In recent years, there has been a greater shift away from traditional partnerships and into Limited Liability Partnerships (LLPs). The rationale for this is that LLPs provide more flexibility, such as its provision for unlimited partners. The true driving force behind the transition, however, is that LLPs provide a significant advantage in terms of limited liability. Because LLPs are a mix of a partnership and a private limited company, the load on the partner’s personal assets is relieved.
The benefits of converting into an LLP Registration business structure surpass those of the regular partnership. Unlimited partners, limited liability and perpetual succession are some of the major factors for such conversion into an LLP.
Benefits of Conversion of Partnership to LLP
There are numerous benefits of converting partnership firm to an LLP, including:
1. More Investment Opportunities: Converting a partnership to an LLP opens up more investment prospects. The LLP structure attracts investors due to its limited liability feature and enhanced flexibility.
2. Perpetual Succession: Unlike traditional partnerships, the LLP enjoys the principle of perpetual succession. The exit or death of a partner does not lead to the dissolution of the LLP, ensuring continuity in operations.
3. Limited Liability Status: Through conversion to an LLP, partners gain limited liability status. This means that the partners’ personal assets are protected from the debts and dues of the LLP, providing financial independence.
4. Enhanced Decision-Making and Flexibility: LLPs offer increased flexibility in decision-making processes compared to traditional partnerships. This added flexibility allows for better management and adaptability to changing business needs.
5. Attracting Foreign Direct Investment (FDI): LLPs have more lenient regulations concerning Foreign Direct Investment (FDI) compared to partnerships. The relaxed FDI rules make LLPs more attractive to foreign investors.
Given below is a table of distinction between a partnership firm and LLP:
| Basis | Partnership | LLP |
|---|---|---|
| Separate Legal Entity | No | Yes |
| Liability | Unlimited liability and even the personal assets of partners may be made liable. | Limited upto the extent of capital contributed by each |
| Books of Accounts | Is Not mandatory. | Has to be prepared as per provisions of LLP Act. |
| Number of Members | Maximum no. is 20. Maximum is 10 for banking business. | No upper limit on maximum partners. |
| Digital Signature Certificate (DSC) | No such need | Designated partners are needed to have a DSC. |
Conditions for Converting a Partnership Firm to LLP
The conditions that must be factored in when converting a partnership firm into an LLP are:
1. Legal Provisions: The conversion of a partnership firm to an LLP is governed by Section 55 of the Limited Liability Partnership Act, 2008, in conjunction with Schedule II of the Act.
2. Unchanged Partners: All the existing partners of the partnership firm must become partners of the LLP; no new partners can be added during the conversion process. Similarly, the existing partners cannot cease to be partners while making the application for conversion.
The LLP formed after conversion must have the same partners as the original partnership firm. However, any partner desiring to exit the LLP may do so after the conversion process is completed.
3. Digital Signature and DPIN: Every partner must possess a valid Digital Signature Certificate (DSC) and at least two partners must have a Designated Partner Identification Number (DPIN) before applying for the conversion.
4. Registration under Partnership Act: The partnership firm intending to convert must be registered under the Partnership Act, 1932.
5. Consent of Partners: Consent from all the partners of the partnership firm is mandatory for the conversion to LLP.
Documents Needed to Convert a Partnership Firm Into an LLP
The following documents are needed to convert a partnership form into LLP:
To Be Submitted by Partners
When converting a partnership into an LLP, certain essential documents need to be provided by the partners, including:
- Scanned copy of PAN Card or passport (For Foreign Nationals & NRIs)
- Scanned copy of Aadhar Card/ Voter’s ID/Passport/Driver’s Licence
- Scanned copy of the latest bank statement/telephone/mobile bill or electricity/gas bill
- Scanned photograph that should be passport-sized
- Specimen signature
Note: One of the partners must self-attest the first three documents. For foreign nationals and NRIs, all the documents must be notarised (if currently in India or a non-Commonwealth country) or apostilled (if in a Commonwealth country).
