Accounting Articles for Students
Limited Liability Partnerships
by Mohammad Ashraf | Published on 10/26/2006
Professionals are aware of the fact that Companies’ Ordinance, 1984 requires partnerships to be registered under section 14 where the number of partners exceeds 20 and the object of such partnership is acquisition of gain. However, since independence or even at the time of promulgation of Companies’ Ordinance, 1984, no body bothered to put cross references in Partnership Act, 1932.
The concept of LLP was introduced in the developed countries like US and UK by active lobbying by large audit firms on the grounds discussed below while on the other hand, Pakistani profession took an active U turn and an amendment in sub section (2) if section 14 by inserting clause (d) was introduced whereby accountants, lawyers and other professions bound by their regulation are not required to register the same. This article is an endeavor to understand ifs and buts relating such U turn by the professionals in Pakistan, conceptual background of Limited Liability partnership [LLP] and basic infrastructure of any proposed limited liability partnership [LLP] law.
HISTORICAL BACKGROUD OF LLP
The core reason of lobbying for the LLP in US is the increased litigation against the professionals owing to the literacy rate and increased awareness about the various professions. The origin of the concept of LLP lies in the 1990’s whereby increasing incidence and scale of actions against professional advisers for liability in respect of financial loss to stakeholders became a matter of acute concern and Audit firms, in particular, came to feel highly exposed.
In general, the reason of development of such feeling, particularly in audit firms, revolves around the fact that they deal with financial authenticity. In particular, for instance, since aggrieved creditors or investors of a failed company may seek redress against the company’s directors or its auditors. It was felt by many in audit profession that they, who are likely to carry substantial professional indemnity insurance, were being specifically targeted by litigant regardless of the level of their fault for the loss claimed. The cost to firms for defending actions rose sharply in the decade, as did the cost of insurance.
In furtherance, under the partnership laws around the globe, each partner is jointly and severally responsible for the liabilities of the firm. In the light of increasing level of risk, it became harder for many in the larger firms to reconcile their firms’ increasing size and specialization with the traditional partnership structure, in which all partners are agents of each other. Many felt that to require each partner in a large, highly specialized firm to accept unlimited financial responsibility for the actions of his or her partners had become an unrealistic proposition.
Owing to the above-mentioned reasons, the professionals were expecting that, given the huge sums which were increasingly involved in negligence claims, the continuing exposure of partners to joint and several liability could deter the most talented young accountants from entering the audit profession.
Although this is not the case in Pakistan owing to the facts contributed to the major factor of literacy and time involved in judicial process, which is also of special nature. In furtherance, there are no major cases pending in courts relating to the audit profession, however, such cases were solved by the involvement from relevant government sectors, like SBP and SECP with penulative actions. This further strengthen our point regarding specialized literacy level and time involved in judicial process that even after such penulative active, none of the shareholders of any company has sued the auditors in Pakistan on the ground that earlier financial statements may also be misleading etc, etc.
However, were the fears to be realized in Pakistan like in developed countries coupled with lacking of the concept of indemnity insurance in Pakistan, it could, in the long term, damage the quality of Pakistani Auditing and, in turn, the whole of the financial services sector and section 14 (d) of CO1984 would be solely responsible for such disaster. However, such an experience has already been experience by the developed nations like UK, and US that respectively promulgated such laws in 1996 and 2001.
NATURE OF LLP
The concept of LLP is already present in CO1984 and resembles the limited company. Firstly, it is corporate bodies with separate legal personality and secondly, the liability of its members is limited. As we know that, being a corporate body with separate legal personality, it can take and be the subject of legal action it its own name. It continues to exist irrespective of changes in its membership.
As far as the status and external responsibilities of LLP is concerned, it remains an aggregate of relationships between the individual partners, which in turn make it a mirror image of the limited company. However, in terms of internal affairs, it approximately resembles to a traditional partnership. The intention, in terms of internal affairs, needs to be that each LLP will be free to decide for itself exactly how it wishes to organize its own internal affairs; for instance, it may make rules not to hold any AGM or approval of profit distribution.
