India: Types of Company
General partnership firms
A partnership is the relationship between persons who have agreed to share the profits of the business or profession carried on by all or any of them acting for all. Under present Indian law, partners have unlimited liability and the number of partners cannot exceed 20. Limited liability partnerships are now permitted and will be taxed essentially under the same structure as applicable to partnership firms (see below). Professional firms are typically organised as partnership firms. Ref: IPA s 4
The partnership firm is governed by the partnership deed which should provide for the profit sharing ratio among partners and salary, interest and remuneration payable to the partners. The partnership must preferably, but not obligatorily, be registered with the Registrar of Firms of the relevant state under the IPA 1932.
A partnership firm is taxed as a separate entity from the partners.
Salary, interest or other remuneration paid or payable by the partnership firm to a partner is allowed as a deduction in computing the taxable profits of the partnership firm, subject to certain specified limits. The partnership firm’s profits are taxed at the rate of 30%, plus education cess, reaching an aggregate rate of 30.9%. The profit after tax is divided among the partners according to the profit and loss sharing ratio; such a share of profit is not taxable in the hands of the partner. The salary, interest or other remuneration received by the partner is taxed in the hands of the partner.
For tax purposes, the accounts must be audited if the turnover or gross receipts exceeds prescribed limits. The prescribed limits are: (a) if carrying on a business, total sales, turnover or gross receipts of Rs6m, or (b) if carrying on a profession, gross receipts of Rs1.5m. For prior years, the prescribed limits were Rs4m and Rs1m respectively. Ref: ITA s 40(a) and 44AB
Limited liability partnerships (LLP)
The limited liability partnership became a valid organisational form in India with effect from the financial year starting 1 April 2009, applicable for AY 2010/11 and subsequent assessment years.
The taxation scheme for LLPs is on the same lines as the current taxation for general partnerships, ie taxation in the hands of the entity and exemption from tax in the hands of its partners. A limited liability partnership and a general partnership will be accorded the same tax treatment.
Each partner will be jointly and severally liable for payment of tax dues of an LLP unless the partner proves that non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his or her part.
The Limited Liability Partnership Act 2008 provides for nomination of “designated partners” who have been given greater responsibility. Where a designated partner has been nominated, he or she must sign the income tax return of the LLP unless unable to do so for any unavoidable reason. Where the designated partner is not able to sign the return, or where there is no designated partner as such, any partner may sign the return.
The Limited Liability Partnership Act 2008 came into effect in 2009. The Limited Liability Partnership Rules (except some rules dealing with conversion) and related forms have been notified with effect from 1 April 2009.
Any transfer of a capital asset or intangible asset by a private limited company or an unlisted public company to an LLP, or any transfer of shares held by a shareholder in a company by a shareholder as a result of the conversion of the company into an LLP, is not considered a transfer for the purposes of capital gains tax; as such, capital gains tax is not levied in relation to such transactions. Ref: ITA s 2(23), 140, 167C; FA 2010; LLPA