Convert a Proprietorship Firm to an LLP in India
Most small business owners start as sole proprietors, and that is how the Indian mindset has been framed for a long time. A sole proprietorship is the easiest, most common, and simplest form of any business structure. This business form has advantages such as easy formation, limited paperwork, fewer capital needs, and minimum compliance requirements.
Once the business starts spreading across various locations and gains its reach, the next logical move will be to widen the operations to a greater extent, depending on the current business and marketing needs. When the business starts to grow more than you expect, or it still stagnates, you have to transform it from a proprietorship to an LLP.
Limited liability partnership (LLP) was introduced in India through the LLP Act, 2008. The fundamental concept behind undertaking the LLP was to supply a hierarchical structure that is as easy to maintain and reduces liability compared to a sole proprietorship structure. The LLP has the joint advantages of the Company and Partnership firm in one form of organization and provides a hybrid structure.
So, converting a sole proprietorship into an LLP is a wise decision when the business grows. Under this LLP, one partner is neither responsible nor liable for another partner’s destructive code of conduct or negligence. This LLP also supplies long-term limited liability protection for the owners from being liable for the debts of the LLP. Those mentioned above are some of the reasons why professionals, small businesses, and micro and macro businesses prefer LLPs.
Your virtual accountant at Kanakkupillai is a robust choice for this work. With 20 offices, 10++ years of industry experience, and competitive and economic costs, we have a team of professional specialists who will convert your Sole Proprietorship firm to an LLP in India in the lowest possible turnaround time.
Key Takeaways
- Advantages of Sole Proprietorship: Sole proprietorship is the simplest and most common form of business structure in India, offering benefits such as easy formation, minimal paperwork, low capital requirements, and fewer compliance obligations.
- Need for Transformation: When a business expands or reaches a certain level of growth, it becomes necessary to consider transforming from a sole proprietorship to a Limited Liability Partnership (LLP).
- Benefits of LLP: LLP provides a hierarchical structure that is easy to maintain and offers reduced liability compared to a sole proprietorship. It combines the advantages of a company and a partnership, providing a hybrid organizational structure.
- Limited Liability Protection: LLPs offer owners long-term limited liability protection, where partners are not held responsible for each other’s misconduct or negligence. This factor makes LLPs preferred for professionals, small businesses, and micro and macro enterprises.
- Choosing to Register an LLP: Converting a sole proprietorship to an LLP allows you to maintain your business goodwill and brand value while enjoying legal existence. It also offers business expansion opportunities, better financing options, increased public visibility and acceptance, asset protection, risk management, and corporate tax benefits.
Choosing to Register an LLP
As soon as the income from the business increases, several sole proprietors become aware of the need to differentiate their accounts and tax filings from those of the business. There are many other reasons why converting your sole proprietorship into a private limited company is wise.
This conversion lets you take advantage of the dual benefits of keeping your goodwill and brand value in touch while enjoying legal existence.
Other key benefits include:
- Business expansion
- Better financing options
- Greater public visibility and acceptance
- Asset protection
- Managing risks
- Corporate tax benefits
Documents required to convert into an LLP
- PAN Card— The PAN card is a mandatory document when converting business needs across formats. This should include the PAN Card of every business partner who is part of the LLP (foreign nationals may supply their passports).
- Address Proof—Each partner’s address proof must be submitted to convert a business from a sole proprietorship to an LLP. This address proof can be an Aadhar card, Voter ID, Passport, or Driving License.
- Photograph – A newly taken picture of each partner in the LLP list. The picture shall be in the form of formally dressed and groomed; the size of this picture must be passport size.
- Business Address Proof – You must submit the organization’s address, which could be in any of these formats, such as an electricity bill or telephone bill.
- Rent agreement—If your business’s registered office is in a rental building, you should provide a rental agreement and a No Objection Certificate from the owner.
- NRI/ Foreign National—If any of your partners is either an NRI or a foreign national, all of their documents should be notarized.
Steps to Convert a Proprietorship Firm to an LLP
- DSC (Digital Signature Certificate) – DSC is required and is to be obtained by the designated partners of LLP. To get this DSC, the documents that are supposed to be submitted include Identity proof & Address proof.
- Apply for DPIN(Designated Partner Identification Number) – DPIN is a prerequisite for the conversion process. The designated partners should process or apply for this unique DPIN number and receive a provisional DPIN. To obtain DPIN, the partners should furnish a photograph, proof of identity, and proof of address.
- Application for name availability—The application to convert the business into an LLP must be filled in FORM—1 to determine the availability of a name for the organization. The partner can suggest a maximum of 6 names in order of priority, and then the application will be submitted to the respective ROC for name approval.
- Changes, if any, proposed by ROC—If the ROC proposes any change in the name application, it must be complied with. If the ROC finds the name is not appropriate for the business, he/she may reject it.
- Documents required – Several documents are to be given to the ROC. The MOA or AOA is required to be sent soon after getting it vetted by the designated partners, and the same must be sent for printing purposes. A Stamping is also required for various documents like,
- LLP Agreement
- Form 3
- Subscription sheet signed by the promoters
- Duly stamped LLP Agreement
- Proof of Address of Registered Office
- Other forms required—Other forms, such as Form 32 and a Letter of Authority or POA, must be filed along with the ROC.
