SMEs switching to LLPs as promoters get dragged to court

Written by Khushboo Narayan | Mumbai | January 29, 2018

A large number of small and medium businesses are now choosing to register as Limited Liability Partnerships (LLPs) to ring fence the liabilities of promoters and partners with more promoters being dragged to courts by lenders over unpaid loans.
According to data from the Ministry of Corporate Affairs (MCA), registration of new LLPs have increased in India since 2014-15. The data suggests that the number of new LLPs registered in the country has doubled from 14,682 in 2014-15 to 29,403 in 2016-17.
An LLP is a partnership in which some or all partners have limited liability and one partner is not responsible or liable for another partner’s misconduct or negligence.
In the first nine months of the current financial year at least 25,334 new LLPs have been formed across the country, which is 86 per cent of the LLPs registered in fiscal 2017. Apart from this, between April and November 2017 over 50,000 private companies have been converted into LLPs. This, despite the amendment in the Finance Bill 2016, which has restricted tax neutrality on conversion of private companies into LLPs.
Experts said that LLPs have become popular as it is tax-efficient and limits the liability of partners as far as civil cases are concerned. Also LLPs are governed by the LLP Act, 2008, and they do not have to comply with the stringent norms of the Companies Act.
“LLPs have become popular as it is does not have to comply with the stringent and sometimes draconian Companies Act. It is a good way to escape compliance. LLPs are also tax efficient as they are exempt from dividend distribution tax and minimum alternative tax. Besides, it allows partners to limit their liabilities as far as civil cases are concerned,” said Amit Maheshwari, partner at Ashok Maheshwary & Associates.
In India, an LLP is treated on par with the conventional partnership entity, where a firm pays the tax and the partner is not taxed on the share of profit. Foreign Direct Investment in an LLP is also allowed and it can be in the form of capital contribution or by way of acquisition of profit shares. As a result, the LLP structure has found wide acceptance among professionals and start-ups for its flexible approach.
Out of the 29,723 LLPs registered or companies converted to LLPs in 2016-17, at least 33 per cent have been registered in Maharashtra, 13 per cent in Delhi and 8 per cent in Gujarat.
Between April and December 2017 as well, the highest number of LLPs have been formed in Maharashtra, followed by Delhi.

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