Understanding LLP-II: Reporting Disinvestment or Transfer in LLPs
Md Saddam Hussain
Md Saddam Hussain is a highly skilled and experienced Company Secretary specializing in corporate laws, regulatory compliance, and legal advisory. With expertise in the Companies Act, FEMA, LLP regulations, SEBI compliance, NCLT proceedings, and liaisoning with government authorities, he provides strategic guidance to businesses, ensuring seamless adherence to statutory obligations. Known for his meticulous approach and in-depth knowledge of corporate governance, he assists companies in mitigating risks, handling regulatory filings, and navigating complex legal frameworks. With a commitment to excellence and integrity, Md Saddam Hussain plays a crucial role in supporting businesses with compliance, litigation, and corporate structuring.
The Limited Liability Partnership (LLP) model has emerged as a preferred business structure for professionals and entrepreneurs seeking the flexibility of a partnership with the legal protection of limited liability. Within this framework, compliance plays a vital role in ensuring transparency and smooth operation. One such critical compliance requirement is Form LLP-II, which is primarily used for reporting the disinvestment or transfer of capital contributions and profit shares in LLPs.
This article aims to decode Form LLP-II by examining its applicability, procedural steps, compliance implications, and best practices.
What is Form LLP-II?
Form LLP-II is a statutory form prescribed under the LLP Act, 2008, and the LLP Rules, 2009. It is officially titled “Form for Intimation of Other Changes or Compounding of Offences” and is utilized for multiple purposes, including notifying changes related to contribution and profit-sharing among partners.
More specifically, LLP-II is used to inform the Registrar of Companies (ROC) about disinvestment or transfer of a partner’s capital contribution and/or profit share to another partner or a third party. This requirement ensures that the records maintained with the Ministry of Corporate Affairs (MCA) are accurate and up-to-date.
When is LLP-II Applicable?
Form LLP-II becomes applicable under the following circumstances:
- Transfer of Capital Contribution:
When an existing partner transfers all or part of their capital to another partner or an outsider. - Change in Profit-Sharing Ratio:
If there is a reallocation of the share of profits or losses among the partners. - Disinvestment by Partner(s):
When a partner exits the LLP, either partially or completely, by transferring their interest in the LLP. - Admission or Resignation of Partners:
While Form 4 is typically used for this, any consequential change in capital contribution or profit ratio will also require filing LLP-II. - Change in Total Contribution of LLP:
If the aggregate capital of the LLP changes as a result of the transaction.
Regulatory Framework and Legal Basis
Form LLP-II is governed by the following statutory provisions:
1. Section 23(2) of the LLP Act, 2008: Requires an LLP to file any changes made in the LLP Agreement.
2. Rule 21(2) of the LLP Rules, 2009: Mandates filing of Form LLP-II to reflect any modification in the LLP Agreement, especially those relating to contribution and profit sharing.
The law mandates that such intimation must be made within 30 days of the effective date of the change.
Step-by-Step Process of Filing Form LLP-II
1. Draft a Supplementary LLP Agreement
Any disinvestment or transfer of capital/profit share must first be recorded through a Supplementary LLP Agreement, duly signed by all the partners. This agreement should mention:
a. The names of the transferring and transferee partners.
b. The amount of capital and the new profit-sharing ratio.
c. Date of change.
2. Hold a Meeting of Partners
Though not explicitly required by law, holding a meeting of partners to pass a resolution approving the change is considered a sound governance practice. Minutes of the meeting should be recorded.
3. Preparation of Form LLP-II
The designated partner must log in to the MCA portal and fill in the required details in LLP-II, such as:
a. LLP Identification Number (LLPIN).
b. Details of change in contribution and/or profit share.
c. Details of the modified LLP agreement.
4. Attachments Required
The following documents are to be attached to Form LLP-II:
a. Certified copy of the supplementary LLP agreement.
b. A copy of the resolution approving the change.
c. Any other supporting documents (e.g., PAN of transferee, consent letters, etc.).
5. Digital Signature and Certification
Form LLP-II must be digitally signed by a Designated Partner and certified by a practicing professional (Company Secretary, Chartered Accountant, or Cost Accountant).
6. Filing on MCA Portal
Once completed, the form is submitted on the MCA portal with the applicable filing fees, which vary based on the total contribution of the LLP.
Consequences of Non-Compliance
Failure to file Form LLP-II within the prescribed time can lead to:
a. Monetary Penalties: A defaulting LLP may be liable to pay additional fees and penalties under Section 35 of the LLP Act.
b. Legal Proceedings: Persistent non-compliance can lead to penal actions, including legal prosecution or striking off of the LLP.
c. Discrepancies in Public Record: Inconsistencies in public records can raise red flags during audits, fundraising, due diligence, or inspections.
Important Considerations
1. No Automatic Approval
Filing the form does not automatically legalize the change. It only means the ROC has been intimated, and the record is updated.
2. Partner’s Consent
In cases of transfer to an outsider, the consent of all existing partners is typically required as per the LLP Agreement.
3. Stamp Duty
The supplementary LLP Agreement must be executed on stamp paper of appropriate value, as per the respective State Stamp Act.
4. Update in Financial Records
Post transfer, the books of accounts, capital ledger, and profit-sharing ledger should be duly updated to reflect the new structure.
Best Practices
- Maintain Clear Records: Ensure that all changes are properly documented, dated, and signed.
- Professional Certification: Always have a professional review the documentation and certification to avoid rejection.
- Timely Filing: Track the 30-day deadline and initiate filing immediately after the change.
- Review LLP Agreement Clauses: Before initiating any transfer or disinvestment, ensure that the agreement permits such transactions and follows the stated process.
Conclusion
Form LLP-II is a crucial compliance mechanism to record changes in capital contribution and profit-sharing in an LLP. Whether a partner is transferring their share, exiting the firm, or the structure of ownership is changing, this form ensures that such developments are legally recognized and recorded by the Registrar.
The transparent and timely filing of Form LLP-II not only upholds statutory compliance but also protects the interests of stakeholders, potential investors, and regulatory authorities by keeping public records consistent with the LLP’s actual structure.
As LLPs continue to grow in popularity, understanding and adhering to such filing requirements is essential for sound governance and sustainable operations.
For any clarifications or queries, please feel free to reach out to us at admin@fintracadvisors.com
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