Conversion Of Partnership Firm Into Limited Liability Partnership Firm

Partnership firms are also widespread in India as they are easy to set up. However, with the growth of businesses, issues such as unlimited liability, attracting investors, and maintaining flexibility are often encountered. In this case, the concept of a Limited Liability Partnership (LLP) will be beneficial. Converting a partnership to an LLP is one of the methods through which entrepreneurs can enjoy the benefits of a partnership while maintaining the limited liability of a company. This blog discusses the advantages of such a conversion, as well as critical needs, including legal, financial, and compliance considerations.

Why Convert a Partnership Firm to an LLP?

The partnership firms are governed by the Indian Partnership Act of 1932, in which the liability of the partners is not limited. This means that partners can utilise their personal assets to address the business liabilities. On the other hand, LLPs enjoy a more secure structure, which the Limited Liability Partnership Act, 2008, underpin.

The major advantages of the conversion into LLP are:

1. Limited Liability Protection – It is not subject to any personal liability on the part of the business except for the contribution of capital.
2. Separate Legal Personality – LLPs are a separate legal personality that enables them to own property and enter into contracts in their own name.
3. Tax Grants – The LLPs pay less taxes than companies do and the dividend is not taxed like the distribution.
4. Ease of Compliance – LLPs are not subject to as many statutory filings and compliance as private limited companies.
5. Enhanced Credibility – Professional organisations tend to be recognised well by virtue of LLPs, and this aspect helps in attracting clients, investors, and lenders.

Legal Requirement and Eligibility for Conversion

To transform a partnership firm into an LLP, the following are the requirements:

1. The Indian Partnership Act of 1932 should be registered in the partnership firm.
2. The LLP must be agreed upon by all the partners of the firm to be partners.
3. There should be at least two such partners, with one of them being an Indian resident.
4. The name of the LLP must be endorsed by the Registrar of Companies (RoC).
5. The application to make the conversion must be submitted prior to receiving all the creditors’ permission.

Step-by-Step Conversion Process

Legal documentation, digital formalities, and RoC approvals are the legal requirements associated with the transformation of a partnership firm into an LLP. The simplified release can be broken down as follows:

1. Procure a Digital Signature Certificate (DSC) and a Director Identification Number (DIN)

Each of the identified partners will have to purchase a DSC to be able to sign electronic documents. When this has been done, partners will be obliged to obtain a DIN, which will serve as an identifier of persons in LLPs.

2. Apply for Name Approval

The application for the proposed name of the LLP is to be carried out via the MCA portal, where the RUN-LLP form is to be filled out. It may be signed by name or the name of another partnership firm.

3. Incorporation and File Documents

The form of Incorporation of an LLP is also presented to the RoC, which includes the address of the office, the partners’ information, and a subscription sheet.

4. File Form 17 for Conversion

Form 17 is also used specifically in the conversion of a partnership firm to an LLP. This format involves the data regarding the company, associates, property and debts. It is to be represented along with:

1. Partner and Creditor Consent.
2. Balance sheet.
3. Copy of certificate of registration and partnership deed.
4. Acknowledgement of recent Income Tax Return.

5. Granting of Certificate of Registration

Upon the verified documents, the LLP is then registered with a certificate of registration by the RoC. This is the registered conversion of the company to LLP.

6. Draft and File LLP Agreement

Upon incorporation, partners must prepare an LLP Agreement that contains the roles, responsibilities, profit sharing and management structure proportions. This contract must be registered within 30 days of incorporation of Form 3.

Conversion and Compliance Effects

After the partnership was converted into an LLP:

1. All the assets, liabilities, rights and obligations of a partnership firm will automatically pass to an LLP.
2. The joint venture company is liquidated, and its name is removed.
3. There is a need to renew the PAN and update the PAN information for the LLP.
4. Banks, vendors, and clients should be informed of the change through effective communication.
5. Like in the case of LLPs, there is a compliance requirement, which is a yearly or annual filing of Form 8 (Statement of Accounts), and Form 11 (Annual Returns).

Issues and Difficulties

Although conversion is also good, there are a number of problems inherent in it:

1. It is a process that is associated with several documents and forms that need the support of a professional.
2. All creditors are to agree, which can serve as a barrier to the process in case of a delay in obtaining the said agreement.
3. The stamp duty can be levied on the transfer of the property of the partnership to the LLP.
4. The deadlines for filing should also be taken into account, since it might incur expenses in case it is not met.

As such, before conversion, companies need to evaluate the legal and financial consequences of the conversion.

Conclusion

Liability Partnerships make sense for any company that wants to expand, build trust, and reduce legal liability. They offer a contemporary approach to structuring and forming a collaboration as an alternative to a conventional partnership. LLPs provide advantages such as limited liability, a distinct legal identity, and more effective tax management. Although some steps are involved in changing to an LLP, a professional converter will remove the majority of the stresses from the negotiation and conversion process. In the case of an organisation with long-term growth potential, converting to an LLP can serve not only to offer further security to the partners but also to improve the company’s general perception. The fact is that converting the partnership into an LLP is not merely a legal matter; it is a long-term growth and success strategy.