What is a virtual limited liability partnership company?

Brief History

An LLP is a relatively recent vintage. It is a body corporate with a separate legal entity distinct from its members. It is often viewed as an ‘alternate corporate vehicle’ which seeks to attain principle benefits of both forms of business organisation, partnership and companies.[1] The concept can be traced back to a 20 odd person law firm in Texas, enacted under the Texas House Bill 278, 1991. The legislation came to be known as a ‘partial shield LLP’ as it did not safeguard partners from privy liabilities, nay only protected them from liabilities arising out of malpractices. The other states soon followed and the National Conference of Commissioner on Uniform State Laws adopted the Uniform Limited Liability Company Act in 1996 and revised it in 2006.[2]

Likewise, several accounting firms in the UK raised an expedition for the creation of LLPs to limit the liability of partners to specific acts which they undertook. Consequently, the UK Companies Act, 1989 was amended to permit accounting firms to works as LLPs. However, general partners of the firm in charge of the banal office routine were still held jointly and severally liable. Subsequently, the UK Department of Trade and Industry submitted a report in 1997. It sought to replace the joint and several liability of members with an arrangement, whereby, each member is individually accountable for his own proportionate share of the loss. The Department took this as juncture to consult the creation of a distinct LLP statute. This was accomplished by a tenacious campaign for proportional liability in partnership firms.[3]Eventually, the UK Limited Liability Partnerships Act, 2000 came into being. The act offered a corporate personality, limited liability, and greater partnership flexibility and taxation status. These principles ensured that the firm has its own separate legal entity distinct from its partners’ rights and liabilities. Furthermore, LLPs are bestowed entity treatment while partnerships administered under the act are often treated as an aggregate of individuals.[4]

The Indian LLP act is heavily influenced from its counterparts in UK, USA, and Singapore. In India, the concept and demand for an LLP legislation first emerged when the Iron, Steel and Hardware Merchants’ Chambers recommended to introducing a statute for LLP before the 7th Law Commission.[5] The regulatory compliances established in the Companies Act, 1956 proved to be impediments in the effortless functioning of private compliances. The issue of LLP has been a matter of discussion in India for a prolonged period of time. The concept of LLP had been put forward several times by various committees. For e.g., the Bhat Committee, 1972, the Naik Committee, 1992, the Expert Committee on Development of Small Scale Enterprises (SSEs), 1997, headed by Abid Hussain, and Study Group on Development of SSEs, 2001 headed by Dr. S.P. Gupta. However, the submission of recommendations lingered without much action.

The concept garnered abutment post the enactment of the Limited Liability Partnership Act, 2000 in the UK. The Naresh Chandra Committee Report on Regulation of Private Companies and Partnership recommended a comprehensive LLP statute. The two primary considerations advanced by the committee were the advantage of risk factor associated with an LLP and the global competitive advantage to several professionals like doctors, lawyers, architects, etc. Hence, the formation of a Limited Liability Partnership company would lower the apprehension of unlimited liability and grant access to international competition.

In 2004, the Ministry of Corporate Affairs (MCA) convened the J.J. Irani Expert Committee on company law to evaluate the Companies Act, 1956. Withal, the committee recommended for the creation of a separate LLP statute. It endorsed LLP for small scale enterprises in the service sector. It would enable joint ventures. FDI in the Indian market, and enable young entrepreneurs to maximise access to technology, harness business synergies, and enable them to compete globally.[6]

In 2005, the MCA introduced the concept paper on LLP with a view to stimulate public discussion. The paper was extensively disseminated for public comments. Finally, the paper sought to fill in the lacuna between firms and companies. The propositions provided for a catalyst for a draft bill. The MCA introduced the LLP Bill, 2006 in the Rajya Sabha. The MCA delineated the bill to be an agreement based structure which incorporates the flexibility of partnerships in internal management with the limited liability advantage of a company. Thereafter, the bill was sent to the Lok Sabha Parliamentary Standing Committee on Finance for review. The committee recommended amendments in statutes regulating specific professions, trade, or activities such as the Advocates Act, 1961 and other enactments such as the Income Tax Act, 1961.