Across the globe, an LLP is formed by at least two natural or legal persons, so unlike the positions with limited companies but like partnerships, the LLP has a minimum membership of two, who may be individuals, companies or a mixture of both. It is worthwhile here to note that the most interesting part of an LLP law is that where an LLP conducts business with fewer than two members for at least six months, its sole acting member is liable, with the company, for the debts contracted by the LLP during that period.
Another most fascinating feature of LLP is its unlimited capacity, which means that it may carry out whatever activities it wishes. There is thus no need for the LLP agreement, the equivalent of the partnership agreement, to set out the firm’s object.
Existing partnership law does not as a rule apply to LLP’s and it should not be looked upon as applying any form of default basis. However, the law and regulations relating to LLP should not create an entirely new body of freestanding LLP legislation. Much of the text of the regulations needs to be taken up from CO1984 in respect of insolvency and disqualification.
Moreover, the intention behind the development of the LLP was always that its external character should mirror that of the limited company; hence, CO1984 should play a major part in shaping the LLP’s legal status and responsibilities. The legal infrastructure of the laws relating to the LLP law is discussed as follows.
The formation procedure of an LLP needs to be almost similar to the formation of a private limited company and the registering authority is normally the Securities and Exchange Commission around the globe. Hence, the founders needs to file two basic documents, one is incorporation document and second is a statement to the effect that basic registration formalities of law are complied with. Globally, it is criminal offence for a person making this statement to include in it anything, which they know to be false or do not believe to be true.
The incorporation documents may include NOC of the name, location and address of registered office, name and address of each of the persons who are members of the LLP on incorporation and designated members of the LLP. The concept of designated member is similar to the company secretary. The name and registered office require a little brief explanation.
As in the case of a company, an application to register an LLP must state its proposed name, which must be followed by the expression limited liability partnership or the abbreviation LLP. The name of the LLP should effectively incorporate the names of the partners. However, where abbreviations are used instead of the names then names of each member should be reflected on every corresponding communication like letterhead, invoice etc. It ought to be a criminal offence for any person to carry on business under a name, which includes any of these terms unless that person actually is an LLP, and entitled to use the term concerned.
Any law relating to LLP should contain similar rules, which currently apply to the approval of the names of limited companies. For instance, an LLP may not be registered with a name, which is the same as a name held by a registered limited company. Similarly, the existing forbidden names sections under the CO1984 need not to be allowed. However, where an LLP has been registered with a name, which the registrar and SECP, on reflection, feel, is the same as or too like the name of a limited company, a direction may be issued within twelve months of the firm’s registration by that name for changing its name.
In furtherance, where it comes to the light that misleading information has been given for the purpose of incorporating the LLP with a particular name or that certain undertakings or assurances with regard to the name have not been fulfilled, then, again a direction may be given for the LLP to change its name. However, in this case the direction period should be extended to five years.
Moreover, where the registrar and SECP are of the opinion that the name of LLP gives so misleading indication of the nature of its activities as to be likely to cause harm to the public, he may in writing direct the firm to change its name, if any such direction is made and the LLP fails to comply with it, then the LLP and any designated member who is in default commit an offence.
As the case of limited companies, an LLP, once registered, can change its name at any time, where it does so, it must formally notify the registrar, on a form approved for the purpose and signed by a designated member or authenticated in a manner to be specified in the law. Unless the proposed new name is unacceptable on one of the grounds discussed above, the registrar will insert the new name in the register and issue a certificate of change of name.
An LLP must at all times have a registered office, which must be situated in Pakistan. Any change of location of the registered office must be notified to the registrar on the appropriate form.
The administration matters need to be the mirror image of limited company. The firm’s name, registered office, registration number and name of its members must be painted or affixed outside every office or place from which it carries on business. This notice must be legible and in a conspicuous position. In the case of non-compliance the LLP and its members are liable to a fine.
