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Limited Liability Partnership (“LLP”) is a developing form of corporate structure in India for doing business in India. It is a mix form of a limited liability company and a partnership firm. It has both the limited liability benefit, perpetual succession with partnership structure lies in its soul. This structure has been introduced by the Government of India in 2008 by passing LLP Act 2008.

Since LLP form of business is very popular in foreign countries, it became necessary for the Government to clear its stand on allowing FDI in LLPs considering the present global economic and business development and status of India as a destination of foreign investment. To address the issue of FDI in LLP firms in India Cabinet Committee on Economic Affairs (‘CCEA’) issued a press release on 11th May 2011, proposing the regulatory outline permitting FDI in LLP. Subsequent to the proposal, the Government of India has allowed FDI in LLPs and decided to permit FDI in LLP firms, subject to specified conditions.    Accordingly, the provisions were made in ‘Circular 1 of 2011-Consolidated FDI Policy’, which became effective from April 1, 2011.

The latest provisions related to foreign direct investment in LLP’s in India is contained in the consolidated FDI policy (“Policy”) dated April 10, 2012 effective from April 10, 2012 issued by the DIPP, Ministry of Commerce and Industry, Government of India (“the FDI Policy”). The provisions are briefly discussed below:  

As per para 3.2.5 (a) FDI policy FDI in LLP’s will be allowed only through Government approval route. Further FDI in LLP would be allowed only in those sectors where 100% FDI is permitted under automatic route.

FDI in LLP in Trading Business

The FDI Policy specifically states that 100 % FDI is allowed under automatic route in Cash & Carry Wholesale Trading/ Wholesale Trading business and also clarifies that Cash & Carry Wholesale trading/Wholesale trading, would mean sale of goods/merchandise to retailers, industrial, commercial, institutional or other professional business users or to other wholesalers and related subordinated service providers. Further wholesale trading would include resale, processing and thereafter sale, bulk imports with ex-port/ex-bonded warehouse business sales and B2B e-Commerce.

Further, in terms of the Policy the followings are the guidelines for carry on whole sale trading:

a) Acts/Regulations/Rules/Orders of the State Government/Government Body/Government Authority/Local Self-Government Body under that State Government should be obtained;

b) sales made by the wholesaler shall be to the valid business customers;

c) full records indicating all the details of such sales like name of entity, kind of entity, registration/license/permit etc. number, amount of sale etc. should be maintained on a day to day basis.

d) whole sale trade of goods would be permitted among companies of the same group. However, such WT to group companies taken together should not exceed 25% of the total turnover of the wholesale venture

e) whole sale trade can be undertaken as per normal business practice, including extending credit facilities subject to applicable regulations.

f)  a wholesale/cash & carry trader cannot open retail shops to sell to the consumer directly.

Thus, if the proposed trading activity is  whole sale trading, it is allowed under automatic route up to 100% and  no approval will be required.  Though 100% FDI is allowed in LLP’s in case of wholesale trading that will require prior Government approval.


As per para 3.2.5 (a) of the FDI Policy FDI in LLP is allowed only through Government route. Further FDI in LLP through Government route is allowed to only those sectors where 100% FDI is allowed under automatic route under FDI policy. That is a foreign company or individual can invest in LLP in India but it requires prior Government approval.

Further, in terms of para 3.2.5 (c) of FDI Policy, an Indian company, having FDI, will be permitted to make downstream investment in a LLP only if both-the company, as well as the LLP- are operating in sectors where 100% FDI is allowed, through the automatic route and there are no FDI-linked performance conditions.

Further, in terms of para 3.2.5 (d) of the FDI Policy LLPs with FDI will not be eligible to make any downstream investments. (Downstream investments refers to further investment by LLP in which there is already foreign direct investment is there into other companies or LLP)

Further, in terms of para 3.2.5 (e) of the FDI Policy foreign Capital participation in LLPs will be allowed only by way of cash consideration. It refers that contribution in any other form than cash is not allowed.

Further, in terms of para 3.2.5 (e) of the FDI Policy investment in LLPs by Foreign Institutional Investors (FIls) and Foreign Venture Capital Investors (FVCIs) will not be permitted.

LLP is not allowed to raise External Commercial Borrowing (“ECB”). Thus LLP cannot take commercial loans from its foreign partners, FII’s, banks from outside India, any financial institution outside India or any other entity outside India.

