The Ministry of Corporate Affairs (MCA) has enhanced transparency regarding the persons who ultimately own or control an LLP by way of notification of the Limited Liability Partnership (Significant Beneficial Owners) Rules, 2023.
These rules require LLPs to report to identify Significant Beneficial Owners (SBOs), obtain prescribed declarations, retain appropriate records and make the required filings with the Registrar. For LLPs, compliance is particularly relevant where ownership or control is exercised through companies, partnership entities, trusts or other indirect structures.
The framework also prescribes certain forms and timelines, exemptions and consequences for non-compliance, making accurate identification of beneficial ownership an important regulatory responsibility.
What Are the LLP Significant Beneficial Owners Rules, 2023?
The Limited Liability Partnership (Significant Beneficial Owners) Rules, 2023 were notified by the MCA through G.S.R. 832(E) dated November 9, 2023. The Rules apply to Limited Liability Partnerships, subject to the exemptions specifically provided under the framework.
Their primary purpose is to identify the natural individuals who ultimately hold prescribed ownership rights or exercise significant influence or control over a reporting LLP.
Under the LLP SBO Rules, both the individual and the reporting LLP have defined compliance obligations involving declarations, filings, record maintenance, and disclosure of significant beneficial ownership.
Who Is a Significant Beneficial Owner in an LLP?
A Significant Beneficial Owner (SBO) in a reporting LLP is an individual who, acting alone, together with others, or through one or more persons or trusts, holds specified rights or entitlements in the LLP. An individual may qualify as an SBO where the person:
- Contribution: Holding of at least 10% of the LLP’s contribution, directly or indirectly (through combined direct and indirect holdings).
- Voting rights: Has at least 10% of the voting rights in management or policy decisions, directly and indirectly combined.
- Profit Share: Entitled to receive not less than 10% of distributable profits or other distributions of the LLP in a financial year.
- Influence or control: Exercises, or has the right to exercise, significant influence or control other than through direct holdings alone.
Does Direct Ownership Alone Make Someone an SBO?
Direct ownership alone does not automatically make an individual an SBO. The Rules provide that an individual without any indirect right or entitlement under these prescribed criteria is not treated as a Significant Beneficial Owner.
How Is Indirect Beneficial Ownership Identified?
Indirect beneficial ownership requires the reporting LLP to look beyond its immediate partner and identify the natural individual who ultimately holds the relevant right or entitlement. The applicable test depends on the nature of the partner:
- Body corporate: The individual holds a majority stake in the partner or its ultimate holding company.
- HUF: The individual is the Karta of the Hindu Undivided Family.
- Partnership entity: The individual is a partner, or holds a majority stake through a body corporate partner or its ultimate holding company.
- Trust: The individual may be the trustee, beneficiary, author, or settlor, depending on the type of trust.
- Pooled investment vehicle: The relevant individual may be the general partner, investment manager, or chief executive officer, subject to prescribed conditions.
These tests help identify the natural person behind layered ownership or control arrangements.
LLP BEN-1, BEN-2, BEN-3 and BEN-4 Explained
The LLP SBO Rules prescribe four forms for declaration, reporting, recordkeeping, and information collection. Each form serves a different compliance purpose, depending on whether the action is required from the individual SBO or the reporting LLP.
- LLP BEN-1: An individual who is subsequently an SBO, or whose substantial beneficial ownership changes, must make this declaration to the reporting LLP within 30 days. When the Rules commenced, the original 90-day period applied to existing SBOs.
- LLP BEN-2: After receiving LLP BEN-1, the reporting LLP must file LLP BEN-2 with the Registrar within 30 days, together with the prescribed fee.
- LLP BEN-3: The LLP must maintain a register of Significant Beneficial Owners in this form, containing the prescribed particulars of each SBO.
- LLP BEN-4: Reporting of LLP requests information about significant beneficial ownership from appropriate non-individual partners meeting prescribed conditions. The recipient has a month to provide the requested information.
