Overview: Partnership to LLP Conversion
Converting a traditional Partnership Firm into a Limited Liability Partnership (LLP) is a strategic move for growing businesses. An LLP combines the flexibility of a partnership with the benefits of a company, most notably limited liability for its partners.
This conversion is governed by Section 55 of the Limited Liability Partnership Act, 2008, read with the Second Schedule. Upon conversion, the LLP takes over all assets, liabilities, rights, and obligations of the erstwhile partnership firm.
Why Convert to an LLP?
- Limited Liability: Partners' personal assets are protected from business debts. In a partnership firm, liability is unlimited.
- Separate Legal Entity: The LLP has a distinct legal identity separate from its partners, allowing it to own property and sue/be sued in its own name.
- Perpetual Succession: The LLP continues to exist even if partners change, retire, or pass away.
- No Limit on Partners: unlike a partnership firm (max 50), an LLP can have an unlimited number of partners.
- Better Credibility: LLPs are registered with the Ministry of Corporate Affairs (MCA), offering higher trust for banks and investors.
Eligibility Conditions for Conversion
To convert a partnership firm into an LLP, the following conditions must be met:
- The partnership firm must be registered under the Indian Partnership Act, 1932.
- All partners of the firm must become partners of the proposed LLP. No new partner can be added at the time of conversion.
- The firm must have the consent of all its secured creditors for the conversion.
- At least one Designated Partner must be a resident of India.
- All partners must have a valid Digital Signature Certificate (DSC).
Step-by-Step Conversion Process
- Obtain DSC & DPIN: All partners must get a Digital Signature Certificate (DSC). At least two partners need a Designated Partner Identification Number (DPIN).
- Name Reservation (RUN-LLP): Apply for the LLP name reservation. Ideally, use the same name as the partnership firm.
- File Form 17 (Application for Conversion): This form contains the statement of partners and details of the firm's assets/liabilities.
- File Form FiLLiP (Incorporation): Filed along with Form 17, this form contains details of the registered office, partners, and consent.
- Certificate of Incorporation: The Registrar of Companies (RoC) verifies the documents and issues the Certificate of Incorporation.
- File LLP Agreement (Form 3): Within 30 days of incorporation, the LLP Agreement must be filed.
- Intimate Registrar of Firms (Form 14): Inform the Registrar of Firms about the conversion within 15 days.
Documents Required
- Partnership Deed: Copy of the latest partnership deed.
- Statement of Assets & Liabilities: Certified by a Chartered Accountant.
- Consent of Partners: Written consent from all partners for conversion.
- Creditors' Consent: No Objection Certificate (NOC) from all secured creditors.
- ITR Acknowledgement: Copy of the latest Income Tax Return of the firm.
- KYC of Partners: PAN Card, Aadhaar Card, and Address Proof (Voter ID/Passport/Driving License).
- Registered Office Proof: Utility bill (Electricity/Gas) + Rent Agreement + NOC from owner.
Tax Implications (Capital Gains Exemption)
The conversion is generally tax-neutral (no Capital Gains Tax) if the following conditions under Section 47(xiii) of the Income Tax Act are met:
- All assets and liabilities of the firm transfer to the LLP.
- All partners of the firm become partners of the LLP.
- Capital contribution and profit-sharing ratio remain the same as in the firm.
- Partners do not receive any consideration other than share in profit/capital.
- The aggregate profit-sharing ratio of the original partners remains at least 50% for 5 years.
- The turnover of the firm in any of the last 3 years did not exceed ₹60 Lakhs.