In furtherance, firm’s name must appear in legible characters on all business letters, notices and other official publications, all cheques and orders and all invoices, receipts and letter of credit. If an LLP issues any business letter, notice, publication, invoice, receipt etc. that does not comply with this requirement then it commits an offence, as does any member who issues it or authorizes its issue. If a member signs or authorizes the signature of any cheques of order on which the LLP’s name is incorrectly presented, he is personally liable to the holder of the cheques in the case of default by the LLP.
Every LLP must have a seal on which the name of the LLP needs to be engraved in legible characters. The firm’s place of registration, registered number, address of its registered office and names of members needs to be appeared on every business correspondence documents apart from above. However, where there are more than twenty members then this requirement needs to be relaxed.
An LLP is required to keep a register of debentures and charges and relevant provisions of CO1984 may apply accordingly. The register must be open to inspection by registered debenture holders and members of the LLP free of charge. In furtherance, the LLP needs to be subject to the rules on the registration of charges. In addition to maintaining its won register of charges granted by it over its assets, an LLP is bound to notify the registrar whenever it grants any of the charges, including floating charges.
Their needs to be a requirement for the LLP to file an annual return and SECP need to adopt the same practice as it uses for the companies. However, the LLP return needs to be brief and simply set out the registered address of the LLP, the name and usual residential addresses of the members, an indication of which members are designated members, and the address where any register of debenture holders and books of account are kept. Non-compliance needs to be offence and the firm and its designated members are liable.
The members of the LLP are the individual persons through whom the LLP operates. The members of the LLP have management as well as ownership right. It could also be said that the members of the LLP are the equivalent of the partners in a partnership and the directors of a limited company.
Under the partnership act, partners are the agents of each other, by implication, while the members of an LLP are agents of the LLP. The members have a financial stake in the firm and in the absence of contrary agreement, a right to participate in its management. Owing to the fact that LLP has legal personality, it can and does act as a principal in agency terms.
Each member of the LLP can bind the firm, however, the LLP will not be bound by the actions of a member if that members has no authority to act for the LLP in the respect concerned and the person they deal with either knows that they lack such authority or does not know or believe them to be a member of the LLP.
As far as third party dealing with an LLP is concerned, a person who has ceased to be a member is regarded as still being a member unless the third party has had notice of such cessation or due notice of the member’s cessation has been delivered to the registrar as required. Thus departing member should in his or her own interest make sure that proper notice is given.
The legislation should provide that a member shall not be regarded as being employee of the LLP unless in the case of a converting partnership. The intention is to ensure that a salaried partner of a partnership that converts to LLP status may continue to be deemed to be an employee.
The legislation should not give guidance as to the overall legal responsibilities and duties of members other than by virtue of their status as agents of the LLP, that they owe fiduciary duties to it. There is no specific statutory duty of good faith in members’ dealings with each other but their fiduciary responsibilities mean that they must act in good faith in the best interests of the firm and exercise due skill and care in the performance of their functions.
However, it needs to be provided that the courts are required to assess a member’s knowledge, skill and experience that may reasonably be expected of a person occupying that role. In the circumstances of this provision, members will be expected to at in accordance with a legal benchmark of skill and care.
On the other hand, the law should impose specific range of specific statutory responsibilities on members and separately designated members. For instance, the members are responsible for ensuring that the LLP complies with governance requirement like appointment of auditor and approving annual accounts while the designated members are responsible for preparing and submitting statutory information to nominated parties including registrar.
The first members of the LLP are those who are listed in the incorporation document as being its first members. Thereafter, the circumstances in which persons may become or cease to be members are left to be decided by the internal rules of the firm.
A member may cease to be a member in accordance with an agreement made with the other members or in the absence of any agreement on the procedure to follow in this regard by giving reasonable notice to the other members. Where persons either become or cease to be members, notification must be made to the registrar with detail of changes in the name or address of a member by the LLP and the member him\herself.
