designated partner in LLP

ROLE OF DESIGNATED PARTNER OF LLP, TAX BENEFITS TO THE EMPLOYEES AND THE CONSULTANT

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What is a Limited Liability Partnership?

It is evident from history that Limited Liability Partnership was introduced for the first time in the USA in the 1980s after the collapse of stock market, real estate business which led to massive destruction in the form of insolvency of banks, loan firms etc.
In India, the concept of Limited Liability Partnership is originated from or got its legal authorization from The Limited Liability Partnership Act, 2008. LLP is defined under Section 2 clause (n) which says that all the partners of LLP have limited liability and no partner is liable for the acts of other partner done fraudulently or negligently. The Limited Liability Partnership Act, 2008 excludes the applicability of Indian Partnership Act, 1932.

The Limited Liability Partnership is a combination of both partnership firm and limited liability. It is a substitute for other corporate structures which have limited liabilities. LLPs give the flexibility to manage the internal matters through mutual agreements and on the other hand it also gives the advantage of limited liability to a firm/ private company/ unlisted public company after being converted into Limited Liability Partnership. Any firm or private company or an unlisted public company can be converted into LLPs by following proper procedures given under Sections 55, 56, 571 respectively. LLP fulfils the requirement of entities which are free from detailed and erroneous decision-making procedures and enables technical, professional innovations with limited financial liability.

 There are various advantages of LLP and few of them are- LLP does not have a limit on a maximum number of partners it requires a minimum of 2 partners only but in case of a private limited company, there is a bar to the maximum number of members that is 200 members. The cost of registration in case of LLP is low as compared to the incorporation cost of public or private limited companies. The auditing of the accounts of an LLP is not mandatory except in the case when the Contribution of the LLP exceeds Rs.25 Lakhs or the annual turnover of the LLP exceeds Rs.40 Lakhs.

Who can be a Designated Partner?

Section 72 of the Act talks about a designated partner that in case of the individual entity of partners every LLP must have minimum 2 Designated Partners and at least one of the Designated Partner shall be a resident of India. In case of partners are corporate bodies minimum 2 individual partner of such LLP or nominees of such corporate bodies shall act as designated partners. The designated partner is also responsible to comply with regulations and legal provisions besides being responsible to the firm as a partner. If the Designated Partner is specified in the document of incorporation then that partner will be considered as a designated partner at incorporation. In LLP each and every partner from time to time has to be a designated partner.

What are the Rights and duties of a Designated Partner?

Section 83 states the liability of Designated Partners that they are responsible to comply with the provisions of this act4 and any penalty arise from the non-fulfilment of provisions of this act. The Designated Partners are duty-bound to do proper documentation including statements, returns etc. which may be specified in the LLP Agreement. The agreement between partners determines the liability to comply with provisions of any other laws or acts but in LLP act The Designated Partners are solely accountable for all the compliances and penalties. 

The LLP Agreement also allows the appointment of a managing partner which is an addition to Designated Partners but that does not mean that both managing partner and  Designated Partners are one and the same entity, they are separate entities. The duty of managing partner is to ensure the compliance of legal provisions. The rights of the Designated Partners are quite similar to that of a partner of LLP and they do not get any remuneration to participate in governing or managing the LLP until and unless it is specifically provided in the LLP Agreement. The Designated Partners are additionally responsible to strictly comply with the provisions of this act or otherwise will be liable to penalties for non-compliance with the provisions mentioned in LLP act. 

Section 7(4)5 states that within 30 days of individuals consented to act as Designated Partners their particulars are needed to be filed with the registrar by the LLP. Section 7(6)6 states that a Designated Partner Identification Number (DPIN) shall be obtained from the central government and the Section 266A-G of Companies Act, 1956 including the provisions of Mutatis Mutandis for the said purpose shall be applicable on Designated Partners. Section 107 states that if the Designated partners contravene the provisions under Section 7, 8, 9 then LLP and every partner is liable to pay the fine which is not less than ten thousand rupees and may extend to five lakh rupees. 

Significant duties of Designated Partner in brief are:

  1. The LLP prepare the statement of account and solvency on which the signature of a designated partner is required. 
  2. It is the duty of a designated partner to co-operate with the investigating authority by producing the necessary books and papers related to LLP.
  3. The inspector is entitled to reimbursement from a designated partner for the inquiry done by him.
  4. Every designated partner on behalf of LLP is duty-bound file annual returns with the registrar in not more than 60 days from the last date of the financial year otherwise fine exceeding Rs. 10000 will be imposed on him.
  5. The designated partner is bound to inform any changes in LLP like the change in partners name, their residential address, signing of e-forms to be filed with the registrar of the company.

Tax benefits in an LLP:

LLP is different from a company form of business in various aspects but the most important aspect which distinguishes an LLP from other forms of business is Taxation aspect. An LLP is equally treated as a partnership firm thus, LLP is bound to pay income tax but the shares of partners of LLP are exempted to pay income tax. LLP is free from additional burden in the form of DDT (Dividend Distribution Tax) @ 15% which a company is bound to pay when the owners of the company want to withdraw profit but in case of LLP, profits can be easily withdrawn by partners without any tax payable on it. Also, Section 40(b) ‘Deemed Dividend’ of Income-tax law which says that any bonus, commission, salary, remuneration or partner’s interest will be considered as a deduction will not be applicable to an LLP.  

