The Limited Liability Partnership has grown to be one of the most popular business structures in India. The current boom of start-ups in India has been fuelled by this very business structure, offering the benefits of a company as well as the flexibility of a partnership firm. Easy registration, ease of maintenance, and minimal compliance requirements make it an ideal business structure for several small and medium-sized businesses.
Breaking down LLP and Partnership
Partnership firms are registered under the Partnership Act, 1932. The registration, however, is itself not compulsory in a Partnership deed. Nevertheless, businesses opt for partnership to minimize the hassles of legal compliances. The partners of a Partnership firm registered under the Partnership Act, 1932, are accountable for an unlimited amount of partnership liabilities. There is no separate consideration for the company and the partners as legal entities in the partnership deed.
LLP on the other hand is registered under the Limited Liability Partnership Act, 2008. The Partners of an LLP, under the Act, are not personally liable for the partnership and it subsequently helps in the discharge of liabilities equally. However, a partner has a limited liability equal to the amount of capital contribution to the LLP. Hence, LLP and the partners of the respective LLP are considered separate legal entities.
Partnership firm against LLP
- Any Indian citizen, residing in India can be a partner in a Partnership firm, where there is no age-limit. A partnership firm can have a minimum of two partners while the upper limit is capped at 20.
- In a Partnership Firm, shares in a Partnership can be transferred to another person, only after obtaining the permission of each individual partner in the firm. Hence, the process of transferability of a partnership firm is a tedious one.
- The profits earned by a partnership firm are chargeable at 30% tax (plus Education cess) by law.. However, there is no need of annual return filing with the Registrar for a Partnership firm.
- LLP, in a similar manner to the partnership structure, offers any Indian Citizen residing in India, to be a partner. Foreign Direct Investment (FDI) is allowed, under an LLP with prior approval from the RBI. There is no limit on the number of partners in an LLP while the minimum number of partners should necessarily be two.
- The shares of an LLP can be transferred easily. The transferee, however, is not allowed to be a partner initially. Hence one can easily convert an LLP into a private limited company or a public one.
- The Profits of an LLP are chargeable at 30% tax +educational cess. LLP are bound to file anual returns with the Ministry of Corporate Affairs (MCA).
How to convert a Partnership Firm to a Limited Liability Partnership
In order to convert a Partnership Firm to a Limited Liability Partnership Firm (LLP), the following procedure would have to be undertaken:
Obtain DSC for Partners: Obtain Digital Signature Certificate (DSC) (Class 2) for the Partners. If the partners already hold a DSC then this step is not necessary.
Obtain DPIN/ DIN for Partners: Apply for Designated Partner Identification Number (DPIN)/ Director Identification Number (DIN) for the Designated Partners and Partners of the Limited Liability Partnership.
Obtain Name Approval: Decide the name with which the LLP is going to be incorporated and apply for Name Approval with the Ministry of Corporate Affairs by filing E-Form 1. The registrar will approve the name applied for provided that (a) the name is not undesirable in the opinion of the Central Government or (b) The name is not identical with or nearly resembles the name of any existing partnership firm or a LLP or a body corporate or a trade mark registered or pending registration under the Trade Marks Act, 1999. The reservation of name of LLP must be obtained first before applying for conversion of the Partnership Firm to LLP.
Apply for Conversion of Partnership Firm to LLP: File E-Form 17 to apply for conversion of Partnership Firm to Limited Liability Partnership along with incorporation application and subscribers sheet. The form can be downloaded from the MCA Portal. The following documents must be attached with E-Form 17:
- Statement of partners of the firm (may be attached in a tabular form)
- Incorporation Document & Statement in Form 2 filed electronically.
- Statement of Assets and Liabilities of the firm duly certified as true and correct by the Chartered Accountant in practice.
- List of all the creditors along with their consent to the conversion (may be given in the form of a tabular statement).
- Approval of the governing council (In case of professional firms)
- NOC from Income Tax authorities.
- Approval from any other body/authority as may be required.
- Particulars of pending proceedings from any court/Tribunal etc.
- Rejection letter of Registrar of any earlier application for conversion.
- Particulars of convictions, rulings, orders, judgement of Courts in favour or against the firm which are subsisting.
- Other optional attachments as may be required.
In addition, LLP Form 2 and LLP Form 3 must also be filed along with the following documents:
- Proof of Address of registered office of LLP
- Subscribers’ Sheet including consent
- Details of other LLPs/ Companies in which the Partner/ Designated Partner is a Director/ Partner
The Registrar will then issue the certificate of registration on conversion of the partnership firm into LLP in Form 19 of the LLP Rules & Forms 2008.
On issue of certificate of registration the new LLP thus formed shall within 15 days from the date of registration inform the concerned Registrar of Firms with whom the erstwhile firm was registered under Indian Partnership act, 1932 about such conversion in Form 14 of the LLP Rules & Forms 2008. Form 14 must be accompanied by the following attachments :
- Copy of Certificate of Incorporation of LLP formed.
- Copy of incorporation document submitted in Form 2 (with the Registrar of Firms)
- Other optional attachments as may be required.
The limited liability partnership shall ensure that for a period of twelve months commencing not later than fourteen days after the date of registration, every official correspondence of the limited liability partnership bears the following :
- a statement that it was, as from the date of registration, converted from a firm into a limited liability partnership; and
- the name and registration number, if applicable, of the firm from which it was converted.
The process of converting a partnership Firm to a Limited Liability Partnership is a lengthy procedure and it would be advisable to take professional help in order to make sure that all formalities are dealt with and all procedures completed.