Can an LLP become a subsidiary of a company?
Limited Liability Partnership (“LLP”) is one of the most prevalent forms of business entity in India, especially for licensed professionals like Chartered Accountants (‘CAs’), Company Secretaries (“CS”)Doctors, and Lawyers, etc. The biggest advantage of forming an LLP is that it ensures rigid control over management, power, and releases only limited exposure to the liability of partners. It envisages the formation of a new entity with no minimum requirement of capital along with following other features:
- No cap over the maximum number of members.
- No restraint over the decision making power of the members.
- No limit over the capacity of members to grant loans to the firm & vice versa.
- No pressure on partners to pay for debts of the firm from their inherited property.
For the corporate sector, to hold a company as a subsidiary, it requires several compliance costs and the additional burden of disclosure reports to be prepared timely. Individual compliances for the subsidiary company have to be fulfilled with the ROC like it is being submitted for the parent company. Though taking into consideration, LLPs due to their foregoing benefits are being considered to be opted for forming subsidiary companies under the Companies Act. But the matter of fact is that ‘’ Can an LLP legally become a Subsidiary company under the Companies Act, 2013? ‘’.
To further elaborate, it is essential to know “Which entity can become a Subsidiary Company under the Companies Act, 2013?”
What is a Subsidiary Company?
In relation to the holding company as per Section 2(87) of Companies Act, 2013, a subsidiary Company is a Company (1) in which the holding company:
- Holds affairs of the Board of Directors.
- Controls or holds half of the total voting power on its own or with one or more subsidiary companies.
(1). Company in this context includes body corporate which further includes any corporate body registered outside India Section 2(11) but does not include any registered co-operative society or any other body corporate notified by the Central government.
Eligibility Check of LLP
In order to satisfy the eligibility of LLP to become a subsidiary company of any company registered under the Companies Act, 2013 the above 2 conditions are to be matched with the LLP rules.
Test 1: The holding company should control the corpus of the Board of Directors (BOD) of the subsidiary company.
The terms of the LLP Act, 2008 define Partners, and the Designated Partners to own a partnership. While Partners in accordance with Act means
Persons are eligible to become partners in an LLP as per the LLP Agreement which should be working for the LLP and not for other partners.
For Designated partners, any two partners of LLP can hold the position of designated partners, of which one should be a resident of India. Where all partners of the LLP are body corporate or LLP is inclusive of both individuals and body corporate, at least two partners or the nominees of the body corporate shall become the designated partners.
When compared to the company’s provisions, the directors have to hold meetings, prepare minutes, take decisions and are required to fulfill numerous responsibilities with ROC.
The LLP Act does not give any reference to the term Director as a partner of LLP and the terms, roles, responsibilities, disqualifications of a partner & that of designated partners cannot be compared with the term Director of a company.
Thus, an LLP does not qualify for the Structure of the Board of Directors as required to become a Subsidiary company and it fails the test.
Test 2: The holding company should hold half of the voting right in the subsidiary company on its own or with one or more other subsidiaries.
Voting in a company as per the Companies Act means voting by members of the company through postal ballot, electronic means or any other mode as finding suitable. While in an LLP there is no such mechanism to conduct voting. Voting in LLP is defined by the LLP Agreement and bound to change with amendments in the LLP Agreement.
Thus, the clause of the LLP Agreements decides for the Voting power in the LLP, so it fails the second test also.
As both conditions to satisfy LLP eligibility to become a subsidiary company stands failed, thus an LLP cannot become a subsidiary company of any holding company as per the Companies Act, 2013.
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