Adding LLP Partner based on referred business earnings

This is an interesting scenario and quite common when partners want to come in based on business brought in rather than direct capital infusion. Here’s a clear way to handle this, keeping accounting and legal compliance in mind:

Key points:

• The LLP partner's contribution ideally should be a capital contribution, not revenue or referral fee.

• The business income (Rs.100,000) is revenue of the LLP, which should be recorded fully as income.

• The Rs.20,000 which the prospective partner wants to count as contribution is essentially a part of LLP's revenue, not yet paid to anyone.

• The referral fee is a separate issue: it’s a payment to the person who brought in business, which is an expense for LLP and income for the partner, usually subject to TDS.

Two practical ways to structure this:

Option 1: Referral fee paid, then partner brings it back as capital contribution

1. LLP records full revenue Rs.100,000.

2. LLP pays Rs.20,000 as referral fee to the prospective partner (the "referrer").

   • This is an expense in LLP books.

   • LLP deducts TDS as applicable.

3. The partner then invests Rs.20,000 as capital contribution into LLP.

4. LLP records Rs.20,000 as capital contribution from the new partner.

5. Partner becomes a partner with Rs.20,000 capital credit.

Pros:

• Clear distinction between revenue and capital.

• Compliance with TDS rules.

• Transparent accounting entries.

Option 2: Direct capital contribution adjustment (less common and more complex)

• LLP can try to adjust Rs.20,000 from revenue to partner’s capital account without paying it as referral fee.

• But this is tricky because LLP cannot just reduce revenue without accounting for tax.

• It’s generally not advisable because:

  • Revenue should be recognized fully.

  • Referral fee is an expense, and should be paid out accordingly.

  • Partner's capital contribution should be actual money or asset brought in, not just a claim on future revenue.

Recommended practice:

Go with Option 1 for transparency, legal and tax compliance. You pay the Rs.20,000 referral fee, deduct TDS, and the partner invests that Rs.20,000 as capital contribution.

Accounting entries under Option 1:

• When Rs.100,000 business revenue comes in:

• When referral fee Rs.20,000 paid to partner (after TDS deduction say 10% TDS):

• When partner contributes Rs.20,000 capital to LLP:

Legal note:

• The LLP Agreement should clearly document how capital contribution is treated.

• New partner's admission and capital account to be updated accordingly.

• Consult with a tax expert to ensure TDS compliance on referral fee.