Differentiate between an Employee and a Consultant:

An EmployeeA Consultant
1. An employee generally works only for one employer.1. A consultant generally works for more than one employer.
2. An employee works for fixed hours as decided by his employer. 2. A consultant renders his services as per the hours decided by himself.
3. An employee works under the control or supervision of the employer.3. A consultant is comparatively independent of the supervision of an employer. 
4. He usually works at the place of the employer.4. He is not bound by place of work and no fixed place of his work.
5. The method and manner of work are according to that specified by the employer.5. He is free from the employer’s interference regarding the method and manner of work. 
6. He receives various employment benefits like health insurance, travel allowances.6. He does not get any employment benefits from the employer. 
7. An employee receives a salary or remuneration in return for his work.7. A consultant receives a commission in return for his services rendered.
8. He avails the benefits of a minimum wage, hour laws, and overtime rules.8. He does not avail such benefits and is paid as per the terms and conditions of the contract.
9. Receives unemployment compensation, worker’s compensation due to termination of employment and workplace injury respectively.9. He does not get any unemployment compensation benefits, worker’s compensation benefits etc.
10. He avails the right to join or form a union.10. He does not avail any right to join or form a union.

Who has better tax benefits an employee or a consultant:

An EmployeeA Consultant
1. An income from employment is called salary income.1. A receipt of a consultant is derived from profits and gains of business.
2. An employee is entitled to tax exemption in various components of salary like allowances for house rent, uniform, education, travelling, etc.2. If any business expense like commuting expenses, internet bill, telephone bill, vehicle fuel expenses incurred to provide consultancy services then it will be deducted from the income of consultant for tax purposes.  
3. It is not mandatory for an employee to maintain the books of accounts or audit them by a CA.3. It is mandatory for professionals like consultants to audit their accounts especially when the total proceeds from consultancy services exceeds Rs. 25 lakhs.
4. The employees are not eligible for such Presumptive Taxation Scheme.4. Under Section 44ADA8 if the total receipts in a financial year of a consultant are Rs. 50 lakh or less then his taxable income will reduce to half.  
5. An employee and an LLP are not allowed to enrol for Presumptive Taxation Scheme except eligible resident individual, resident partnership firm or resident Hindu undivided family.5. Such Presumptive Taxation Scheme helps the consultants reduce the compliance burden and can now file income tax return form ITR-4 (old ITR-4S) which is less complex.
6. The employer deducts income tax as per the tax rates from the salary of the employee on a monthly basis.6. The payment to a consultant is given post-TDS @ 10% from the fee of the consultation.
7. An employee is not required to pay advance tax except in case he has another source of income besides this employment.7. A consultant is required to pay advance tax and if he fails to pay then he will be liable to pay interest @ 1% on the amount failed to pay.
8. An employee is not required to pay service tax or to comply with provisions of service tax.8. When the turnover of a consultant exceeds Rs. 9 lakh then within 30 days of it he is required to apply for registration of service tax.

Conclusion:

  • Before opting for an employee or a consultant one must explore all the option regarding taxation benefits besides those mentioned above that includes provident fund, gratuity and leave reimbursement etc. One must critically analyze the advantages and disadvantages of both an employee and a consultant then decide which one is more beneficial. 
  • A Limited Liability Partnership is an ideal form of business as compared to another form of business like private or public limited companies etc. Unlike a partnership firm, the partners of a Limited Liability Partnership are not personally liable for the acts of business and the shares of partners are also free from tax liability. Decision-making procedure is fast and flexible in case of an LLP as compared to that of a company where there requires an annual general meeting for which there needs the formation of a board of directors. 
  • There is no need to publish the financial statement of an LLP but it is mandatory for a company to publish their correct financial position in form of financial statements and if the company is running in loss then public will not invest in ventures of the company and it will have an adverse impact on the goodwill of company.
  • One disadvantage of an LLP is that they have limited funds but in the case of a company they can raise more and more funds by inviting subscription to their shares. LLP has the advantage of having maximum numbers of members without any bar but the number of members is limited to 200 in case of a company. 

Endnotes

1.  Section 55, 56, 57, The Limited Liability Partnership Act, 2008. 

2.  Section 7, The Limited Liability Partnership Act, 2008. 

3.  Section 8, The Limited Liability Partnership Act, 2008. 

4.  The Limited Liability Partnership Act, 2008. 

5.  Section 7(4), The Limited Liability Partnership Act, 2008. 

6.  Section 7(6), The Limited Liability Partnership Act, 2008. 

7.  Section 10, The Limited Liability Partnership Act, 2008. 

8.  The Finance Bill, 2018


Shivani Singh

Author

An amazing, exciting and inspiring writer from NLU Odisha. She keeps herself informed about the latest cases and laws and analyzing the same is her hobby. For any clarifications, feedback, and advice, you can reach her at 17ba074@nluo.ac.in


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