In the business world, partnerships are a prevalent form of business entities, where two or more individuals come together to carry on a business for profit. Partnerships are relatively easy to set up and operate, and partners share the profits and losses equally. However, one significant drawback of partnerships is that partners have unlimited liability, which means that their personal assets can be seized to pay for business debts.
In contrast, LLP is a hybrid business entity that combines the features of partnerships and corporations. LLP is a separate legal entity from its partners, which means that its partners are not personally liable for business debts beyond their contribution to the business. Therefore, many partnerships are converting into LLPs to limit their liability and enjoy other benefits that come with LLPs.
What is Partnership?
A partnership is a business entity where two or more people come together to carry on a business for profit. Partnerships can be general or limited. In a general partnership, all partners have unlimited liability for the debts of the business, while in a limited partnership, there are both general and limited partners. The general partner has unlimited liability, while the limited partners have limited liability.
What is LLP?
LLP is a hybrid business entity that combines the features of partnerships and corporations. It is a separate legal entity from its partners, which means that its partners are not personally liable for business debts beyond their contribution to the business. LLP is a popular form of business entity, especially in the UK and India.
Why Convert from Partnership to LLP?
There are several reasons why a partnership may want to convert to an LLP. One of the primary reasons is to limit the liability of its partners. In a partnership, partners have unlimited liability for business debts, which means that their personal assets can be seized to pay for business debts. In contrast, LLP partners are not personally liable beyond their contribution to the business. Therefore, converting from a partnership to an LLP can help protect the personal assets of partners.
Another reason why a partnership may want to convert to an LLP is to enjoy the benefits that come with LLPs. LLPs have a separate legal entity, which means that they can own property, sue and be sued in their own name. Additionally, LLPs have perpetual succession, which means that the business will continue to exist even if one or more partners leave the business or pass away.
Eligibility for Conversion from Partnership to LLP
Partnerships that are registered under the Partnership Act, 1932, are eligible to convert into LLPs. However, the partnership should not have any pending dues, including income tax returns, sales tax, or any other government dues.
Process of Conversion from Partnership to LLP
The conversion process from partnership to LLP involves several steps, which are as follows:
- Obtain a Digital Signature Certificate (DSC) and Director Identification Number (DIN) for all designated partners of the proposed LLP.
- Reserve a unique name for the LLP with the Registrar of Companies (ROC). The name should not be identical or too similar to an existing LLP or company.
- File Form-1, which is an application for reservation of name with the ROC.
- Prepare and file Form-2, which is the incorporation document for LLP, along with the necessary fees, and submit it to the ROC.
- File Form-17, which is an application for conversion of a partnership firm into an LLP, along with Form-2 and the necessary fees, and submit it to the ROC.
- Obtain a Certificate of Incorporation from the ROC, which indicates that the LLP is now a separate legal entity.
- Once the LLP is incorporated, all assets, liabilities, and obligations of the partnership firm will be transferred to the LLP.
- Apply for a new Permanent Account Number (PAN) and Tax Deduction and Collection Account Number (TAN) for the LLP.
Effect of Conversion on Assets, Liabilities, and Obligations
Once the LLP is incorporated, all assets, liabilities, and obligations of the partnership firm will be transferred to the LLP. This means that all contracts, agreements, and obligations that were entered into by the partnership firm will now be the responsibility of the LLP.
Additionally, all legal proceedings that were initiated by or against the partnership firm will be continued by or against the LLP. The conversion will not affect any pending or existing legal proceedings.
Taxation Aspects of Partnership to LLP Conversion
In terms of taxation, the conversion from partnership to LLP is not considered a transfer. Therefore, there is no tax liability on the conversion itself. However, the LLP will be required to file income tax returns and pay taxes on its income.
Additionally, the partners of the partnership firm will be considered partners of the LLP, and their capital contribution in the partnership firm will be treated as their capital contribution in the LLP. The partnership firm’s capital gain or loss will be carried forward to the LLP.
Compliance Requirements for LLPs
LLPs are required to comply with several legal and regulatory requirements, including filing annual returns and maintaining proper books of accounts. LLPs are also required to appoint an auditor if their turnover exceeds a certain threshold.
Advantages of LLP over Partnership
Some of the advantages of LLP over partnership are as follows:
- Limited liability: LLP partners have limited liability, which means that their personal assets are not at risk in case of business debts.
- Separate legal entity: LLP is a separate legal entity from its partners, which means that it can own property, sue and be sued in its own name.
- Perpetual succession: LLP has perpetual succession, which means that the business will continue to exist even if one or more partners leave the business or pass away.
- Easy to set up: LLP is relatively easy to set up and operate compared to other forms of business entities.
- Greater credibility: LLP is considered more credible than partnerships as it is a registered entity with the government.
Disadvantages of LLP over Partnership
Some of the disadvantages of LLP over partnership are as follows:
- Compliance requirements: LLP is required to comply with several legal and regulatory requirements, which can be time-consuming and expensive.
- Limited flexibility: LLP has limited flexibility in terms of ownership and management structure, which can be a disadvantage for some businesses.
- Higher cost: The cost of setting up and maintaining an LLP is higher than that of a partnership.
Conclusion
In conclusion, partnership to llp conversion can be a beneficial move for businesses, especially those that want to limit their liability and establish a separate legal entity. However, the process of conversion involves several steps, and compliance requirements can be time-consuming and expensive.
Before making the decision to convert, businesses should carefully evaluate the advantages and disadvantages of LLP over the partnership and assess their business needs and goals.
It is recommended to consult with legal and financial experts before proceeding with the conversion process to ensure a smooth transition and avoid any legal or financial risks.