Llp Route: Investing In India's Future

Foreign nationals can invest in India via the LLP route. A Limited Liability Partnership (LLP) is a corporate body that is a legal entity separate from its partners. LLPs are governed by the LLP Act, 2008, which allows for a multi-disciplinary professional LLP. The LLP structure has been widely accepted among professionals and entrepreneurs for its liberal and flexible approach. Foreign investment in India is governed by the foreign direct investment (FDI) policy of India, which allows 100% FDI under the automatic route in LLPs operating in sectors/activities with no FDI-linked performance conditions. Foreign nationals can invest in an LLP without the Indian government's permission.

Foreign nationals can be partners in an LLP

However, foreign nationals must obtain a Digital Signature Certificate (DSC) and a Director Identification Number (DIN). The DSC is necessary for obtaining the DPIN. To obtain a DSC, a foreign national must submit a signed DSC application along with a notarized copy of their passport and address proof. The address proof should not be older than one year from the date of filing the E-Form. The passport copy and address proof should be notarized by the Consulate of the Indian Embassy, a foreign public notary, or a Company Secretary in full-time employment/CEO/Managing Director of the Indian company in which the partner is proposed to be a director.

In addition to the above, foreign nationals and foreign companies need to obtain the necessary approvals from the Reserve Bank of India (RBI) and the Foreign Investment Promotion Board (FIPB) if they want to invest in an LLP.

LLPs are taxed at a lower rate than companies

When it comes to investing in India via the LLP route, it is important to understand the taxation implications. Limited Liability Partnerships (LLPs) are taxed at a lower rate than companies, which can result in significant tax savings. Here are the key points to consider:

Firstly, LLPs are taxed as a separate entity, much like a traditional partnership. This means that the firm pays the tax, and the partners are not taxed on their share of the profits. Any remuneration drawn by a partner, however, is subject to tax in India. This is in contrast to a company structure, where shareholders may be taxed on their dividends.

Secondly, the flat tax rate for LLPs is 30% of their total income. When the total income exceeds 1 crore rupees, a surcharge of 12% is applied. This results in an effective tax rate of 34.32% (including cess) for LLPs with a total income above this threshold. In comparison, private limited companies are taxed at a rate of 25% if their turnover is up to 400 crores, and 30% if their turnover exceeds 400 crores. This higher tax rate for companies can result in a higher tax burden when compared to LLPs.

Additionally, LLPs have lower registration costs and fewer compliance requirements than companies. LLPs are not required to conduct board meetings or annual general meetings, and statutory audits are not mandatory unless the annual turnover and capital contribution exceed certain thresholds. This simplifies the management of the business and can result in cost savings.

It is important to note that LLPs may face challenges in raising funds, as venture capitalists and angel investors cannot be shareholders in an LLP. Therefore, when choosing between an LLP and a company structure, it is essential to consider the nature and size of the business, fund-raising requirements, and the level of personal liability protection desired.

An LLP must have at least two partners

An LLP, or Limited Liability Partnership, is a type of business organisation that combines the advantages of a corporation and a partnership. It is a popular choice for many small and medium-scale businesses in India. An LLP must have a minimum of two partners, with no upper limit on the maximum number of partners.

Among the partners, there should be a minimum of two designated partners who are natural persons, and at least one of them should be a resident of India. The rights and duties of designated partners are governed by the LLP agreement, and they are directly responsible for ensuring compliance with the LLP Act, 2008, and the provisions specified in the LLP agreement.

The LLP Act, 2008, allows for a multi-disciplinary professional LLP, and an LLP can only be set up for profit. The LLP has a separate legal entity, distinct from its partners, and can sue and be sued in its own name. This helps to gain the trust of stakeholders and gives customers and suppliers a sense of confidence in the business.

The LLP agreement governs the mutual rights and duties among the partners and between the LLP and its partners. It must be filed online within 30 days of the date of incorporation. The value of the stamp paper for the LLP agreement differs across Indian states.

The eligibility requirements to be appointed as a designated partner in an LLP include being an individual partner and consenting to the appointment in accordance with the LLP agreement. A body corporate cannot be a designated partner. However, all partners can be designated partners if this provision is included in the LLP agreement.

If the number of partners in an LLP falls below two at any time, the remaining partner can continue the business for six months. After this period, if the LLP still only has one partner, that partner will be personally liable for the obligations of the LLP. The National Company Law Tribunal can also wind up the LLP if the number of partners remains below two for more than six months.

The LLP Act allows for a multi-disciplinary professional LLP

The LLP Act does not restrict the benefit of the LLP structure to certain classes of professionals. It is open to any two or more persons associating to carry on a lawful business with a view to making a profit. This flexibility in the LLP structure is particularly useful for small enterprises and for investment by venture capital.

The LLP Act enables professionals to form multidisciplinary partnerships. For example, a Chartered Accountant (CA), a Cost and Works Accountant (CWA), and a Company Secretary (CS) can come together to form an LLP. This allows them to offer a wider range of services to their clients and expand their businesses.

The LLP Act also allows for the conversion of other entities into LLPs and vice versa. This means that existing companies or partnerships can change their structure to take advantage of the benefits offered by the LLP Act.

The LLP Act has brought India on par with business practices followed in developed nations, providing Indian entities with an alternative choice in corporate organisation to compete internationally on a level playing field.

An LLP can invest in a private limited company

To convert an LLP into a private limited company, the requirements outlined in Section 366 of the Companies Act, 2013, and the Company (Authorised to Register) Rules, 2014, must be met. This includes obtaining approval from all partners, advertising in local and national newspapers, and obtaining a No Objection Certificate (NOC) from the Registrar of Companies (ROC).

The LLP must then undergo the incorporation process, which involves securing a Digital Signature Certificate (DSC) and Director Identification Number (DIN) for future directors, filing the necessary forms, and submitting various documents, including the Memorandum of Association and Articles of Association.

It is worth noting that there is an alternative option where the LLP establishes a separate private limited company and transfers the entire business to the new entity. However, this option may incur capital gains tax and stamp duty implications.

Frequently asked questions