Designated members indicate the persons within the LLP who are to assume responsibility for certain statutory compliance functions on behalf of the firm. Designated members need to be responsible for putting their names to and/or filing a range of statutory documents, such as annual accounts, the annual return, details of changes in membership, appointment of auditors, power to fill casual vacancy of auditors, power to fix auditor’s remuneration, duty to send notice regarding removal or replacement of an auditor, circulation of auditor’s representation, duty to convene general meeting at requisition of auditor, power to make application to the registrar for strike off, duties following strike off, enforcement of duties to make returns and service of documents.
As apparent from above discussion, the role of designated member is comparable to functions carried out by the directors and secretary of a limited company. There must be at least two designated members in each firm. In case the number falls below two, every member is deemed to be designated member. Where an LLP fails to comply with a specific obligation, in most cases both the LLP and its designated members will have committed an offence.
Each LLP must, on incorporation, indicate which of its members is to hold the post of designated member or state that every member is to be a designated member. Where individual members are specified at the outset, others may become designated members at any time by agreement with the other members. Details of resignations and appointments of designated members are required to be notified to the registrar. However, this does not apply where the LLP has declared to the registrar that all of its members are to be designated members.
The shadow member concept is imported from the concept of shadow director that form part of corporate laws around the globe. In the event that the members of an individual LLP are collectively accustomed to acting in accordance with the instructions of a particular person, that person will be deemed to be a shadow member of the LLP and will be subject to the same liabilities as members proper. However, a person who issues instructions purely in a professional advisory capacity will not be deemed to be a shadow member.
Any law relating to LLP should not intrude upon, for the most part, the relations between members. The intention behind this is to allow the internal arrangements of an LLP to be as flexible as autonomous as they are in traditional partnerships. However, the law must make this documented by stating the fact that the mutual rights and duties of members, as between themselves and the LLP itself, are to be governed by agreement between the members or between the members and the LLP.
There must be a range of limited default provision in the LLP regulations that will apply to members and the firm in the absence of specific agreement on a particular matter. The default provisions may include the following.
- All members of the LLP are entitled to share equally in the capital and profits of the LLP,
- The LLP must indemnify each member in respect of payments made and personal liabilities incurred by him either in the ordinary and proper conduct of the business of the LLP or about anything necessarily done for the preservation of the business or property of the LLP,
- Every member may take part in the management of the LLP,
- No member shall be entitled to remuneration for acting in the business or management of the LLP,
- No person may be introduced as a member or voluntarily assign an interest in an LLP without the consent of all existing members,
- Any difference arising as to ordinary matters connected with the business of the LLP may be decided by a majority of the members but no change may be made in the nature of the business of the LLP without the consent of all the members,
- The books and records of the LLP are to be made available for inspection at the LLP’s registered office or at such other place as the members think fit and every member of the LLP may when they think fit have access to and inspect and copy any of them,
- Each member shall render true accounts and full information of all things affecting the LLP to any member or their legal representatives,
- If a member without the consent of the LLP carries on any business of the same nature as and competing with the LLP, they must account for any pay over to the LLP all profits made by them in that business,
- Every member must account to the LLP for any benefit derived by him or her without the consent of the LLP from any transaction concerning the LLP or from any use by him of the property of the LLP, name or business connections.
Disputes between members
As from the above-referred discussion it is apparent that LLP’s will make their own arrangements to provide for dispute resolution, however, minority interest protection, and regulatory authorities intervention cannot be denied on such premise.
There must be a section devoted in the LLP law that entitle a member or members with a minority interest to file petition in the court on the ground that the affairs of their company are being run in a way which unfairly prejudicial to their interests. If the court finds in favor of the applicant, it may order, inter alia, the petitioning members’ interests to be bought out or that a change be made in the LLP Agreement. However, the members of an LLP can, by unanimous written agreement, determine to exclude the application of the sections concerned for whatever period they determine including and indefinite period.
The registrar needs to be authorized to initiate a formal statutory investigation into the LLP’s affairs on the application of 20% of the current membership of the LLP. Similarly, the law may state that no majority of members of an LLP may expel any member unless a power to do has been conferred by express agreement between the members.
