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CONVERSION OF PARTNERSHIP TO LLP

With the advent of Limited Liability Partnership firms in the Indian legal scenario, most of the people carrying out their activities through a Partnership Firm are converting their existing Traditional Partnership Firms to a Limited Liability Partnership firm, considering the lower risks and other synergies associated with such form of business.
Following is comparison of a Traditional Partnership firm and an LLP:

Particulars

Partnership firm

LLP

Governing law

The Indian Partnership Act, 1932

The LLP Act, 2008

Registration

Optional

Compulsory

Status of the Entity

Not a Separate Legal Entity.

Separate Legal Entity

Minimum No of Partners/ Members

2

2

Liability of Partners

Not Limited

Limited Liability

Tax Rates

30%

30%

Minimum Capital Requirement

No Limit

No Limit

Audit of Accounts

No such requirement to get the accounts audited unless required under Tax Audit

As per the provisions of LLP Act, accounts are to be audited annually except for LLP’s having turnover less than Rs. 40 lacs or contribution less than Rs. 25 lacs in any financial year.

Reputation with Banks and other Financial Institutions

Low

High

Basis the aforementioned features, an LLP surely has an edge over a Traditional Partnership Firms, considering the limited liability of the partners and the reputation it enjoys with banks and other financial institutions.

CLOSURE/ CONVERSION OF BUSINESS








Current year
Previous year


Advantages:

  1. Limited Liability:Liability of the Partners is limited and they are not liable for the deeds of the other partners.
  2. Better Governance:Since it is a legal requirement to have a written partnership deed and the same has to be registered, thus there is more clarity with regard to management roles and profit sharing ratios. This may allow for greater flexibility in the management of the business.
  3. Separate Legal Entity: The LLP is deemed to be a legal person. It can buy, rent, lease, own property, employ staff, enter into contracts, and be held accountable if necessary.
  4. Better Reputation with Banks and Financial institutions:Since it is a registered entity and is required to get its accounts audited after a certain threshold, it increases the trust of the banks and other financial institutions such form of business.

Requirement for conversion:


  • Statement of consent of all the partners;
  • Copy of the recent Income tax returns;
  • List of the secured creditors and their consent for conversion;
  • Clearance or No-objection Certificate from Tax Authorities;
  • Atleast 1 partner of LLP should be a resident Indian;
  • A partnership firm to be converted should be registered;
  • All the partners of the old firm should become partners of new firm.

Procedure:



Applying for Digital Signatures and DIN/ DPIN.


Drafting and Preparation of the LLP Agreement.


Checking the Name Availability and Filing the Form for Reservation of Name.


Drafting and Preparation of MOA and AOA of LLP.


Registration of LLP and Obtaining the Certificate of Incorporation of LLP.

Documents required:


  • Self attested copy of PAN card of the partners;
  • Self attested copy of address proof of the partners;
  • Copy of the bank statement/ electricity bill/ telephone bill;
  • NOC from the landlord, in case of rented premises;
  • Copy of telephone bill/ electricity bill/ gas bill, etc as proof of place of business;
  • DSC of all the partners;
  • DIN/ DPIN of the partners;

FREQUENTLY ASKED QUESTIONS


1. Is there any residency requirement for becoming partner?

– No, there are no residency requirements but atleast one designated partner shall be resident in India.

2. Is there a need to for minimum capital to setup an LLP?

– No, there are no minimum capital requirement norms to setup an LLP.

3. Whether it is necessary for partners to contribute in the LLP?

– As per the LLP Act 2008, the LLP Agreement will define the requirement related to contribution and therefore, the LLP Agreement may also provide for NIL contribution from the Partners. So, LLP can also be incorporated without any contribution from the partners.

4. Can I choose any name I want for my LLP?

– No, you cannot choose any name for your LLP. The LLP Act prescribed guidelines for determining the name of your LLP. Under the said guidelines, name of the LLP should not be identical with an already registered name and the name should not be prohibited. In case the name requires the consent of any regulatory authority, the consent shall be obtained.

5. What is the current rate of tax on LLP’s?

– The current rate of the tax on LLP’s is 30% as increased by surcharge and education cess.

6. Whether every LLP would be required to maintain and file accounts?

– Every LLP shall be under obligation to maintain annual accounts reflecting true and fair view of its state of affairs. A Statement of Accounts and Solvency shall be filed by every LLP with the Registrar of LLP every year.

7. Whether conversion of Partnership firm to LLP amounts to transfer and subject to Capital gains tax?

– No. Since the said conversion does not amount to transfer, accordingly, this is not subject to capital gains taxation.

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