The MCA reintroduced the bill in 2008. The bill was passed in December 2008 and received President’s assent in January 2009. The act was a hybrid statute; wherein, partners were shielded from unlimited liability while enjoying organisational flexibility,

Difference between LLP and a general partnership

An LLP is governed by the Limited Liability Partnership Act, 2008, whereas, a general partnership is governed by the Indian Partnership Act, 1932. An LLP is a separate legal entity in the eyes of law, with perpetual succession, and limited liability to the extent of capital contributed to the partnership. The minimum number of partners in an LLP is two and there is no ceiling on the maximum number of partners. Furthermore, each partner must have a Designated Partner Identification Number (DPIN). An LLP can be wound up.

Difference between LLP and a company

A company is governed by the Companies Act, 2013. There is no requirement of a minimum paid-up share capital to incorporate an LLP. Every partner is obligated to contribute to the capital of the LLP as per the subscriber sheet. An LLP cannot issue shares; hence it cannot be listed on any stock exchange. Furthermore, only those LLPs whose turnover exceeds ₹40 lakhs in any financial year or whose contribution does not exceed ₹25 lakhs are required to get audited.

Salient features of an LLP[7]

1. No minimum paid-up capital required: There is no minimum paid-up capital required to incorporate an LLP. An LLP can be established with the least amount of capital or even ₹1.
2. Separate legal entity: An LLP is a body corporate and has separate existence distinct from its partners. An LLP can sue and be sued in its name, acquire, hold, and enjoy property. The entry or exit of members won’t affect the LLP.
3. Limited liability: Every partner of an LLP acts as an agent of the LLP but not of other partners. Hence, the liability of each partner is limited to the extent of his contribution and shall not be liable for the wrongful acts or omission of any other partner or debts contracted by the LLP. Such liability is bounded, except for unauthorised acts, fraud or negligence.
4. Fewer compliances: An LLP has fewer regulatory compliances as compared to companies. It is exempted from maintaining a minute’s book, AGM is avoidable. It is only required to file an annual return under Form-11 and a statement of account & solvency under Form-8.
5. Audit not indispensable: Only those LLPs whose annual turnover exceeds ₹40 lakhs or whose contribution exceeds ₹25 lakhs is required to get an audit done.
6. Board Meetings: There is no statutory requirement to conduct mandatory board meetings. The partners of an LLP can convene a meeting as per their requirements and convenience.
7. No ceiling on the number of members: An LLP is statutorily required to have a minimum of two partners. However, there is no limit on the maximum number of members. If at any time, the number falls below two and the LLP carries on business for more than a period six months while cognizant of the fact, then such partner shall be personally liable for the debts incurred during such period.
8. Taxation: Since India follows the French or Singapore model of an LLP, it is not treated as a fiscally transparent entity. Rather it is treated at par with a partnership and is a taxable entity under Section 2(23) (i) of the Income Tax Act, 1961. Furthermore, remuneration to partners will be taxed an income arising from business and profession and distribution of profits to partners is exempt from tax. Moreover, if an LLP is a non-resident under the Information Technology Act, 2000, then it is taxed at 30% in addition to the applicable cess. LLPs are not subject to corporate taxes such as presumptive tax, dividend distribution tax or minimum alternate tax and the requirement of a minimum surcharge has also been dispensed with for LLPs.
9. Ease in loans: Since an LLP is a body corporate, it is relatively easy for them to receive loans from banks or financial institutions. Furthermore, a partner can accept loans from the LLP if the agreement contains such a clause.
10. Foreign Direct Investment: RBI vide notification dated 3rd March 2017 issued Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) (Second Amendment) Regulations, 2017 allowed FDI under automatic route in LLPs[8]. However, the prerequisites to such investment are that an LLP must be operating in sectors/activities where 100% FDI is allowed through the automatic route, and there is no FDI linked performance conditions. Furthermore, an LLP, having a foreign investment is permitted to make downstream investments (without approval) in another company or LLP having the same prerequisites.

