or in the hands of the partners. This methodology will also ensure that the same is on par with other countries leading to eligibility to the tax benefits to such Llps in terms of the tax treaties entered into by India with other countries. In any case, amendments would be required to be introduced to the Income-tax Act, 1961.

The conversion of a partnership firm or a company into an Llp should be tax neutral, as one understands is the legislative intent. This is on the ground that there is no transfer of any assets to a third party on conversion, but an internal reorganization taking place through a statute. Similar reorganizations like conversion of a proprietary/partnership into a company, or registration of a firm as a company under Part IX of the Companies Act, 1956, are treated as tax-free, for which there exists legislative/judicial precedence.

Some of the aspects (linked to conversion into Llps) in relation with the tax issues that may be addressed by amendments to the Income-tax Act/stamp duty legislation are:

*Contribution by partners can be in the form of money or intangible assets. For contribution in kind, say, intangible assets introduced, the tax impact may be clarified in the Income-Tax Act as being tax neutral.

*Enabling provisions for carry forward and set-off of losses of the firm/company on conversion to Llp would also be covered by the amendments to the Income-Tax Act.

*In relation to stamp duty applicability may be treated as tax neutral by appropriate amendment to the stamp duty regulations. This is also the intent of the government as brought out in the concept paper issued in 2006.


There are several countries which have organizations that are in the structure of an Llp. Countries such as the UK, the US, Australia and Singapore, do provide for Llps as an alternative structure of an organization. The benefits that the Llp structure of organization will bring for certain businesses necessitate a quick addressing of and putting to rest of the above, i.e., translating the intent into legislation. The rules, which are at present issued and are in draft stage, provide for ease of methodology of conversion into an Llp. Organizations such as professional service firms, law firms, architect firms and special purpose vehicles required for undertaking different types of infrastructure projects, could be the initial ones to go for conversion into an Llp.

The tax neutral manner of taxability of conversion into an Llp, as intended and expected, would act as an important catalyst for such conversion.

Ketan Dalal is executive director and Manish Desai is associate director, PricewaterhouseCoopers. Your comments and feedback are welcome at