Convert Partnership Firm to LLP
As the business landscape evolves and changes, so do the structures available to organize and operate a business. One such structure that has gained popularity in recent years is the Limited Liability Partnership (LLP). With the advantages that LLPs offer, many partnerships in India are now opting to convert and restructure themselves as LLPs. In this blog post, we will dive into the process of converting a Partnership firm to an LLP in India, along with its benefits, requirements, and documents needed to complete the conversion successfully.
Explanation of the shift from traditional partnerships to Limited Liability Partnerships (LLPs)
In recent years, there has been a significant shift from traditional partnerships to Limited Liability Partnerships (LLPs). This change is due to LLPs offering greater flexibility, such as allowing unlimited partners, and limited liability for partners. Small and medium-sized businesses find LLPs to be a suitable organizational structure for their needs. The advantages of LLPs include limited liability, perpetual succession, and unlimited partners. One of the key differences between partnerships and LLPs is that the personal assets of partners in partnerships are liable, whereas in LLPs they are only liable to the extent of their capital contribution.
LLPs offer several features that make them a desirable option over traditional partnerships, such as allowing partners flexibility in conducting operations, allowing professionals of various disciplines to work together, and the death of a partner not affecting the existence of the LLP. Foreign investors and venture capital funds also view LLPs as an investment opportunity due to their corporate structure and organization. Overall, the trend towards LLPs is driven by their flexibility, limited liability, and suitability for small and medium-sized businesses.
Advantages of LLPs for small and medium-sized businesses
Limited Liability Partnerships (LLPs) are a popular choice for small and medium-sized businesses due to their numerous advantages. These advantages include:
1. Limited Liability: LLPs offer limited liability protection to their partners, which means that their personal assets are not at risk if the business incurs any debts or liabilities.
2. Flexible Structure: LLPs have a flexible structure that allows for limitless partners, making it easy to raise capital and expand the business.
3. Tax Benefits: LLPs are taxed at a lower rate compared to companies, and they are eligible for several tax deductions and exemptions, which can help reduce their tax liability.
4. Perpetual Existence: LLPs enjoy a perpetual existence, which means that the business can continue to operate even if one of the partners decides to leave or pass away.
5. Efficient Management: LLPs have a more efficient management system compared to traditional partnerships, making it easier to run the business and make important decisions.
Overall, LLPs offer small and medium-sized businesses greater flexibility, protection, and tax benefits, making them a popular choice for entrepreneurs and startups.
II. Conditions for Converting a Partnership Firm to LLP
Sections 55 and Schedule II of the LLP Act
Sections 55 and Schedule II of the LLP Act provide detailed guidelines for the conversion of a traditional partnership into a Limited Liability Partnership (LLP). The conversion process is governed by specific rules and regulations that must be followed to ensure a smooth transition. The Second Schedule of the LLP Act outlines the provisions relating to the conversion of partnerships to LLPs, and it specifies that a partnership firm must comply with the requirements set forth in Schedule II to convert into an LLP. This includes obtaining consent from all partners, having a valid Digital Signature Certificate (DSC), obtaining Director Identification Number/Designated Partner Identification Number (DIN/DPIN) for designated partners, and filing the necessary forms with the Registrar of Companies (RoC). Additionally, the LLP must have the same partners as the partnership firm it is converting from, and the transfer of assets, liabilities, and obligations must also be carried out in accordance with the Second Schedule. It is essential to include a statement of conversion in official correspondence to ensure compliance with applicable laws and regulations.
Consent of all partners
In order to convert a partnership firm into an LLP in India, the consent of all partners is crucial. According to Section 55 of the Limited Liability Partnership Act of 2008 read with Schedule II of the Act, all partners of the partnership entity being converted must be partners of the LLP as well. Thus, before submitting an application for conversion, all partners must agree and give written consent for the shift. It is important to note that there cannot be any new partners during the application process. In addition, all partners of the partnership firm must possess a current Digital Signature Certificate (DSC) and at least two partners must have a Designated Partner Identification Number (DPIN). Furthermore, the partners of the LLP must be the same as those of the partnership firm. Once the conversion is completed, any partner who wishes to leave the LLP can do so. Overall, obtaining the consent of all partners is an important initial step in the process of converting a partnership firm into an LLP.
Valid Digital Signature Certificate (DSC) and DPIN for partners
In order to convert a partnership firm to a Limited Liability Partnership (LLP) in India, it is mandatory for all partners of the partnership firm to hold a Valid Digital Signature Certificate (DSC) and at least two partners must have a Designated Partner Identification Number (DPIN). The DSC is a prerequisite for e-filing and is utilised to authenticate documents in electronic format. It is crucial that each partner understands the significance and process of obtaining a DSC. The application for obtaining a DSC is submitted electronically to a Certifying Authority (CA) and then personally verified by the CA. The DPIN is a unique identification number that is assigned to each designated partner, which acts as a unique identifier and is used to access the central database of the Ministry of Corporate Affairs (MCA). This process can be easily completed online and requires submission of basic details along with identification proof and address proof of each designated partner. It is important to note that all the partners must have these certificates in place before applying for the conversion of the partnership firm to an LLP.
