Conversion of Proprietorship Firm into LLP

Are you a sole proprietor looking to expand your small or medium enterprise? Converting your proprietorship firm into a Limited Liability Partnership (LLP) may be the answer you’re looking for. However, as a sole proprietorship cannot be directly converted into an LLP, there are a few steps you need to take. In this blog post, we’ll guide you through the process of converting your proprietorship firm into an LLP in India and highlight the benefits and advantages that come with making the switch. So, let’s dive in!

I. Introduction

Definition of a sole proprietorship firm:

A proprietorship firm is a type of business entity which is owned and operated by a single individual. It is the simplest and most common form of business ownership in India. In a sole proprietorship, the owner is responsible for all debts and liabilities incurred by the business and has complete control over all decisions of the business. The proprietor is also the only one who receives profits and bears losses. Since there is no legal distinction between the owner and his/her business, all profits and losses are treated as personal income or loss. This type of business does not require any separate legal registration, and the proprietor has unlimited liability. However, being a one-person entity, a sole proprietorship cannot be directly converted into a limited liability partnership (LLP). It can either be closed and an LLP registered or include another person as a partner and then converted.

II. Conversion Process

Inability to directly convert a sole proprietorship into an LLP

Con a sole proprietorship firm into an LLP may seem like an easy process, however, it cannot be directly done due to certain limitations. As a sole proprietorship firm has only one person, it cannot be converted directly into an LLP. In such a case, the conversion can be done by either closing the proprietorship and registering an LLP or by including another person in the business and making them a partner, and then converting it to an LLP. Moreover, the conversion of a proprietorship to LLP involves a cumbersome process of obtaining a Designated Partner Identification Number (DPIN), which requires a passport-sized photograph, a scanned copy of relevant identification and address proof, a soft copy of the PAN card, and a completely filled form. If the partner is a non-resident Indian, then the passport copy and address proof should be notarized by the Indian embassy, a foreign public notary, or company secretary in full-time employment.

Options for conversion: closing the proprietorship or including another partner

When it comes to converting a sole proprietorship into an LLP, there are two options available, and both require careful consideration. The first option is to close the proprietorship and register as an LLP. This means terminating the sole proprietorship and starting afresh as an LLP. The second option is to include another partner in the existing business and convert it into an LLP. This will require finding the right partner and making sure that both partners are ready for a long-term commitment.
While the second option may seem more appealing, it’s essential to consider the implications of bringing in another partner, including sharing profits and decision-making responsibilities. On the other hand, if you choose to close the proprietorship, you will need to settle all outstanding debts, pay off any liabilities and distribute any remaining profits before starting the new LLP.

Ultimately, the decision of which option to choose depends on the individual circumstances of the business owner and their long-term goals.

Requirements for Designated Partner Identification Number (DPIN)

In for a person to become a designated partner in a Limited Liability Partnership (LLP) in India, they are required to obtain a Designated Partner Identification Number (DPIN). This registration is mandatory and can only be obtained by a natural person, not artificial legal entities like companies or LLPs. To obtain DPIN, the applicant must submit proof of identity, such as a PAN card for Indian Nationals or a passport for Foreign Nationals, along with proof of address, attested by a Gazetted Officer, Notary Public, or Chartered Accountant. It is also necessary to submit a passport-sized photograph and a soft copy of the PAN card. Applicants must also obtain a Class 2 digital signature and fill out an electronic form, Form DIR-3. Once the form and necessary documents are uploaded on the MCA website, the applicant is required to make an electronic payment. The DPIN will then be allotted to the applicant. DPIN is essential for verifying the legal validity of a designated partner.

III. Documents Required

Passport-sized photograph

For Designated Partner Identification Number (DPIN) requirement during the conversion of a proprietorship firm to an LLP, a passport-sized photograph is needed along with other documents. This photograph should be clear, and the face of the person should be visible without any disturbance. Along with the photograph, scanned copies of the relevant identification and address proof are also required, along with a soft copy of the PAN card. If a non-resident Indian is involved, they should submit a notarized copy of the passport and address proof from the Indian embassy or foreign public notary or company secretary in full-time employment.
Having a clear passport-sized photograph is essential, as it helps in identity verification and should be submitted with all the correct documents. The photograph must be recent, as an outdated photograph may cause issues in verification. Therefore, one must take care to submit a clear and precise passport-sized photograph along with the required documents during the conversion of a proprietorship firm to an LLP.

