A Limited Liability Partnership is governed by the 2008 LLP Act in India. This form of business organization is considered to be a hybrid of partnership and private company and as the name suggests it provides for limited liability of its partners, in other words, the personal assets of the partners of LLP are not used for paying off the debts of the LLP which has a separate legal entity than that of its partners.
Number Of Partners In LLP
Unlike partnership which has a minimum and a maximum limit on the number of partners, LLP only requires a minimum of 2 partners for its functioning, as there is no upper limit provided in the act. As per section 6 of the LLP Act, it is mandatory to have at least 2 designated partners in a Limited Liability Partnership all the time, with at least one of them being resident of India and in case the number goes below 2 due to any reason, the same is to be restored within a period of six months, in case of default, the remaining partner would be held personally liable for all the acts of the Limited Liability Partnership.
Section 7-10 of the act deals with Designated Partners and provides the roles, liability, changes, and punishment in case of default on carrying out the same. In simple words, the role of a partner is to invest capital in an LLP, whereas the role of a Designated Partner is to ensure legal compliances for the effective administration of LLP.
Who Can Become A Partner In LLP
As per section 5 of the Limited Liability Partnership Act 2008, any individual or body corporate may become a partner in an LLP. However one cannot become a partner in an LLP if –
- He is of unsound mind by a Court of competent jurisdiction, and the finding is in force;
- he is an undischarged insolvent; or
- he has applied to be adjudicated as an insolvent, and his application is pending.
In other words till the time an individual or a body corporate does not fall in one of the above three categories and has subscribed to the ‘Incorporation Document’ at the time of forming the LLP, he would be a partner in an LLP. Thus an individual residing in India, body corporate or company and foreign nationals or NRIs can become a partner in an LLP.
As per section 24 of the act, a partner ceases to be so in four situations-
- by agreement with other partners
- on the death of the partner
- by giving notice to other partners with reasons for the same
- in case a body corporate is a member then by dissolution
Remuneration To Partners In Limited Liability Partnership
The remuneration to partners in a Limited Liability Partnership LLP is governed by the clause in the Limited Liability Partnership Agreement; even if a partner is a sleeping partner, he might be eligible for remuneration if it is provided in the agreement. The term remuneration includes not only the salary but also the bonuses and commission paid to the partner.
There is no restriction on as to who and what the amount of remuneration will be, however, a maximum limit is provided under the Income Tax Act, which states that certain amounts are subject to deduction and this includes remuneration is paid to the working partners who is an individual in an LLP. This remuneration should, however, be specified and authorised by the LLP Agreement and should in no case exceed the limits given below-
REMUNERATION TO PARTNERS
On first 3 Lakh of Book profit or loss
|Rs. 1,50,000 or 90% whichever is more|
|On remaining balance amount||
In cases where the LLP has paid cumulative remuneration in excess to the prescribed limits under the two above mentioned conditions, then the amount more than the permissible limit would not be subject to deduction.
The given conditions can be better understood with the following situations-
- Case 1- No Profit
Where the LLP has incurred zero profit in a year, then remuneration can be paid according to condition one, i.e. up to Rs. 1,50,000 cumulatively to the partners
- Case 2- Profit Within 3 Lakh (1,50,000 > 90% Of Profit)
Where the book profit of an LLP is Rs. 1,00,000, then the total remuneration paid to the partners cumulatively is calculated in the following manner-
Here 90% of the book profit, which in the given case is Rs. 1,00,000, would be 90,000, but according to the first condition, payment can be made up to Rs. 1,50,000 as cumulative remuneration to all the partners. Hence, in this case, the cumulative remunerative would be Rs. 1,50,000 as it is more than 90% of Rs. 1,00,000 which is 90,000.
- Case 3- Profit Within 3 Lakh (1,50,000 < 90% Of Profit)
Where the book profit of an LLP is Rs. 2,50,000, then the total remuneration that can be paid to the partners cumulatively can be calculated as under-
Here 90% of the book profit would amount to Rs. 2,25,000. According to condition 1, in this case, 90% of profit is more than Rs. 1,50,000, hence the cumulative remuneration, in this case, would be Rs. 2,25,000.
- Case 4- Profit More Than 3 Lakh
Where the book profit of an LLP is Rs. 15,00,000, then the total remuneration that can be paid to the partners cumulatively will be calculated in 2 steps as under-
Firstly, for the first Rs. 3,00,000 the total remuneration would be as per condition 1, i.e. 90% of the profit which amounts to Rs. 2,70,000 and the balance amount of profit would be subject to the following condition, balance amount= Rs. 12,00,000 and as per 2nd condition total remuneration is 60% of the balance amount, i.e. Rs. 7,20,000.
Hence, in this case, the maximum amount of remuneration that can be paid to the partners is Rs. (2,70,000+ 7,20,000) 9,90,000.
This remuneration received by the partners of the LLP is taxable as business income in the hands of the partners as per section 28 of the Income Tax Act and is considered as an expense for the LLP.