Partnership firm must be registered under Partnership Act 1932
In to convert a partnership firm into a Limited Liability Partnership (LLP) in India, there are certain conditions that need to be fulfilled as per Section 55 of the Limited Liability Partnership Act 2008 read with Schedule II of the Act. One such condition is that the partnership firm must be registered under the Partnership Act 1932. It is mandatory for all partners to give their consent to the conversion process, and the LLP must have the same partners as that of the partnership firm. Furthermore, any partner that wishes to be removed from the LLP may be removed after the conversion is complete. Director Identification Number (DIN)/Designated Partner Identification Number (DPIN) must be obtained for all designated partners, and all partners must hold a valid Digital Signature Certificate (DSC). Once all these conditions are met, the procedure for conversion into an LLP can be initiated, which involves obtaining name approval and filing of forms with the Registrar of Companies (RoC), amongst other formalities. It is important to note that the conversion process must include the transfer of assets, liabilities, and obligations from the partnership firm to the LLP.
LLP must have same partners as partnership firm
In order to convert a partnership firm to a Limited Liability Partnership, it is mandatory for the LLP to have the same partners as the original partnership firm. This means that there cannot be any new partners or existing partners leaving the partnership during the conversion process. All partners of the original partnership must become partners of the LLP. Furthermore, the partners must have a valid Digital Signature Certificate and Designated Partner Identification Number. Every partner in the partnership firm must contribute to the LLP in the same proportion in which their capital accounts stood in the books of the firm. Consent in writing from all partners for the conversion is also necessary. All the partners should have up-to-date filing of income tax returns. Approval from creditors shall also be given for the proposed conversion. Lastly, at least one designated partner shall be resident in India, and all designated partners must have DPIN and DSC.
Obtain DIN/DPIN for designated partners
One important requirement when converting a partnership firm into an LLP is for the designated partners to obtain a DPIN (Designated Partner Identification Number) from the central government. This DPIN serves as a registration number that verifies the legal validity of the designated partner. To obtain a DPIN, the applicant must fill out Form DIR-3 and acquire a Class 2 digital signature, which has to be verified by the directors of the company. Foreign nationals must submit their passports as identity proof. The applicant also needs to make an electronic payment on the MCA website to complete the process. It is important to note that a DPIN is mandatory for anyone wanting to become a designated partner, as required by Section 7(6) of the Limited Liability Partnership Act 2008. Every designated partner is eligible to obtain a DPIN, and it is required for regulatory and legal compliance. Additionally, under Indian law, every LLP must have at least two designated partners, one of which must be an Indian resident who has stayed in India for more than 182 days in the last year.
III. Procedure for Conversion of Partnership Firm to LLP
Name Approval and DSC
In to convert a partnership firm to an LLP, the first step is to obtain name approval and Digital Signature Certificates (DSC). The MCA portal provides an option called RUN-LLP, under the MCA Services tab, and the “Conversion of Firm into LLP” option needs to be selected from the dropdown list. Two proposed names for the LLP need to be given, after which any supporting documents may be uploaded in PDF format before submitting it. The Designated Partners must have their own Digital Signature Certificates, and every e-form requires DSCs of the Designated Partners to be affixed to the relevant forms for successful submission. After submitting the name and DSC, the partners need to file Form 17(Application and Statement for conversion of firm into LLP) with the RoC. This Form emphasizes the consent of all partners and ensures that all partners become a part of the LLP. In addition, getting a Director Identification Number (DIN) or Designated Partner Identification Number (DPIN) is mandatory for all designated partners before proceeding with the conversion process.
Filing of forms with RoC
Once the partners obtain their Digital Signature Certificate (DSC) and Designated Partner Identification Number (DPIN), they can move on to filing the necessary forms with the Registrar of Companies (RoC). Here’s what you need to know about filing these forms:
1. Name Approval – The first step is to reserve a unique name for your LLP through the RUN-LLP form on the MCA portal. The form requires you to provide two proposed names for the LLP, along with supporting documents in PDF format. Once the name is reserved, it is valid for 90 days.
2. Filing Forms with the RoC – The LLP form 2 needs to be filed with the RoC to incorporate the LLP. This form contains details of the LLP, partners’/designated partners’ details and consent to act as partners/designated partners. Additionally, Form 17 (application and statement for conversion of a firm into LLP) needs to be filed along with Form 2 for converting an existing partnership firm into an LLP.