Together, these forms create a structured process for identifying, reporting, and maintaining records of significant beneficial ownership.
What Must a Reporting LLP Do?
A reporting LLP must take necessary steps to identify individuals who may qualify as Significant Beneficial Owners and ensure the prescribed declarations and filings are completed. This requires reviewing both direct partners and the ownership or control behind non-individual partners.
The reporting LLP should:
- Review its contribution, voting, and profit-sharing structure.
- Identify relevant non-individual partners and trace indirect ownership or control.
- Obtain LLP BEN-1 from identified SBOs.
- File LLP BEN-2 within 30 days of receiving the declaration.
- Maintain the SBO register in LLP BEN-3.
- Issue LLP BEN-4 where information must be sought.
- Monitor subsequent changes in significant beneficial ownership.
This process supports timely Compliance for LLPs and reduces the risk of incomplete SBO reporting.
What Happens If SBO Information Is Not Provided?
If a person does not provide information requested through LLP BEN-4 within the specified period, or the response is unsatisfactory, the reporting LLP must apply to the Tribunal. The Tribunal may restrict rights connected with the relevant contribution.
Such restrictions may include:
- Transfer rights: Restriction on transferring the related interest.
- Profit rights: Suspension of profits or other distributions.
- Voting rights: Suspension of voting rights attached to the contribution.
- Other rights: Restriction on other rights connected with the contribution.
This process enables unresolved SBO disclosures to be addressed through formal regulatory action.
Penalties for Non-Compliance with LLP SBO Requirements
Failure to comply with significant beneficial ownership requirements may give rise to monetary penalties under Section 90 of the Companies Act 2013 (as applied to LLPs).
- Individual SBO: ₹50,000 + ₹1,000 per day for each continuing day up to a maximum of ₹2 lakh.
- Reporting LLP: One lakh rupees and Rs. 500 for each day thereafter up to a maximum of Rs. 5 lakh.
- Partner or designated partner in default: ₹25,000, plus ₹200 for each continuing day, subject to a maximum of ₹1 lakh.
Timely Compliance for LLPs therefore requires accurate declarations, proper filings, and continuing ownership monitoring.
Exemptions Under the LLP SBO Rules
The LLP SBO Rules do not apply to the extent that the reporting LLP’s contribution is held by certain government bodies or regulated investment vehicles. The main categories of exemptions include:
- Government authorities: Central Government, State Government, or any local authority.
- Government-controlled entities: Specified LLPs, bodies corporate, or entities controlled by the Central or State Governments.
- SEBI-regulated vehicles: Mutual funds, AIFs, REITs, and InvITs.
- Other regulated vehicles: Investment vehicles regulated by RBI, IRDAI, or PFRDA.
The exemption applies to the relevant contribution rather than automatically exempting the entire LLP.
Common LLP SBO Compliance Mistakes
Errors in identifying or reporting significant beneficial ownership can lead to incomplete filings and regulatory non-compliance. Reporting LLPs should not make the following mistakes:
- Direct ownership misconception: Considering all 10% owners as SBO without looking into the indirect rights.
- Omission in ownership review: Failing to look into ownership behind the company, LLP, partnership or trust entity.
- Incorrect use of form: Consideration of LLP BEN-1 as the tax return filed to the Registrar instead of LLP BEN-2.
- Misconception of BEN-4: Considering LLP BEN-4 as a partner filing and not as the notice from the reporting LLP.
- Inadequate record keeping: Failure to update SBO information in case of any change in ownership or control.
Stay Compliant With LLP SBO Requirements
Compliance for LLPs requires proper identification of beneficial ownership, timely declarations, accurate filings, and continued monitoring of changes in ownership or control. Reporting LLPs should review their ownership structures carefully and maintain the prescribed SBO records.
FinGuru India can assist with ownership reviews, applicable SBO requirements, LLP BEN-2 filings, and related MCA compliance based on the LLP’s circumstances.
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