Can a foreigner open an Limited Liability Partnership company in India?

As we read above RBI has allowed 100% FDI under automatic route in LLPs. However, to incorporate an LLP in India, there has to be minimum one designated partner who is an Indian citizen and resident of India. Furthermore, the LLP needs to have a branch office in India on sanction by RBI and comply with all the relevant foreign exchange rules. The registration process is completely online. Hence a foreign national can fill in the requisite documents online to obtain his DPIN.

The Inception of Virtual Limited Liability Partnership

In the 2008 session of the General Assembly, the state of Vermont embraced NYC Law School Professor David Johnson’s plan for a virtual corporation law.[9]He envisioned to create a model of a business organisation that corresponds with the transient technological world. The legislation eliminates barriers to the creation of companies. The concept is completely paperless and administered on the internet. The rationale behind making an LLP virtual is to secure the traditional legal safeguards available while providing enhance technological pliability conducive to an ingenious work environment and prolific corporate control in the digital era without a physical office, a graded management structure, and the requirement of the influx of capital at the time of incorporation in the form of money or property. Furthermore, it is a separate legal entity with limited liability, acknowledge by other business entities, for e.g. Buffer, Zapier, Fire Engine RED, etc.

Professor David Johnson, in an article[10] comments that there are a lot of people coming together over the net to create open-source content. If; by the formation of a virtual corporation, compliances like in-person board meetings, physical office can be absolved then more people can adapt to such a design. For e.g. a software developer or a product designer can work on the net without the need of a physical office.

In 2010, Icelandic Modern Media Initiative drafted legislation based on the Vermont law, which allowed the incorporation of virtual companies in Iceland[11]. Some examples of Indian virtual companies are Brickwork, GetFriday, Acelerar Technologies, etc. Most of these companies provide administrative and accounting support to companies.

How is virtual Limited Liability Partnership company different from traditional corporations?

As per the miscellaneous tax amendments introduced in Vermont legislative session, the Vermont Business Corporation Act governs the formation and subsequent management of a corporation. A company can conduct corporate transactions digitally. It is authorised to store its data and documents electronically and have them digitally signed. Since everything is done digitally, a virtual corporation need not have a physical headquarter as most members or employees are geographically dispersed. A collective of online workers could organise a company without a management team or a traditional operating agreement.[12] Initially, the state of Vermont charged only $275 as fees a year for each virtual company registered, with the state taxes applying to income generated in Vermont only. This meant that an individual sitting in Asia could form and register a company in Vermont without hiring a lawyer or paying a visit to the U.S.A.

The state of Vermont has noticed a boom in the incorporation of virtual corporations largely due to the incentives given. For e.g. The state has witnessed $12.3 billion in economic activity fuelled by SMEs that are also instrumental towards 27% of employment. There has been an increase in the number of high-tech firms in Vermont in 2017 with 3,012 firms registering in the state as compared to 2,011 firms in 2007.[13] Several incentives such as tax incentives, flexible profit distribution, limited liability, Vermont Employment Growth Incentive (VEGI), and Vermont Opportunity Zone Program make it an alluring location to register a corporation.

The Vermont Limited Liability Company Act was passed in 1996 and revised in 2015. It allows for the formation of single-member limited liability companies. The act also allows for the incorporation of a foreign limited liability partnership. Such LLP must file a statement of foreign qualification with the Vermont Secretary of State to conduct business. The statement must include.[14]

• The name of the LLP
• The street address of the office, or if there is no physical office then the street address of the agent of service of process
• A deferred effective date, if any