Liability of members
The financial liability of the members of an LLP, in the event of winding up, should encompass any present or past member, who is being liable to contribute financially to the extent that they have agreed with the LLP or with other members. However, a person who has ceased to be member will not be liable if the agreement between them and the firm exempts them from continuing liability.
For instance, if the agreement between the members requires each to pay Rs100 on the winding up, this is the amount, which the law requires them to pay to the liquidator. To this extent, the position of the member as regards personal liability and is comparable to that of the member of a company limited by guarantee. It will be up to each LLP, when drafting its own agreement, to decide how it wishes to deal with this aspect.
In furtherance, where an LLP goes into creditors’ voluntary liquidation, the liquidator will be able to investigate the circumstances prior to the firm’s winding up in order to assess whether any of the firm’s members should be ordered personally to pay some contribution, to be decided by the courts in light of the circumstances of the case, towards paying off the company’s debts to its creditors.
If a liquidator can identify a point at which, in his or her opinion, a member knew or ought to have known that LLP would not be able to avoid insolvent liquidation, he or she may be required to apply to the court for an order to be made against the member concerned. It will be a defense for any members, in court, to be able to demonstrate that they took every step to minimize potential losses to creditors. This will effectively cater the situation where the members of an LLP conclude that their firm cannot avoid insolvent liquidation and they should take some form of remedial action forthwith.
However, the courts ought to be required to asses whether an individual member knew or ought to have known the likely fate of the firm and must apply both subjective and objective test. In the subjective test, the courts will consider whether the member concerned, given their particular expertise and experience, could have been expected to understand the firm’s situation and take appropriate action on the strength of it. In the objective test, the member’s conduct will be assessed against an objective test of what a reasonable person could have been expected to know and do as a member of an LLP.
The law must incorporate a claw back rule whereby the liquidator of an LLP may investigate all withdrawals of property made from the firm by any member in the two year period leading up to the commencement of the LLP’s winding up. Withdrawals for this purpose include profit share, salary, repayment or payment of interest on a loan to the firm. The liquidator may make an application to the court where he or she considers that at the time of making any withdrawals, the member concerned knew or had reasonable grounds for believing that the LLP was unable to pay its debts or would become unable to pay its debts following the withdrawals either on its own or in conjunction with other withdrawals being made by other members at the same time.
However, in making its assessment of the facts that a member should know and the conclusions that they ought to have reached, the court will make reference to a benchmark of a reasonable diligent person having the knowledge, skill and experience that may reasonably be expected of a member of an LLP and the knowledge, skill and experience that the member in question actually has. The court, if it upholds the application, may order a member to make a financial contribution to the liquidator of up to the value of all the property withdrawn by him or her during the two-year period.
As stated earlier, Where an LLP continues for more than six months with a single member, that member becomes liable jointly and severally with the LLP for the debts of the firm contracted for during that period. In furtherance, if a member signs or authorizes the signature of cheques, order etc. on which the LLP’s name is incorrectly presented is liable to the holder of the instrument unless the amount is paid by the LLP.
Keeping an over liability in tort or contract, the members of LLPs should ensure that, in all their dealings with clients or customers and the public, they do not give cause to believe that the activity being undertaken is undertaken other than by its agents on behalf of the LLP. The protection which the corporate structure of the LLP offers to individuals members should not, however, be taken entirely for granted.
It is suggested that where members of an LLP acted in a substantive way as if they were partners in a partnership, the court might decide to pierce the veil and treat the LLP’s members as if they were in fact partners and outside the protection of the LLP structure. The members of an LLP owe a personal duty of care; there must be not only a special relationship between a member and a client or customer, but a clear assumption of responsibility.
It is the duty of the court to impute a personal duty of care to a member, it is necessary for there to be objective evidence that, in the circumstances, it is reasonable for a customer to rely on the member’s assumption of personal responsibility. Such evidence would include oral or written statements and the actual conduct of the member.
