In its drive against generation of black money and money laundering, government has now turned its focus on Limited Liability Partnership (LLPs) firms.
LLPs could be used for tax evasion and money laundering.
The government is thus in the process of identifying and deregistering inactive LLP firms.
What is an LLP?
A limited liability partnership (LLP) is a partnership in which some or all partners (depending on the jurisdiction) have limited liabilities.
In an LLP, each partner is not responsible or liable for another partner's misconduct or negligence.
This is an important difference from the traditional unlimited partnership in which each partner has joint and several liability.
What are the recent developments?
The trend of converting existing companies into LLPs and creation of new LLPs spiked after the Companies Act, 2013, came into effect.
Also, according to the Ministry of Corporate Affairs data in recent months there is a rise in new LLPs getting registered.
Why are LLPs preferred?
LLPs are preferred mainly to avoid the higher compliance requirements with a traditional firm.
On a yearly basis, an LLP is only required to file an annual return, and a statement of account and solvency.
All other filings are event-based such as change in LLP partners, retirement, resignation, change of address, etc.
All these makes it easier at operational level.
Moreover, recent de-monetisation of high-value currency notes has also given a fillip to LLPs.
Also, obtaining government approval is not a requirement to convert certain companies into LLPs.
In recent years, the government and the Reserve Bank of India have also liberalised norms for allowing FDIs in LLPs, while allowing the appointment of foreign partners.
A recent RBI amendment has allowed LLPs to avail of external commercial borrowing (ECB), including masala bonds.
What are the deregistering provisions?
As per Section 75 of Limited Liability Partnership Act, 2008, the Registrar of Companies (RoC) can suo moto take action if an LLP does not carry out any business for a period of two years or more.
The RoC can also deregister the LLP if it is not satisfied with the reasons given by the firm for its inactivity.
An LLP can also apply for deregistration if it has not carried out business for a period of one year or more.
In case of an active LLP, winding-up can be initiated voluntarily or by a tribunal only.