Conclusion

LLPs in India are allowed FDI only through 100% automatic route. It is regulated by the Foreign Exchange Management Act, 1999 and Income Tax Act, 1961. FDI in the automatic route does not require any prior approval either by the Government or RBI. Investors are required to intimate and file documents, disclosing the investment with the regional office of RBI within 30 days of issue of shares to foreign investors.[15] Albeit, norms have been relaxed yet,investment is only permitted for 100% automatic route, and there needs to be a designated director and registered office in India. India, as of now doesn’t allow the incorporation of a virtual office, however, the process to register a company has been made wholly digital. The MCA vide its circular dated 24th March 2020 relaxed a few compliances.[16] As the pandemic continues we see more LLPs asking its employees to work from home making the office redundant. It’d be a welcomed move if India allows the incorporation of virtual corporations as in Vermont.

Also read What is a Private Limited Company?

[1] Amit M. Sachdeva & Sachin Sachdeva, The Indian LLP Law: Some Concerns for Lawyers and Chartered Accountants, SEBI & Corporate Law, Vol. 92 No. 6, 2009, 1 available at http://ssrn.com/abstract=1423766 (Accessed on 07/15/2020)

[2] Bromberg, Alan R. et al, Bromberg & Ribstein On Limited Liability Partnerships, The Revised Uniform Partnership Act, And The Uniform Limited Partnership Aspen Some States, Including New York, California, Nevada and Oregon, Only Offer LLP Status to Professional Firms, 2001-2003, 15.

[3]Ashish Ahuja, Limited Liability Partnership Act, 2008- Some Issues, available at http://www.bcasonline.org/webadmin/res_material/resfiles/LM%20Ashish%20Ahuja%204Feb09.pdf (Accessed on 07/16/2020)

[4] Yeo Hwee Ying, Liability of Partners in a Limited Liability Partnership Regime, (2003) 15 SAcLJ 392; Also see Partnership: Pick and Mix or Mix-Up, JBL, 475-483

[5] Dolly S. Ingle, Hybrid of Partnership and Corporation, i.e., “Limited Liability Partnership” Critics

[6] Dr. Vivek Kumar, A study of concept of limited liability partnership in India, Volume 3, Issue 2, International Journal of Academic Research and Development, page 484, page 485

[7] Anju Kahal, Limited Liability Partnership: An Emerging Business form for Entrepreneurs, Volume 7, Issue 3, International Journal of Engineering and Management Research, page 654, page 656, 2017

[8] Kular Chirag, FDI in LLP, TAXGURU available at https://taxguru.in/corporate-law/fdi-llp.html (Accessed on 07/16/2020)

[9] Julie Tower-Pierce & et al, Virtual Incorporation: A Lawyer’s Guide to the Formation of Virtual Corporations, American Bar Association, 2009

[10] Mike Gleason, Vermont: The Delaware of the Internet, BRATTLEBORO REFORMER available at https://www.reformer.com/stories/vermont-the-delaware-of-the-internet,35873 (Accessed on 07/16/2020)

[11] The Icelandic Modern Media Initiative. WIRED available at https://www.wired.com/2010/02/the-icelandic-modern-media-initiative/ (Accessed on 07/16/2020)

[12] Max Chafkin, A Haven For Virtual Companies Behind Vermont’s unlikely ploy to attract online businesses, INC. available at https://www.inc.com/magazine/20080701/a-haven-for-virtual-companies.html (Accessed on 07/17/2020)

[13] Advantages of Incorporating a Business in Vermont, INCPARADISE available at https://incparadise.net/vermont/advantages-incorporating-business-vermont/ (Accessed on 07/17/2020)

[14] Guide to Doing Business in Vermont: A Legal Guide for Out-of-State and Foreign Businesses, Down Rachlin Martin PLLC – A Lex Mundi member firm, 2017

[15] Incorporation of Company/LLP in India, Swift India Corporate Services LLP, 2019

[16] Mahi Jyoti, Relaxations under Companies & LLP Act amid COVID-19 Outbreak available at https://taxguru.in/corporate-law/relaxations-companies-llp-act-amid-covid-19-outbreak.html (Accessed on 17/07/2020)