LLP Bill Passed in Parliament

Media reports (here and here) indicate that the Limited Liability Partnership Bill, 2008 has been passed by Parliament. It was passed in the Lok Sabha on December 12, 2008, while the Rajya Sabha had already approved the Bill on October 24, 2008.

The Ministry of Company Affairs has also published on its website two sets of draft rules relating to LLP for comments from the public:

1. The Limited Liability Partnership (Concept) Rules & Forms: comments due on December 31, 2008; and

2. Concept LLP (Winding up and Dissolution) Rules: comments due on January 12, 2009.

This is an important step under Indian law as it creates a new business vehicle with the flexibility of a partnership structure, but with the protections of separate legal personality and limited liability of a corporate structure. However, before it is successfully implemented, changes will be required to the Income Tax Act to define the tax liability of an LLP and its partners.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.


  • Also, from what I remember, there was a need to clarify the tax treatment (esentially, exempt any tax incidence) for conversion of existing partnerships to LLPs.

  • Hybrid Business, thanks for your question. LLCs (as you refer to) are essentially companies in the Indian context, consisting of two types, public companies and private companies. Public companies are generally large entities with no limits on number of shareholders, have a clear management structure and are subject to a vast number of regulations prescribed in company law. On the other hand, private companies are closely-held entities, with limitation on number of shareholders (to 50) and enjoy a leaner and more flexible regulatory structure. While public companies are very different from LLPs, there could indeed be a substantial number of operational similarities between a private limited company and an LLP. However, the key difference is likely to be the taxation treatment to these two types of entities. While a company (whether private or public) is taxed as a separate entity apart from its shareholders, an LLP is likely to be tax transparent, whereby the LLP itself will not be taxed as an entity, but only its partners would be liable to tax on income in their hands. The tax treatment for LLPs is yet to be prescribed under the Income Tax Act, but it is possible that this factor would largely determine the decision of businesses on whether to set themselves up as LLPs or private limited companies.

  • Let’s take a comparative law perspective. This means both tax rules and tax accounting principles. India can choose its rules.

    In US, an LLC is a juridical entity that can be taxed either as a corporation (not a pass-through unless entitled to “S” Corp election by being owned only by US citizens or LPR’s) or a partnership (pass-through; no tax on entity). The normal route is pass-through treatment, but you can opt out.

    A US LLP is a partnership and thus a tax pass-through.

    Between LLC and LLP under US tax law, there are differences in tax accounting treatment, since admission of a new partner (regardless of form of entity) normally constitutes a termination of the US “partnership” for tax purposes, requiring adjustments to tax basis and new calculations of tax basis of continuing partners.

    As to LLC’s, in France and Germany, the Societe a` responsabilite limitee (SARL) and the Gemeinschaft fuer beschraenker Haftung (GmbH) are taxed as entities, not partnerships. This is the old US rule for LLC’s.

    Overall, big question for Indian tax authorities is whether the LLP form will provide the benefits of a pass-through accounting structure. Fun time for accountants.

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