Any liability in the nature of civil or criminal under the law needs to be placed collectively over the members, for instance, the liability for appointing auditors and preparing accounts etc. Designated members are additionally responsible for filing information and providing information to third parties, for instance, they are required by law to file the LLP’s annual account and to make a statutory declaration in the case of LLP’s members voluntary winding up. Financial penalties need to be provided for any breach of any of these or any other requirements.
Any law relating to LLP should provide for disqualification of members. Accordingly, the should be allowed to make a disqualification order against any member or shadow member of an LLP if it feels that their conduct in that capacity warrants such action. A disqualification order made against a member of an LLP will preclude the person concerned from acting as a member of an LLP.
Disqualification orders can be made in respect of breaches of on-going obligations, for example, following prosecution for failing to deliver statutory documents to the registrar and also on the specific ground of unfitness, as initiated by the liquidator following the winding up of the LLP. However, the court, at the time of considering whether any individual member of an LLP is unfit, is required to find the extent to which the member has been held responsible and is required to make a contribution.
For most external purposes, an LLP is intended to approximate to a limited company. It is therefore required to comply with virtually the same accounting and disclosure rules, which would have applied to it, were it in fact a limited company. In summary, LLP is required to keep accounting records, to prepare annual accounts, which comply with CO1984 formats for disclosure intended to present a true and fair view and to file them with registrar. Hence, IAS shall be applicable over the LLP not merely the 4th schedule and SECP would come to know about the fact that how the 4th or 5th schedule has become obsoletes with the passage of time but with certain specific amendments. However, the small LLP’s needs to be exempted to prepare accounts in accordance with the law but should not be allowed in any way to depart from generally accepted accounting principles.
Balance sheet should contain specific heading that may be called share capital, Loans and other debts due to members and members’ other interests. Members’ other interests may include members’ capital, revaluation reserve and other reserves. Loans and other debts due to members may include the aggregate amount of money advanced to the LLP by way of loan, the amount of money owed to members by the LLP in respect of profits and any other amount.
The notes for the Loans and other debts due to members may include the aggregate amount of loans and other debts due to members as at the start of the financial year, the aggregate amounts contributed during the financial year, the aggregate amount transferred to or from the profit and loss account during the year, the aggregate amount withdrawn by members or applied on behalf of members during the year, the aggregate amount of loans and other debts due to members as at the balance sheet date, the aggregate amount of loans and other debts due to members that fall due after one year.
In the profit and loss account, the term profit or loss for the financial year needs to be replaced with profit and loss before member’s remuneration and profit share. As far as the remuneration of members is concerned, a figure for the average number of members in the firm during the year must be given and if the amount of the LLP’s profit before members’ share exceed the threshold specified for small LLP’s, the amount of profit, including remuneration, which is attributable to the members with the largest entitlement to profit, including remuneration, must be disclosed.
For the purpose of deciding the amount to be disclosed in relation to the highest earning member, remuneration include by whatever name called which are either paid by or receivable from the LLP, its subsidiary or any other person. However, the law needs to specify which method of accounting needs to be used for consolidation, like merger etc.
As far as accounting records is concerned, the LLP must keep, at its registered office, all of its accounting transactions. They must be retained for five years from the date on which they were made and in the event of default, the LLP and every member commits an offence.
The accounting reference date in respect of financial year of an LLP needs to be the end of the month in which the first of its incorporation occurs. However, the LLPs should be allowed to change the date. The first financial year may be anything between six and eighteen months.
The responsibility to prepare accounts rests on the members of the LLP, and if applicable, consolidated accounts for it and its subsidiaries. The accounts must be approved by the members and signed by a designated member. The accounts, together with the auditor’s report where applicable, must be sent to every member of the LLP and to all the firm’s debenture holders, if any, within a period, say one month, of being signed.
The accounts must be properly prepared and give a true and fair view and may comprised of balance sheet, profit and loss account and notes to the account. There must not be a requirement of member’s report, similar to director’s report, and member’s emolument.