- Final process – To fill all the above-mentioned mandatory documents with the ROC, you should follow up with the ROC and make the necessary changes to the MOA, AOA, or other specified documents as prioritized by the ROC. The mandate steps to be followed are given below,
- LLP Agreement
- Form 3
- Subscription sheet signed by the promoters
- Duly stamped LLP Agreement
- Proof of Address of Registered Office
- Upload the forms—All the duly filled forms must be uploaded on the MCA site. An online service is available for the forms.
- Payment of fees – The fees must be paid for the incorporation process.
- Collect the Certificate of Incorporation—After the ROC is satisfied that all the necessary steps have been followed correctly and no errors have occurred during the initial to final process, it will provide the Certificate of Incorporation to the Company.
Conclusion
In conclusion, converting a proprietorship firm to a Limited Liability Partnership (LLP) in India offers numerous advantages and opportunities for business owners. By transitioning to an LLP structure, entrepreneurs can benefit from limited liability protection, shared responsibilities, and reduced personal liability. Additionally, LLPs provide long-term sustainability, flexibility for business expansion, better financing options, and enhanced credibility in the market. The conversion process involves fulfilling the legal requirements, submitting the required documents, and following the procedures. Seeking professional assistance from experts in the field can ensure a smooth and efficient conversion process. Converting a proprietorship firm to an LLP is a prudent decision for entrepreneurs looking to scale their business while enjoying the benefits of a structured and legally compliant business entity.
Related Services
- Sole Proprietorship Registration in India
- Private Limited Company Registration in India
- GST Return Filing Online in India
- Trademark Registration Online in India
FAQs
What are the advantages of converting from a proprietorship to an LLC?
Converting a proprietorship to an LLP (Limited Liability Partnership) has several advantages, such as protecting personal assets from business liabilities, easier access to funding, better management structure, and a more credible business image. Additionally, LLPs are a separate legal entity and enjoy perpetual succession, meaning the death or departure of any partner does not affect the existence of the LLP. Overall, transitioning to an LLP can lead to greater stability and success for a business.
What is the difference between a proprietorship firm and an LLP?
The main difference between a proprietorship firm and an LLP is the liability of the owner/partners. In a proprietorship, the owner is personally liable for all business debts and obligations. In contrast, an LLP provides limited liability protection to its partners. This means that the partners’ assets are not at risk in case of business losses or legal issues. Additionally, an LLP has a separate legal entity and can continue to exist even if one or more partners leave the business.
Can I convert my partnership firm to an LLP?
Yes, it is possible to convert a partnership firm to an LLP. The process involves filing an application with the Registrar of Companies (ROC) and obtaining their approval. Once approved, the partnership firm must get a new PAN and other registrations required for an LLP. It is important to note that all partners in the existing partnership firm must become partners in the new LLP, and each partner’s rights and obligations must be specified in the LLP agreement.
What are the tax consequences of the conversion of a sole proprietorship to an LLP?
One of the main tax consequences of converting a sole proprietorship to an LLP is that the business will be required to obtain a new PAN and file taxes as an LLP. Additionally, there may be some tax implications related to the transfer of assets and liabilities from the proprietorship firm to the LLP. It is recommended to consult with a tax advisor or chartered accountant for specific guidance on the tax implications of converting a sole proprietorship to an LLP.
How can I convert my sole proprietorship into a different business structure?
Converting a proprietorship firm to a different business structure, such as a Limited Liability Partnership (LLP) or a Private Limited Company, involves following the prescribed legal procedures, fulfilling documentation requirements, and obtaining necessary approvals from the appropriate authorities. The specific process may vary depending on the chosen business structure and relevant laws and regulations.
What is DIN?
DIN stands for Director Identification Number. It is a unique identification number allotted to individuals who wish to become directors of companies registered in India. DIN is mandatory for individuals intending to hold a directorship position and is obtained by applying with the Ministry of Corporate Affairs.
What is NOC?
NOC stands for No Objection Certificate. It is a legal document issued by an authority or entity to grant permission or express no objection to a specific action or transaction. NOCs are often required in various scenarios, such as obtaining a loan, starting a new business, or transferring ownership of property.
What is the purpose of an audit?
An audit is a systematic examination and verification of a business’s financial records, statements, and operations to ensure accuracy, compliance with laws and regulations, and financial transparency. The primary purpose of an audit is to provide an independent assessment of the organization’s financial health and the reliability of its financial information.
What is the process for business incorporation in India?
Business registration in India involves obtaining the necessary licenses. The relevant authorities can obtain a Certificate of Incorporation for companies or register under the appropriate Act for partnerships or proprietorships. The specific registration requirements may vary depending on the type and nature of the business.
What is a trademark?
A trademark is a distinctive symbol, logo, word, phrase, or combination thereof that represents and distinguishes a company’s products or services from those of others. Trademarks help protect the brand identity and prevent unauthorized use.
How can I register for GST in India?
To register for GST in India, you must visit the GST portal and complete the registration process by providing the required information, such as business details, PAN (Permanent Account Number), bank account details, and contact information. After successful registration, you will be assigned a unique GST Identification Number (GSTIN) for your business.