As per section 27 of the Limited Liability Partnership Act 2008 the limited liability partnership is liable if a partner of a limited liability partnership is liable to any person as a result of a wrongful act or omission on his part in the course of the business of the limited liability partnership or with its authority.

Partners Liability is unlimited for his personal acts.

LLP is more recognized for services sector. A note by the Ministry of Corporate Affairs on LLP as available on LLP website ( recommend and describes the suitability only for the services sectors and professionals as follows:

 + Persons providing services of any kind

+ Enterprises in new knowledge and technology based fields where the corporate form is not suited.

 + For professionals such as Chartered Accountants (CAs), Cost and Works Accountants (CWAs), Company Secretaries (css) and Advocates, etc.

+ Venture capital funds where risk capital combines with knowledge and expertise

+ Professionals and enterprises engaged in any scientific, technical or artistic discipline, for any activity relating to research production, design and provision of services.

+ Small Sector Enterprises (including Micro, Small and Medium Enterprises)

+ Producer Companies in Handloom, Handicrafts sector


The FDI policy is silent about the repatriation of profits/ winding up proceeds of the LLP. Since FDI in LLP is allowed under Government route, repatriation and remittance matters may be subject to the discussion and approval while considering approval FDI in proposed LLP. Thus repatriation may or may not be allowed. The Government may come up with certain policies/provisions on the repatriation/ remittance of the proceeds of LLP, but nothing can be commented right now. Thus please note that remittance/ repatriation may be subject to the consideration or conditions as may be imposed upon by the Government while granting approval.

Thus in the light of this, it can be said that repatriation of profit or other proceeds depends upon the conditions as may be imposed upon by the Government while granting approval for FDI. Hence, nothing can be commented on repatriation of the proceeds under LLP form.


Exit under LLP form is possible in the following manners:

a) Sale of partner’s interest to one of the party subject to condition of minimum two members.

b) Winding up of LLP

Please note that sale of Partner’s interest by one party (partner) to another or to any third party in LLP is Governed by the LLP agreement, as  LLP act does not restrict transfer of partner’s interest. Hence any party is allowed to transfer its interest in LLP subject to LLP agreement.

It is to be further noted that repatriation of the amount of out exit proceeds is not specifically allowed under the FDI policy and no clear guidelines have been issued in this regard. So repatriation may be subject to the conditions as may be imposed upon by the Government while granting approval. Further the Government may come up with certain specific provisions for repatriations of proceeds of LLP which may or may not allow repatriation.


Tax structure on LLP’s is as follows:

Tax on Profits: 30%

Education cess: 3 % on income-tax (inclusive of surcharge, if any)

Minimum Alternative Tax

MAT is levied @ 18.5 percent of the adjusted book profits in the case of those LLP’s    where income-tax payable on the taxable income according to the normal provisions of the Income-tax Act, 1961 (the Act), is less than 18.5 percent of the adjusted book profit.

Further education cess is applicable @3 percent on income-tax (inclusive of surcharge, if any)


1. No surcharge is applicable.

2. No tax is applicable on distribution of profits amongst the partners. However the salary and remuneration as paid by the LLP to the partners is taxable in the hands of partners.

From taxation point of view LLP may be an economic structure as compared to a company as there is no dividend distribution charge on the profits distribution of LLP. Further if the profit exceeds the above mentioned limited LLP will also save 10% surcharge. The LLP can be said to have two tax advantage over company i. e. saving of dividend distribution tax and surcharge.

However the Government may consider for imposition of taxes on distributed profits of LLP like dividend distribution tax as in company. No such proposal is available till now but there may be possibilities and a provision of such tax may come in future.

To conclude, it can be said that LLP is a new concept in India and hence, most of the laws (e. g. labour laws, environmental laws, corporate laws) are not clear about its applicability on this form, which may or may not be applicable depending upon the Government clarification from time to time, also which may be favourable or unfavourable for LLP, while company is a well established form and specific and clear provisions are provided in various statues, so no question of disputes. Therefore, Government still need to bring more clarity in the laws regulating LLP and FDI related provisions in the LLP form of business.

Note: the views of the author are personal and do not constitute any kind of opinion.

Best regards

CS Devesh Pandey

Published by

Devesh Pandey
(Company Secretary Head Corporate Division)
Category Corporate Law   Report

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