CONVERT YOUR BUSINESS
PARTNERSHIP FIRM VS LIMITED LIABILITY PARTNERSHIP
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PARTNERSHIP TO LLP
PARTNERSHIP FIRM VS LIMITED LIABILITY PARTNERSHIP (LLP)
In India, there are two common types of partnership-based business models: general partnerships and limited liability partnerships (LLPs).
A general partnership is an arrangement in which two or more people share ownership and responsibility for a business. In a general partnership, each partner is personally liable for the partnership’s debts and obligations. This means that if the partnership cannot pay its debts, the partners may be held personally responsible for them.
On the other hand, a limited liability partnership (LLP) is a type of partnership in which each partner’s liability is limited to the amount they have invested in the business. This means that the personal assets of the partners are protected from the liabilities of the business. LLPs are governed by the Limited Liability Partnership Act of 2008.
A Limited Liability Partnership firm is a perfect combination of the recognition and security offered by a Private Limited Company while at the same time retaining the ease of setting up and running a Partnership Firm. An LLP has few extra compliances in comparison to a Partnership firm but far less than a Private Limited Company.
Hence it is an optimal choice for adopting a Limited Liability Partnership kind of Business model in comparison to a Partnership type model 90% of the time.
ADVANTAGES
ADVANTAGES OF A LIMITED LIABILITY PARTNERSHIP OVER A GENERAL PARTNERSHIP FIRM
Limited Liability Partnership (LLP) offers several advantages over a traditional partnership firm in India, which includes:
Limited Liability:
One of the most significant advantages of an LLP over a partnership firm is the limited liability protection it provides to its partners. In an LLP, the partners’ liability is limited to the extent of their contribution to the business, and they are not personally liable for any debt or obligation incurred by the business. This means that the personal assets of the partners are protected in case of any financial losses or legal liabilities incurred by the LLP.
Separate Legal Entity:
An LLP is a separate legal entity from its partners, which means it can enter into contracts, own property, sue, and be sued in its own name. This makes an LLP a more credible and reliable entity, which can enhance its ability to do business with other companies, secure financing, and enter into agreements with vendors, customers, and employees.
Perpetual Succession:
An LLP has perpetual succession, which means that the existence of the LLP is not affected by the death, retirement, or insolvency of any of its partners. This ensures continuity in the business, and the LLP can continue to operate even if one or more partners leave the business.
Flexibility in Management:
An LLP provides flexibility in management, as the partners are free to manage the business as per their agreed terms and conditions. LLPs do not have any restrictions on the number of partners or the nature of the business, which makes it easier to add or remove partners, bring in new business ideas, and raise capital.
Overall, the limited liability protection, separate legal entity status, perpetual succession, flexibility in management, and lower compliance burden make LLPs a preferred choice for many businesses in India, especially those involved in high-risk sectors, like finance, real estate, and construction.
PARTNERSHIP FIRM TO AN LLP?
CAN YOU CONVERT YOUR EXISTING PARTNERSHIP FIRM TO AN LLP?
Yes, there is a provision in Section 55 of the Limited Liability Partnership Act 2008 to convert your Partnership Firm to an LLP. But there are certain prerequisites to be met before the conversion of your firm.
Prerequisites for Conversion
To convert a Partnership firm to a Limited Liability Partnership (LLP) in India, the following prerequisites must be met:
- The Partnership firm must be registered under the Indian Partnership Act, 1932, and have at least two partners.
- All partners of the Partnership firm must consent to the conversion to an LLP and become partners in the LLP.
- The Partnership firm must not have any pending income tax returns or statutory dues to be paid to any authority.
- The Partnership firm must have a valid PAN and TAN.
- The Partnership firm must have a registered office address, which can be used as the registered office address of the LLP.
- The Partnership firm must have a valid email address and phone number for communication purposes.
- The Partnership firm must obtain a Digital Signature Certificate (DSC) for all partners who will become designated partners of the LLP.
- The Partnership firm must obtain a Designated Partner Identification Number (DPIN) for all designated partners of the LLP.
- The Partnership firm must have a name that complies with the LLP naming guidelines and is not similar to any existing LLP or company name.
- The Partnership firm must have complied with all regulatory requirements, including filing of annual returns, payment of taxes, and maintenance of proper accounting records.
PROCESS
PROCESS OF CONVERSION OF YOUR PARTNERSHIP FIRM TO AN LLP
The procedure to convert a Partnership firm to a Limited Liability Partnership (LLP) in India is as follows:
STEP: 1
Obtain Digital Signature Certificate (DSC) and Designated Partner Identification Number (DPIN) for all partners who will become designated partners of the LLP.
STEP: 2
File an application for reservation of name in Form-1 of the LLP Act, 2008, with the Registrar of Companies (RoC). The name should be unique, not similar to any existing LLP or company name, and should comply with the LLP naming guidelines.