Scanned copy of relevant identification and address proof

For the conversion of a proprietorship firm into an LLP in India, the partners need to submit scanned copies of relevant identification and address proof. These documents include a passport-sized photograph, a soft copy of PAN card and a scanned copy of either a telephone bill, driver’s license or previous two months bank statement. In case the partner is a non-resident Indian, a copy of the passport will replace the PAN card. However, it is important to note that the passport copy and address proof should be notarized by the Indian embassy, a foreign public notary or a company secretary in full-time employment. Once the designated partners have obtained the necessary Designated Partner Identification Number (DPIN), they need to submit the required documents such as Form 1 for name confirmation and Form 2 for incorporating an LLP after the incorporation of the LLP. An initial LLP agreement is also required to be filed within 30 days of incorporation of LLP. With all the necessary documents in place, the conversion of a proprietorship firm into an LLP in India can be a smooth and hassle-free process.

Soft copy of PAN card

One the key requirements for converting a proprietorship firm into an LLP is obtaining a Designated Partner Identification Number (DPIN) for the partners. To obtain a DPIN, the partners need to submit a scanned copy of their PAN card. It is important to note that only a soft copy of the PAN card is required for this purpose. The soft copy should be in a format that is easy to read and should clearly mention all the details. This soft copy can be easily uploaded while filling out the relevant application forms for obtaining a DPIN and for incorporating the LLP. One advantage of using a soft copy is that it can be easily shared via email or other digital modes, and there is no need to submit a hard copy of the PAN card. Overall, obtaining a DPIN is a crucial step in the conversion process and having a soft copy of the PAN card makes the process smoother and faster.

Notarization requirements for non-resident partners

For non-resident partners looking to convert their proprietorship firm into an LLP in India, there are certain notarization requirements that must be met. These requirements aim to ensure the authenticity and legality of the documents submitted during the conversion process. Non-resident partners must have all their documents attested by an Indian embassy or notary public. Additionally, all documents must be signed by the foreign national or NRI, and a copy of their identification and address proof must be attached.
Some of the documents that must be notarized include the apostilled passport and address proof of NRI designated partner, as well as photographs, a self-attested PAN card, and self-attested ID proof of Indian designated partner. Electricity bill of the registered office not older than two months must also be provided.

Following the notarization requirements is crucial for the successful conversion of a proprietorship firm into an LLP and ensures compliance with Indian regulations. It is recommended to seek the help of professional service providers, such as Meerad, who can guide non-resident partners through the entire process and ensure proper compliance.

IV. Benefits of Conversion

When proprietorship is converted into an LLP, all assets and liabilities of the firm become the assets and liabilities of the LLP. This means that the LLP takes over all the business operations and debts of the proprietorship. However, there is no requirement for an instrument of transfer or stamp duty for the transfer of assets. In addition, there is no capital gains tax on the transfer of properties from the proprietorship to the LLP. This makes it easier for businesses to transition from one form of organization to another without incurring additional costs and taxes. The loss and unabsorbed depreciation of the proprietorship is also deemed as that of the successor LLP. This allows for a smoother transition of the business and helps to minimize any potential losses. Overall, converting a proprietorship into an LLP can provide added benefits such as limited liability protection, asset protection, and easier compliance with legal requirements.

No requirement for an instrument of transfer or stamp duty

When converting a proprietorship firm into an LLP, there are certain advantages that come with it. One such advantage is that there is no requirement for an instrument of transfer or stamp duty. This means that there is no need for stamp duty to be paid on the transfer of properties during the conversion process. This is a significant benefit as it eliminates an additional cost that would have been incurred in the process. Additionally, all assets and liabilities of the firm become that of the LLP which simplifies the process of transfer of ownership. Loss and unabsorbed depreciation are deemed as that of the successor LLP which ensures that there are no tax implications during the conversion process. It is important to note that even though there is no requirement for an instrument of transfer or stamp duty during the conversion process, an LLP agreement is mandatory. This agreement outlines the mutual rights and duties of the partners and the LLP which ensures clarity in the partnership.

