Everything you need to know on Remuneration to LLP Partners, Eligibility Criteria, and Maximum Remuneration to Partners in LLP allowable by Income Tax Department

Introduction

The Internal Revenue Service has issued a number of detailed instructions regulating the remuneration granted to LLP (Limited Liability Partnership) partners. While LLP compliance is very simple, it is prudent for any LLP partner to pay attention to the minimal obligations that exist. This article major focuses on Remuneration to Partners in LLP (Limited Liability Partnership). Let’s have quick look at what is LLP? Before going through the discussion on Remuneration to LLP Partners.

What is LLP (Limited Liability Partnership)?

A Limited Liability Partnership (LLP) is one in which some or all of the partners are having limited liability. As a result, it can display aspects of partnerships and businesses. Each partner in an LLP is not responsible or liable for the misbehavior or carelessness of another partner. An LLP (Limited Liability Partnership) is a type of business that combines the advantages of partnerships and private limited companies. It is made up of partners who have limited accountability for the company.

Information on the term “Remuneration to Partners in LLP”

Because it is such an important component of running a firm, the LLP agreement contains rules regarding how salary is paid. As a result, each partner will want the highest possible investment return for their work, and partners must be aware of the many types of returns available in order to balance the agreement properly. When dealing with an LLP, the three most common types of returns are as follows.

1. Interest on Capital

This is a type of payment that has a direct link to the capital they put in at the outset of the company’s development. It has nothing to do with their current project. Each partner must have contributed a portion or percentage of the total capital required when the partnership was formed, and their interest return is a fixed percentage of this amount. As a result, the interest they receive will be a proportion of the amount they invested.

2. Profit-Sharing

When the LLP begins to make a profit or becomes cash positive, this return becomes available. This type of return considers both the amount of effort they have put in as well as the capital they have previously invested. As soon as the LLP starts to produce money, the profit is analyzed and divided into portions based on the amount of work completed, and capital is introduced and distributed among the partners as needed.

3. Remuneration

This term encompasses anything from incentives and commissions to a partner’s or employee’s base compensation. It is usually given to partners who make a concerted effort to help the LLP grow and prosper. It is a method of remuneration that is proportional to the work performed and has little to do with the funds invested at the start of the partnership.

Maximum Remuneration to Partners in LLP (Limited Liability Partnership)

Partners’ remuneration shall not exceed the following amount:

• On the first Rs. 3 lakhs of book profit or, in the event of a loss, Rs. 1,50,000 or 90% of book profit, whichever is greater; on the remainder of the book profit – 60% of book profit.

• The annual interest rate due to partners shall not exceed 12%.

Eligibility Criteria for Remuneration to Partners

The clauses registered in the LLP Agreement determine which partners receive returns and which do not. Even if a partner is working, inactive, asleep, active, or non-working, if a percentage of the profit or interest is clearly stated in the LLP Agreement, they must be provided that amount regardless of whether they deserve it or have done any work. However, the Income Tax Act sets a restriction on the amount of remuneration that an LLP can payout. Furthermore, the LLP agreement does not provide for any remuneration or a return to a time before the arrangement was in effect.

The amount that is Deductible under Income Tax Act

• Only if the remuneration is received by a working partner or a person is a deduction possible.

• The payment of remuneration must be approved and recorded in the LLP agreement.

• The sum owed must not be more than the figures listed below.

• If a partner is paid more than what is listed below, the extra amount is not eligible for a deduction and must be paid in tax.

• The partners’ remuneration is subject to taxation as Business Income. The profit share is not listed in the same area as the remuneration.

• Section 10 (2A) of the Income Tax Act exempts the share of profit returns earned by both working and non-working members. Interest paid on capital invested by them is also treated as Business Income.

• In terms of taxation, the interest earned by the LLP on drawings from partners is charged as earnings and gains of business.

• A Limited Liability Partnership (LLP) will be taxed in the same way as a partnership. This means that their earnings will be taxed at a rate of 30%. LLPs, on the other hand, are not eligible for the benefits of Section 44AD, which permits businesses to avoid keeping records if their revenue is less than 8% of their total gross revenue.

• Because an LLP (Limited Liability Partnership) does not distribute dividends like a corporation, it is not subject to the dividend distribution tax.

• Anything the partners receive above this portion is taxed.

• The exact interest rate and how it will be paid must be specified in the LLP Agreement.

Amounts that are not considered as a Deduction

A deduction for the following sum paid by a Limited Liability Partnership (LLP) to its partners is not allowed:

• Non-working partners’ salary, bonus, commission, or payment.

• Payment of remuneration or interest to partners that is not in conformity with the partnership deed’s requirements.

• If the partners are given a salary or interest in accordance with the partnership deed’s terms, but it is for a time anterior to the partnership deed’s date.

• Interest paid to partners is greater than 12% per year.

• The remuneration paid to partners complies with the partnership agreement’s requirements, however it exceeds the following allowable limit:

1. On the first Rs. 3 lakhs of book profit or, in the event of a loss, Rs. 1,50,000 or 90% of book profit, whichever is greater.

2. On the remainder of the book profit – 60% of book profit.

Note: ‘Book profit’ refers to the net profit computed under the heading ‘Business or Profession,’ plus the total amount of remuneration paid or payable to all partners of the firm if that amount has been deducted from the net profit.

Conclusion 

The designation of Partners or the terms put into the LLP Agreement filed during LLP Registrations and later through amendments determine eligibility for returns and remuneration to partners in LLP. As a result, before forming an LLP, the partners must carefully consider the designation and rights of each LLP member.

It should also be noted that, regardless of the conditions and restrictions of remuneration in the LLP Agreement, the taxability of returns, remuneration of partners, and profits of the LLP is determined in accordance with the Income Tax Act.