Conversion from firm to LLP

The conversion of a partnership firm into a Limited Liability Partnership (LLP) is a popular choice for businesses seeking to benefit from limited liability, enhanced credibility, and statutory recognition. Governed by the provisions of the Limited Liability Partnership Act, 2008, this process ensures a seamless transition while preserving the existing rights and obligations of the partners.

Overview of Conversion

Conversion refers to the process of transforming a partnership firm into an LLP, allowing the business to retain its existing obligations, contracts, and goodwill while gaining the advantages of an LLP.

• Governing Provisions:

The conversion is governed by Sections 55-58 of the LLP Act, 2008, read with Schedule II of the Act. These sections outline the eligibility, process, and implications of the conversion.

Reasons for Conversion:

• Limited Liability:

Unlike a partnership firm, where partners have unlimited liability, an LLP limits the liability of partners to their agreed contribution.

• Perpetual Succession:

An LLP enjoys perpetual existence, unaffected by the death, insolvency, or withdrawal of any partner.

• Legal Recognition:

LLPs are recognized as separate legal entities, offering better credibility and trust among stakeholders.

• Flexibility in Ownership:

LLPs allow easy transfer of ownership and entry of new partners without disrupting business continuity.

• Tax Efficiency:

LLPs enjoy certain tax benefits and are not subject to the dividend distribution tax applicable to companies.

Eligibility Criteria for Conversion:

• Existing Partnership Firm:

Only a registered partnership firm under the Indian Partnership Act, 1932, is eligible for conversion.

• All Partners to Agree:

All partners of the firm must consent to the conversion, and they must become partners in the LLP after the conversion.

• No Pending Legal Proceedings:

The firm should not have ongoing legal disputes or liabilities that could hinder the conversion process.

• Compliance with LLP Rules:

The firm must adhere to the provisions of the LLP Act, 2008, including the minimum number of partners (two) and other statutory requirements.

Procedure for Conversion:

The conversion involves several steps, as outlined below:

Step 1: Obtain Digital Signature Certificate (DSC)

• Every designated partner of the LLP must obtain a DSC to file electronic forms with the Ministry of Corporate Affairs (MCA).

Step 2: Apply for Director Identification Number (DIN)

• The designated partners must apply for a DIN through the MCA portal by submitting Form DIR-3.

Step 3: Name Approval

• File Form RUN-LLP (Reserve Unique Name) with the MCA to reserve the name of the LLP. The name must include “LLP” or “Limited Liability Partnership” and should not conflict with existing names.

Step 4: File Application for Conversion

• Submit Form 17 to the Registrar of Companies (RoC) for the conversion of the partnership firm into an LLP. This form must include:
  • Details of the partnership firm and its partners.
  • Consent of all partners for the conversion.
  • Statement of assets and liabilities certified by a Chartered Accountant.
  • A copy of the partnership deed.

Step 5: Draft and File LLP Agreement

• Prepare the LLP agreement, which outlines the rights, duties, and profit-sharing ratios of the partners. File the agreement with Form 3 within 30 days of incorporation.

Step 6: Certificate of Incorporation

• Upon verification, the RoC issues a Certificate of Incorporation (COI), officially recognizing the LLP. The date on the COI marks the completion of the conversion.

Step 7: Update Records and Inform Authorities

• Update all business records, bank accounts, and statutory registrations to reflect the new LLP status. Notify relevant authorities, such as GST and income tax departments, about the change.

Legal and Financial Implications

• Transfer of Assets and Liabilities:

All assets, liabilities, rights, and obligations of the partnership firm automatically transfer to the LLP upon conversion.

• Continuation of Contracts:

Contracts entered into by the firm remain valid and enforceable, ensuring business continuity.

• Tax Implications:

The conversion does not attract capital gains tax if it complies with specific conditions under the Income Tax Act, 1961, such as all partners of the firm becoming partners in the LLP.

• No Fresh Registrations:

Licenses and approvals held by the partnership firm remain valid for the LLP, subject to intimation and necessary updates.

Benefits of Conversion:

• Enhanced Credibility:

LLPs are more credible due to their statutory recognition and separate legal status.

• Reduced Liability Risk:

Partners’ liability is limited to their contribution, protecting personal assets.

• Better Governance:

LLPs are governed by structured regulations, ensuring transparency and accountability.

• Attracting Investors:

LLPs are better positioned to attract investments compared to traditional partnership firms.

Challenges in Conversion:

• Compliance Requirements:

LLPs must adhere to stricter compliance norms, such as maintaining financial records and filing annual returns.

• Increased Costs:

The conversion process involves costs for professional services, government fees, and compliance.

• Loss of Informality:

LLPs operate under formal regulatory frameworks, reducing the flexibility of decision-making.