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The stage is set for Indian entrepreneurs to enjoy the benefits of the most flexible way of organizing businesses with the government finalizing the tax code for limited liability partnerships.

The business format that will be available from April 1, 2009 will allow professionals, traders and even producers of goods to organize themselves into large limited liability partnerships (LLPs) where individual partners and investors need not worry about losing their personal assets due to lapses of other partners.

“An LLP would be taxed for its income while the income of individual partners would be tax free. This benefit is not available to companies,” said an official privy to the development. Companies pay tax on their profits and again pay dividend distribution tax when they distribute profits among shareholders. The LLP format protects partners from double taxation.

“Although LLPs can be registered in India from April this year, the announcement of the tax code can be done by the government that comes into power after the general elections as annual accounts of LLPs will be finalised only at the end of the 2009-10 fiscal year,” the official said. Therefore, the details of the LLP tax regime will be unveiled in the Finance Bill presented by the new government later this year. The proposals will be implemented through an amendment to the Income-Tax Act.

The official, however, did not rule out the possibility of the interim budget making a mention of the new flexible business model.

The ministry of corporate affairs will allow online incorporation of LLPs through its e-governance project with the registrar of companies as the regulator. The new model will encourage law firms, accounting firms and financial consultancies to get converted into LLPs to achieve scale by inducting unlimited number of partners. Absence of vicarious liability will help LLPs to rope in investors with deep pockets.

While finalising the tax code, the finance ministry decided not to go by a parliamentary panel’s recommendation that LLPs should be given the freedom to choose between taxation at the organisation level or at the partner level, depending on their internal structure.

The corporate affairs ministry has framed the LLP rules and regulations that will be notified soon. “The law requires that once a Bill becomes law, rules have to be framed within six months. The LLP Bill, 2008 got presidential approval in January 2009. Although there is time till June to frame the rules, the ministry will do it faster,” said another official who asked not to be named.

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