For Registered Office
Apart from the partner-related documents, certain documents related to the registered office are also essential for the conversion process. The following documents must be provided:
- Scanned copy of bank statement or telephone or mobile bill or electricity or gas bill (latest)
- Scanned copy of the notarised rental agreement which is in English
- Scanned copy of NOC from the owner of property
- Scanned copy of the property deed or sale deed and must be in English for owned property
Process for Conversion of Partnership to LLP
Converting a partnership firm into an LLP involves several essential steps, which includes the following:
Step 1: Obtain DSC (Digital Signature Certificate of Partners)
- All partners of the existing partnership firm must first obtain a Digital Signature Certificate (DSC). The DSC is a significant electronic signature required for online filing during the conversion process.
Step 2: Obtain DIN or DPIN
- Next, partners need to obtain a Designated Partner Identification Number (DPIN). This identification number is essential for designated partners and once issued, it remains valid for life. If a partner already has a Director Identification Number (DIN), it can be used as the DPIN.
Step 3: Approval of Name
- The partners must choose an appropriate name for the LLP and get it approved. The name should comply with the LLP naming guidelines and should not be identical to any existing company or LLP name.
Step 4: Filing Form FiLLip
- Partners are required to file Form FiLLip, which is an application for reservation of the chosen name for the LLP. Once approved, the name will be reserved for 3 months.
Step 5: Drafting the LLP Agreement and Filing Form-3
- Partners need to draft the LLP agreement, which should include details about the LLP’s name, address, partners’ names, capital contribution, profit-sharing ratios and other terms and conditions. Once the LLP agreement is prepared, partners must file Form-3 with the Registrar of Companies (ROC). The LLP agreement must be printed on a non-judicial stamp paper and the original copy must be submitted with Form-3.
Step 6: Filing Form 17
- Partners need to file Form 17, which is an application for the conversion of a partnership into an LLP. This form must be digitally signed by all the partners and a practicing chartered accountant, company secretary or cost accountant. Along with the form, partners must submit the following documents:
- Consent of all the partners for the conversion.
- Certified statement of the assets and liabilities of the firm.
- Information regarding the firm’s creditors.
- Copy of Income Tax Returns of the Firm.
Step 7: Certificate of Incorporation
- After the successful submission of Form 17 and other required documents, the Registrar will issue a Certificate of Incorporation for the LLP. This certificate marks the completion of the conversion process.
Step 8: Application for PAN and TAN
- Following the issuance of the Certificate of Incorporation, partners must apply for a new Permanent Account Number (PAN) and Tax Deduction and Collection Account Number (TAN) for the LLP.
Step 9: Intimate Registrar of Firms
- Within 15 days of receiving the Certificate of Incorporation, partners must intimate the Registrar of Firms about the conversion. This is done by filing Form 14 with the ROC, providing details of the conversion.
Effect of Conversion from Partnership Firm to LLP
When a partnership is changed into an LLP, the partnership firm is presumed dissolved and its name is deleted from the Registrar of Firms’ registry. The Partnership firm’s assets, liabilities, rights, privileges and obligations are considered fully transferred to the LLP and the conversion has no effect on any existing contracts, employment or agreements.
The Partners will have limited liability protection for all transactions undertaken after the partnership is converted into an LLP. The Partners, however, will remain individually liable for all business undertaken as a Partnership prior to the conversion to LLP.
Furthermore, after the conversion to LLP, the LLP must include a statement in all official correspondence that it was changed from a Partnership to an LLP in a period of not less than 12 months from the date of conversion.
Final Thoughts
The conversion of a partnership firm to an LLP presents a profitable path for businesses seeking enhanced flexibility and limited liability benefits. LLPs attract more investors, ensure continuity through perpetual succession and protect partners’ personal assets from the firm’s debts.
This conversion process involves obtaining DSC and DPIN, approval of the LLP name, filing relevant forms with the Registrar and obtaining the Certificate of Incorporation. The effect of conversion transfers all assets and obligations from the partnership to the LLP, with limited liability for future transactions. Conversion into the LLP structure can guide businesses towards greater opportunities and secure growth in the competitive market.
For more clarity on the process of conversion from partnership firm to an LLP, connect with our experts at StartupFino.
