India’s LLP Amendment Bill to Benefit Start-ups, Chartered Accountants Among Other Beneficiaries

The LLP Amendment Bill, passed by India’s upper house of parliament on August 4, introduces the concept of ‘small LLPs’, which will encourage start-ups and unincorporated MSMEs to opt for this entity model. It also decriminalizes offenses in the LLP Act, 2008 by converting them into civil defaults liable to monetary penalties instead of fines.

After receiving the Union Cabinet’s nod on July 28, 2021, the Ministry of Corporate Affairs (MCA) had tabled the ‘Limited Liability Partnership (Amendment) Bill, 2021’, in the upper house of the Indian parliament. On August 4, 2021, the bill was passed by the upper house (Rajya Sabha) after a brief 20-minute debate.

In its bid to further ease doing business in India, the amendment bill introduces a slew of changes to the existing Limited Liability Partnership Act, 2008, including the decriminalization of certain provisions by converting offenses into civil defaults and making them liable to monetary penalties instead of fines.

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Hailed as a move to boost India’s start-up ecosystem, the amendment bill primarily intends to place limited liability partnerships (LLP) on an equal footing with larger corporates as the government had previously decriminalized certain provisions of the Companies Act, 2013. The bill also introduces the concept of small LLP, akin to the concept of ‘small company’ under the Companies Act.

The intention behind the move is to make LLP an attractive model for start-ups as well as unincorporated micro, small and medium enterprises (MSMEs), as the organized LLP structure offers incentives like lesser compliance requirements.

According to India’s finance minister Nirmala Sitharaman, the amendment bill will also benefit chartered accountants and cost accountants due to increased ease of doing business. The newly inserted section 34A in the bill will empower the Centre to prescribe the “Accounting Standards” or “Auditing Standards” for a class or classes of limited liability partnerships.

What is a limited liability partnership entity model?

A limited liability partnership is an alternative corporate business form that combines the benefits of the limited liability of a company and the flexibility of a partnership. It is a separate legal entity with perpetual succession, liable to the full extent of its assets but the liability of the partners is limited to their agreed contribution in the LLP. Unlike a partnership, an LLP can continue to exist irrespective of changes in the partners.

Proposed changes under the Limited Liability Partnership (Amendment) Bill, 2021

Under the proposed bill, as many as 12 offenses under the existing law are set to be decriminalized. The penal provisions will be reduced to 22 from the existing 24, compoundable offenses will be reduced from 21 to seven, and there will be only three non-compoundable offenses.

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It is also proposed that the 12 decriminalized offenses will further be shifted to an “In-house Adjudication Mechanism” (IAM), thereby speeding up the resolution process along with helping in de-clogging the overburdened Indian criminal courts.

Below are the highlights of key amendments proposed in the bill.

Decriminalization of offenses

The existing law specifies the manner of operations of LLPs, wherein violation of certain requirements is deemed punishable with a fine ranging between INR 2000 (US$26.89) and INR 500,000 (US$6722.99). These requirements include:

• Changes in partners of the LLP
• Change of registered office
• Filing of statement of account and solvency and annual return
• Arrangement between an LLP and its creditors or partners
• Reconstruction or amalgamation of an LLP

The 2021 bill decriminalizes these provisions and instead, imposes a monetary penalty on their violation.

Changing the name of LLP

Earlier, the 2008 Act empowered the federal government to direct an LLP to change its name in certain circumstances like the name being undesirable or identical to a trademark pending registration and impose a fine ranging from INR 10,000 (US$134.46) to INR 500,000 (US$6722.99) on non-compliance. The amendment bill removes some of these grounds and empowers the federal government to allot a new name to such an LLP instead of imposing a fine.

Increased punishment for fraud

In case of any willful fraudulent activity, the amendment bill increases the maximum tenure of imprisonment from two years to five years.

Non-compliance with order of appellate tribunal no longer an offense

Under the Act, non-compliance with an order of the National Company Law Appellate Tribunal (NCLAT) is punishable with imprisonment up to six months and fine up to INR 50,000 (US$672.30). The 2021 amendment bill removes this offence.

Introduction of the concept of small LLP

The amendment bill provides for the formation of a small LLP where:

• The contribution from partners is up to INR 2.5 million (US$33,614.95). This limit may be increased up to INR 50 million (US$0.67 million).
• Turnover for the preceding financial year is up to INR 4 million (US$53,783.92). This limit may further be increased up to INR 500 million (US$6.72 million). 

The federal government may also notify certain LLPs as start-up LLPs.

Formation of Special Courts

The amendment bill provides for the establishment of special courts for speedy trial of offenses under the Act. The special courts will consist of a sessions judge or an additional sessions judge, for offenses punishable with imprisonment of three years or more and a metropolitan magistrate or a judicial magistrate for other offenses. The decision of these special courts can be appealed in high courts.

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