3. LLP Agreement – Executing the LLP Agreement is mandatory and needs to be filed with the RoC in eForm 3 within 30 days of incorporation of LLP.
4. Appeal and Rejection – A conversion application (Form 17 or 18) can be rejected by the Registrar if found inappropriate, and the applicant has the option to appeal. If marked for re-application, the applicant has 60 days to file fresh forms.
By following these procedures for filing with the RoC, you can smoothly convert your partnership firm into an LLP.
Form 17 application and statement
LLP formation requires the filing of Form 17, which is an application and a statement for the conversion of a partnership firm into a limited liability partnership. The form must be filed along with the incorporation application and subscribers’ sheet while converting a partnership firm into an LLP. The form includes the details of the consent of partners of the firm, the statement of assets and liabilities of the firm certified by the Chartered Accountant, and a copy of the acknowledgement of the latest income tax return. An approval from any regulatory body or authority is mandatory, along with the list of all secured creditors, including their consent to the conversion and the clearance or no-objection certificate from tax authorities. The LLP Form 17 must be digitally signed by a designated partner and a chartered accountant or cost accountant or company secretary. Once the LLP is incorporated and the partnership firm is converted, all properties, assets, interests, rights, privileges, liabilities, and obligations of the firm are transferred to the LLP.
IV. Transfer of Licenses, Registrations, and Property
Licensing and registration transfer process
After converting your Partnership firm into an LLP, licenses, permits, and registrations issued in the name of the partnership firm won’t be automatically transferred to the LLP. You must approach concerned authorities and take steps to transfer properties registered under the Partnership firm prior to the conversion. It is important to clarify all procedural aspects with the concerned licensing or registration authorities prior to beginning the process of conversion into LLP. Moreover, the LLP must inform the concerned Registrar of Firms about the conversion within 15 days from the date of conversion through the prescribed forms.
Once converted, the Partnership firm is deemed dissolved, removing its name from the register of Registrar of Firms. All assets, liabilities, rights, privileges, and obligations of the Partnership firm are wholly transferred to the LLP. However, this conversion doesn’t affect any existing contracts, employment agreements, etc. In terms of limited liability protection, partners enjoy it for all transactions conducted after the conversion, whereas personal liability for all business conducted as a Partnership prior to the conversion remains. It’s crucial to include a statement that the LLP was converted from a Partnership into an LLP in all official correspondence for at least 12 months from the date of conversion.
Dissolution of partnership firm
When converting a partnership firm into an LLP in India, one crucial aspect that needs to be taken into consideration is the dissolution of the partnership firm. This process involves the transfer of assets, liabilities, and obligations of the partnership firm to the newly formed LLP. It is important to note that all partners of the partnership firm must give their consent for the conversion process, including the dissolution of the partnership firm. After the conversion is complete, any partner who wishes to leave the LLP may do so. A term of dissolution must be mutually agreed upon by the firm to dissolve. The LLP must legally take over all the assets and liabilities of the partnership firm, and this process must comply with Section 55 of the Limited Liability Partnership Act 2008 read with Schedule II of the Act. With the right documentation, procedures, and support, the dissolution of a partnership firm during the conversion to an LLP can be executed without any legal complications.
Transfer of assets, liabilities, and obligations
When converting a partnership firm to a Limited Liability Partnership (LLP), it is important to consider the transfer of assets, liabilities, and obligations. The LLP takes over all the assets and liabilities of the partnership firm and hence its operations continue without any disruption. The transfer of assets takes place by way of an agreement and executed in the presence of a Notary Public. This is important to ensure that all assets and liabilities are fully accounted for, and there is no dispute or confusion later on.
As for the liabilities and obligations, they will continue to be borne by the LLP in the same manner as the partnership firm. This means that any pending lawsuits, contracts, or obligations will be transferred to the LLP and the partners will not be personally liable for them. It is important to note that the LLP must maintain accurate records of all assets and liabilities to ensure proper compliance with the law.
In summary, the transfer of assets, liabilities, and obligations is an essential part of converting a partnership firm to an LLP, and it is crucial to ensure that it is done in a proper and legal manner.
Importance of including statement of conversion in official correspondence
After converting a partnership firm to an LLP, it’s important to include a statement of conversion in all official correspondence for a period of not less than 12 months from the date of conversion. This statement should clearly indicate that the LLP was converted from a partnership firm. This is important for several reasons. First, it helps prevent confusion among clients, vendors, and other stakeholders who may have known the company as a partnership firm. Second, it maintains transparency and clarity in business communications, which can help build trust among partners, customers, and regulators. Finally, it helps prevent legal disputes and misunderstandings that could arise in the future. By including this statement in all official correspondence, the LLP can clearly establish its legal status and avoid any potential conflicts that might arise due to confusion about its status.