How to Set Up a Limited Liability Partnership in India
Foreign direct investment (FDI) in limited liability partnership (LLP) has opened new avenues of opportunities for many foreign companies to enter India.
An LLP is essentially a hybrid form of corporate structure that combines benefits of both, a company (private or public) and a partnership firm. It embodies limited liability for its partners, like a company, and tax benefits of a partnership firm.
Any person resident outside India or a company incorporated outside India, other than those from Bangladesh and Pakistan, can invest in an LLP in the form of capital contribution or by way of acquisition of profit shares. That is, an investor can become a partner of an LLP, either by contributing to its capital or by acquiring a partnership share from an existing partner.
In this article, we highlight the benefits of using LLP business structure for foreign investors looking to operate in India, the latest changes pertaining to FDI in LLPs, as well as steps to register an LLP in India.
Advantages of setting up an LLP
- An LLP is simpler and less expensive to incorporate as compared to a company. The minimum amount of fees for incorporating an LLP is INR 500 (US$7) and the maximum amount is INR 5,000 (US$70).
- LLPs have no mandatory requirement for account auditing unless annual turnover exceeds INR 4 million (US$55,750) or contribution of LLP exceeds INR 2.5 million (US$34,900).
- There is no minimum capital requirement for the registration of an LLP.
- Being a separate legal entity an LLP limits the liabilities of its partners up to their agreed contribution and partners are not liable to pay the debts of the company from their personal assets. In other words, LLP safeguards partners including the foreign investors from unlimited liability risks, in contrast to sole-proprietorship or partnership firms.
- Unlike Company, there are no restrictions on the partners, if they wish to enter into any legal contracts outside India.
FDI in LLPs – key reforms
To promote foreign holdings in LLPs, the Reserve Bank of India (RBI) liberalized its policy for accepting FDI in LLPs in March 2017, by making amendments to the Foreign Exchange Management Regulations, 2000.
New rules allow LLPs by foreign entities to perform downstream investment in any other company or LLP operating in sectors in which foreign investment is allowed.
In 2015, the RBI had partially liberalized FDI in LLPs by permitting investment under the automatic route only in sectors or business activities where:
- 100 percent FDI was permitted under the automatic route (without government approval); and
- There were no FDI-linked performance conditions.
Other changes include:
- Availing borrowing from abroad (External Commercial Borrowings or ECBs)
Previously, Indian law barred LLPs from availing borrowings from a source outside India, including masala bonds. The 2017 amendments have relaxed the norms – permitting LLP having foreign investments to access external borrowings at a lower cost.
- No government approval needed for conversion of certain companies to LLPs
A company that has received foreign investment can now be converted into an LLP under the automatic route without government approval. Previously, this required prior government approval.
LLP registration for non-resident investors
An LLP must have at least two designated partners (DPs) with one being resident in India for at least 180 days. According to the Ministry of Corporate Affairs (MCA), designated partners will be accountable for regulatory and legal compliances, besides their liability as partners.
Foreign nationals, including foreign companies and LLPs, can incorporate an LLP in India, provided at least one designated partner is a resident of India. However, the LLP/Partners must comply with all relevant foreign exchange laws/ rules/ regulations/ guidelines.
The MCA states: “In case of an LLP in which all the partners are bodies corporate or in which one or more partners are individuals and bodies corporate, at least two individuals who are partners of such an LLP or nominees of such bodies corporate shall act as designated partners.”
LLPs engaged in the services or technology-based sectors can provide services globally. This may require any number of its partners to be located abroad. In view of the liability structure of partners, designated partners, and the LLP, the LLP Act does not mandate that the number of designated partners resident in India is not more than partners from outside India.
Steps for setting up an LLP
- Obtain Digital Signature Certificate (DSC) for at least two proposed designated partners of the LLP.
- Acquire Director Identification Number (DIN) or Designated Partner Identification Number (DPIN) of proposed partners.
- Apply for the availability of the name using Reserve Unique Name LLP (RUN LLP), which is a web service used for reserving a name for a new company or for changing its existing name. Ensure compliance with the Ministry of Corporate Affairs (MCA’s) naming guidelines in this regard. Every limited liability partnership must have the words “limited liability partnership” or the acronym “LLP” as the last words of its name.
- Once the name of the proposed LLP is approved, file the form FiLLiP – to incorporate the LLP. FiLLiP is an integrated form that offers multiple services, such as allotment of DIN, reservation of name, and incorporation of LLPs.
- LLP Agreement is one of the most crucial documents as it governs the rights and duties of partners. Various aspects covered under the agreement may include the amount and manner of contribution, rights, and duties of partners, description of the business of proposed LLP, among others. The LLP agreement must be filed within 30 days of incorporation of LLP.
Documents of partners
- Permanent account number (PAN) card or ID proof of the partners;
- Address proof of the partners;
- Residence proof of partners;
- Photograph; and
- Passport (in case of foreign nationals, or NRIs).
Documents of LLP
- Proof of registered office address; and
- Digital Signature Certificate.
Tax liability of the LLP
The LLP is liable to pay income tax at 30 percent on its income. In case the total income exceeds INR 10 million (US$137,252), the LLP is also liable to pay surcharge at 12 percent on the income tax. Additionally, health and education cess of four percent is payable on the income tax plus surcharge.
In terms of the minimum tax liability, India’s tax authorities introduced the concept of Minimum Alternative Tax (MAT) for companies that were able to take advantage of various profit linked deductions and incentives to become zero tax companies or pay marginal taxes.
However, gradually this concept of MAT was made applicable to all types of taxpayers in the form of the Alternate Minimum Taxation (AMT). According to the Finance Act, 2011, AMT provisions are applicable to the LLP only in the following cases –
- When an LLP has claimed deduction under section 80H to 80RRB (except section 80P).
- If an LLP has claimed deduction under section 35AD.
- When an LLP has claimed deduction under section 10AA.
AMT is levied at 18.50 percent (plus surcharge and cess as applicable) of the adjusted total income. AMT is levied at nine percent (plus surcharge and cess as applicable) in case the assessee is a non-corporate unit located in the IFSC [International Financial Services Center] and such unit derives its income only in convertible foreign exchange. This is effective from the Assessment Year 2019-20.
If AMT provisions apply to the LLP, it must obtain a report in FORM 29C from the Chartered Accountant, which certifies that the calculation of adjusted total income and the AMT is as per the applicable provisions. The LLP will pay tax as per AMT only in the financial year when the tax on its normal income is lower than AMT on adjusted total income.
Calculation of adjusted total income to levy AMT
Adjusted total income (E) = (A)+(B)+(C)+(D), where
A = Taxable income
B = Deduction claimed if any under Chapter VI-A from 80H to 80RRB except 80P
C = Deduction claimed if any under Section 10AA
D = Deduction claimed if any under Section 35AD reduced by regular depreciation allowed
Then, AMT = 18.5% of (E)
Choosing the LLP route
Prospective companies and investors seeking to take advantage of India’s liberalized FDI caps must carefully consider their options for investment in the country, and choose a business or corporate entity that takes care of their liability as well as tax planning issues. Foreign companies planning to do business in India must pay special attention to available avenues for establishing a business presence, and corporate structuring to save taxes to the best extent.
For more information on setting up or doing business in India, please feel free to contact our professional service advisors at email@example.com.
This article was first published in March 2019 and has been updated on February 10, 2021.