No capital gains tax on transfer of properties

Proprietorship firms in India can be converted into limited liability partnerships (LLPs), a process that has several benefits, including the transfer of assets and liabilities to the LLP. One significant advantage of this conversion is that there is no capital gains tax on the transfer of property from the proprietorship firm to the LLP. This means that the business can retain its existing assets without incurring any additional tax liabilities. Also, no instrument of transfer is required to be executed, making the entire process of conversion straightforward and cost-effective. This tax benefit also helps businesses to retain their talent by offering better salaries and bonuses without having to worry about the additional tax liability. The LLP can retain the brand value and goodwill of the proprietorship firm, as it is considered a separate legal entity in India. Overall, converting a proprietorship firm to an LLP offers several advantages, including asset transfer without incurring any capital gains tax.

Loss and unabsorbed depreciation deemed as that of the successor LLP

When it comes to converting a sole proprietorship into an LLP in India, there are several considerations to keep in mind. One important factor to take into account is how to handle any losses or unabsorbed depreciation that the proprietorship firm may have incurred. Fortunately, the LLP setup offers a solution to this issue.
In the case of a conversion, any losses and unabsorbed depreciation of the proprietorship firm are deemed to be that of the successor LLP. This means that the LLP can carry forward these losses and use them to offset future profits. This can be a significant advantage for the newly formed LLP, as it can help reduce its taxable income and, in turn, reduce its tax liability.

It’s worth noting that this rule only applies to firms that are converted from sole proprietorships to LLPs. If the firm were to be converted to a different type of business entity, such as a private limited company, the losses and unabsorbed depreciation would not transfer over.

To take advantage of this benefit, it’s important to ensure that all necessary accounting records are properly maintained and transferred over during the conversion process. Additionally, it may be helpful to consult with a qualified tax professional to ensure that all relevant tax laws are being followed.

Overall, the ability to carry forward losses and unabsorbed depreciation can be a significant benefit to firms considering a conversion to an LLP in India. By taking the time to properly plan and execute this process, business owners can help ensure a successful transition and a strong start for their new LLP.

V. Conversion of Proprietorship to LLP Process

Incorporation of new LLP

Incorporating a new LLP in India is a simple and straightforward process. It is one of the most preferred forms of business registration due to its ease of formation, flexible structure, and limited liability protection. To incorporate a new LLP, one needs to obtain a Designated Partner Identification Number (DPIN), which requires a passport-sized photograph, scanned copy of identification and address proof, and a soft copy of the PAN card. Non-resident partners need to get their documents notarized. Once the DPIN is obtained, the LLP agreement needs to be filed with the Registrar of Companies (ROC) along with necessary attachments. There is no requirement for an instrument of transfer or stamp duty, and no capital gains tax on the transfer of properties. The LLP can be registered with as little as Rs. 1000 as the total capital contribution, making it an attractive option for small businesses. Overall, incorporating a new LLP offers several advantages, including separate legal identity, transferability of interest, and reduced compliance obligations.

Filing LLP agreement

After a proprietorship firm into an LLP, one of the most important steps is to file the LLP agreement. The LLP agreement should clearly outline the rights, duties, and responsibilities of each partner, and provide details on how the business will be run. This document must be drafted with care, as it serves as the guiding document for the LLP. It should include the name of the LLP, its registered address, details of the designated partners, the contributions made by each partner, the management structure, profit-sharing arrangements, and procedures for admitting or removing partners. Before submitting the LLP agreement, it must be signed by all the partners and notarized. Attachments such as proof of address, identity proof, and photographs of the designated partners must also be included. After completing these formalities, the LLP agreement must be filed with the Registrar of Companies. With proper guidance, this process can be completed smoothly and swiftly.