The responsibility to deliver the accounts to the registrar with reference to financial year needs to assign to the designated member. In addition, late filing penalties applicable under CO1984 need to form part of LLP law!
The designated members appoint the LLP’s first auditor before the end of the firm’s first financial year. In subsequent years, the designated members make the appointment again, within two months following the approval of the accounts for the preceding financial year. The designated members also have power to fill any casual vacancy. If designated members fail to fulfill their obligation to appoint auditors, the members generally may convene a meeting to make an appointment. Separately, the registrar may step to fill any vacancy.
The auditor, once appointed, holds office from the date of their appointment until not later than the expiration of two months from the date of approval of the accounts for the financial year covered by the appointment.
The eligibility to act, as auditor of LLP needs to be extended to members of professional accounting bodies having active presence in Pakistan, like ACCA, PIPFA, ICMAP, ICAP and CAT. The auditor’s remuneration is fixed either by the designated members or in such other manner as the members may determine.
The designated members of an LLP may at any time determine to remove the firm’s auditor. They must, however, give the sitting auditor seven days written notice of their intention. Similar notice must be given to a sitting auditor where the designated members propose to replace him or her at the termination of their period of office.
The auditor is required to report to the members of the LLP on whether, in the auditor’s opinion, the accounts have been properly prepared and whether the balance sheet gives a true and fair view of the state of affairs of the LLP at the end of the financial year and whether the profit and loss account give a true fair view of the LLP for the financial year.
The auditor has a right of access at all times to the books, accounts and vouchers of the LLP and is entitled to call for such information and explanations necessary from any member of the LLP. Auditors are entitled to receive notices for, and to attend and speak at, any meeting of members of the LLP where any part of the business concerns them as auditors.
When auditors resign, they are required to submit to the LLP a statement of whether there are any circumstances, which they believe should be brought to the attention of members or creditors. They may also require the designated members to convene a formal meeting of the LLP members to discuss whatever concerns they have.
An LLP may enter into a voluntary arrangement, administration, and receivership or voluntary or compulsory liquidation. The CO1984 needs to be extended to an LLP. Accordingly, the insolvency of an LLP needs to be dealt with in much the same way as company with little modification.
The commencement of a voluntary winding up is the date on which the LLP determines that it is to be wound up voluntarily. While there is no statutory rule to say that the determination must take place at a general meeting of members, it is likely that LLP agreements will provide that any determination to wind up should be made at such a meeting.
The statutory declaration of solvency to be made before entry into members’ voluntary winding up is to be made by the designated members. It has to be made within the five-week period before the determination by the members that the LLP should be wound up.
Following a determination to wind up, the designated members are required to notify the registrar.
In the case of a compulsory winding up where the LLP has not already been put into voluntary winding up, the procedure is deemed commencing at the time of presentation to wind up.
The court may wound up an LLP on the ground that it has not commenced business within a year from its incorporation, suspends its business for a whole year, the number of members falls below two for the whole year, it is unable to pay its debts or the court is of the opinion that it is just and equitable that the LLP be wound up.
Although from the above referred discussion it is clear that the LLP is a corporate body with separate legal personality but for tax purposes the principles enunciated in section 92(2) and 93 of Income Tax Ordinance, 2001 needs to be extended to LLPs as this structure is expected to be adopted by the professionals.
In other words, a trade, profession or business carried on by an LLP with a view to profit is to be treated for tax purposes as being carried on in partnership by its members and not by the LLP as such. Hence, the members of an LLP are individually liable to tax on their shares of the profits earned by the LLP. This concept is normally known as transparent entities.
The property of the LLP is to be treated for tax purposes as partnership property. Where an LLP carries on a trade or business with a view to profit assets held by the LLP to be treated for the purposes of capital gain as being held by its members as partners and any dealing by the LLP are to be treated likewise as dealing by the members in practice. Income tax on capital gains occurring to the members of the LLP on the disposal of any of its assets is to be assessed and charged on each of them separately. Any acquisition or disposal of assets will not be treated as being made by the LLP itself.
Article courtesy of Accountancy
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