STEP: 3
Once the name is approved, file Form-17, which is the application for conversion of a partnership firm into an LLP, along with Form-2, which contains details of the LLP’s proposed partners, designated partners, and registered office address.
STEP: 4
File Form-3 with the RoC within 30 days of the date of registration of the LLP, along with the LLP Agreement, and the following documents:
STEP 5. Intimation to Registrar of Firms (Form 14):
You would have already registered your Partnership Firm with the Registrar of Firms. This intimation is made to let the Registrar of Firms to know that you have converted your Partnership Firm to an LLP. Upon receiving your intimation, the Registrar will remove your Partnership Firm from the List of Partnership Firms he maintains in his register. This intimation should be given on or before 15 days from the date of incorporation of your LLP.
STEP: 6. Receiving your Incorporation Certificate:
Once the Registrar is satisfied that all requirements have been complied with, he will issue a Certificate of Incorporation, and the partnership firm will be deemed to be converted into an LLP on the date specified in the certificate.
STEP: 7. Drafting your LLP Agreement
Draft an LLP Agreement that specifies the rights and obligations of the partners, the nature of business, profit-sharing ratio, capital contribution, etc. The LLP Agreement should be executed and notarized by all partners. This agreement should be submitted to the Registrar of Companies within 30 days from receiving your Incorporation Certificate.
ADDITIONAL COMPLIANCES
WHAT ARE THE ADDITIONAL COMPLIANCES TO BE ADHERED AFTER CONVERTING YOUR PARTNERSHIP FIRM TO AN LLP?
Limited Liability Partnerships (LLPs) have additional compliance requirements in comparison to a General Partnership Firm in India. Some of these additional compliance requirements are:
Annual filings:
LLPs are required to file annual returns and financial statements with the Registrar of Companies (RoC). The annual return contains details of the LLP’s partners, business activities, and financials, while the financial statements include the balance sheet, profit and loss account, and cash flow statement. In contrast, a partnership firm does not have to file any annual returns or financial statements with any regulatory authority.
Audit requirements:
LLPs are required to get their accounts audited by a qualified Chartered Accountant if their annual turnover exceeds Rs. 40 lakhs, or if their contribution exceeds Rs. 25 lakhs. However, if the partnership firm’s turnover is below Rs. 1 crore and its capital account is less than Rs. 50 lakhs, it is not required to undergo a statutory audit.
Appointment of Designated Partners:
Every LLP must have at least two Designated Partners, out of which one must be a resident of India. The Designated Partners are responsible for ensuring compliance with the LLP Act and rules, maintaining records, and filing documents with the RoC. There is no such requirement for a partnership firm to appoint designated partners.
Compliance Certificates:
LLPs are required to obtain compliance certificates from a qualified Company Secretary or Chartered Accountant on an annual basis. The compliance certificate certifies that the LLP has complied with all the legal requirements under the LLP Act and rules. There is no such requirement for a partnership firm to obtain compliance certificates.
PAN and TAN Registration:
LLPs are required to obtain a Permanent Account Number (PAN) and Tax Deduction and Collection Account Number (TAN) from the Income Tax Department, which is not a requirement for a partnership firm.
Overall, LLPs have additional compliance requirements, which are meant to ensure transparency, accountability, and good corporate governance. It’s important to ensure that these requirements are met to avoid any penalties or legal consequences.
HOW CAN TAXKEY HELP?
HOW CAN TAXKEY HELP YOU IN YOUR JOURNEY?
Taxkey, as a registered Tax Practitioner, has helped hundreds of Partnership Firms convert their businesses to LLPs and successfully resume their operations.
Some of the ways Taxkey can help include:
- Conversion Process: As discussed earlier, converting your Partnership Firm to a Limited Liability Partnership (LLP) involves a lot of legal compliances, required documents and frequent follow-up with the relevant Government Bodies. It will be overwhelming for you to keep track of all this stuff at once, and that is where Taxkey can help. Our professionals are highly experienced and helped hundreds of companies convert their business. So, please sit back and relax our professionals will do the needful for you.
- Acquiring required Documents: By now, it will be apparent that several documents are required to convert your Partnership firm to an LLP. Some documents include DSC for all your Partners, DPIN for all your Designated Partners, Procuring and filling the required forms like Form 2, Form 14 & Form 17, Drafting your LLP agreement etc. Acquiring these documents, filling them and submitting them to the proper authorities may look like a Himalayan task to novices. But to Taxkey, it is just another cakewalk. So, trust us; we’ll help you through every step of the process.
- Additional Compliances: A new journey begins once you have completed the conversion process. The annual compliance requirements for an LLP will be utterly different from the Compliance processes for a Partnership firm you are used to. So, during the initial phases, TAXKEY will guide you through every step of the process and ensure that your company completely adheres to the compliance requirements of the Indian Government.
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