CONVERSION OF PARTNERSHIP FIRM INTO LLP

1 | B Y A N M O L G U L A T I
CONVERSION OF PARTNERSHIP INTO
LLP
CONCEPT OF PARTNERSHIP
A. DEFINITION OF "PARTNERSHIP”
According to PARTNERSHIP ACT 1932,
"Partnership" is the relation between persons who have agreed to share the profits of a business
carried on by all or any of them acting for all.
(Persons who have entered into partnership with one another are called individually, "partners" and
collectively "a firm”, and the name under which their business is carried on is called the "firm-name")
B. MEANING
When the business grows and prospers, one person is not enough to procure capital and look
after its day-to-day affairs. In such a scenario, more persons join hands and contribute their
funds as well as other skills to run the business. Thus, partnership is said to be an extension of
sole proprietorship.
• Partnership is an association of two or more persons who have mutually decided to
carry out business activities jointly and share its profits as well as losses. The partnership
agreement may be written or oral.
• Under the Act, persons who have entered into partnership with one another are
individually called as ‘partners’ and collectively as ‘firm’ and the name under which they
run their business is called the ‘firm name.’
C. PROVISIONS RELATING TO TAXATION OF PARTNERSHIP FIRMS
i. The partnership firm is taxed as a separate entity.
ii. With no distinction as registered and unregistered firms.
NOTE: Legally, a partnership firm does not have a separate entity from that of the partners
constituting the firm as the partners are the owners of the firm. However, a firm is treated as
a separate tax-entity under the Income-tax Act.

iii. A partnership firm is or required to submit a copy of the partnership deed in the first
year of assessment and later on only if there is a change in the terms/constitution of
partnership.
iv. The firm is evidenced by an instrument i.e. there is a written partnership deed.
D. SUITABILITY OF PARTNERSHIP FIRM
A partnership form of organization is easy to establish. The only procedure for the
formation of partnership is to draw up a partnership deed. This form of organization is
suitable due to the following factors:
• Quick decision making: The decision making on important business matter is quick
as compared to a company form of organization because partners meet frequently
together.
• Less risky: The chance of getting involved in risky activities is very less because every
important decision is made with the concurrence of all the partners.
• Additional resources can be arranged easily: As compared to sole proprietorship,
the problem of raising additional resources is much less. Whenever the business
expands and it is necessary to raise finance, it will be easy to raise it by admitting a
new partner or raising it by way of borrowing because of number of partners and
their joint and several liabilities to pay the debts of the firm, the lenders will be more
interested in lending.
• Remuneration and interest to partners allowed: The firm can pay interest on
capital and loan to partners at the maximum rate of 12% p.a. Further, it can also give
remuneration to its working 234 PP-ATLP partners subject to the limits mentioned in
Section 40(b). Firm’s profits are taxable after allowing interest and remuneration to
working partners.
• Suitable in cases where firm’s profits are not large: This form of organization is
suitable from income-tax point of view in such cases where the amount of profit is
not large and the partners of the firm do not have any other additional income
except by way of remuneration and interest from the partnership firm. In such a
case the profit of the firm shall be lower and the individual partners can also avail of
the maximum ceiling of income exempt under the Act.
• Share of partners’ in firm’s profit is exempt: The share in the profit of the
partnership firm is exempt from tax under section 10(2A) of the Act.
• Risk of losses is divided: The risk as to losses and liability incurred is divided
amongst the partners.

E. UNSUITABILITY OF PARTNERSHIP FIRM
However, this form of organization is not suitable due to the following reasons:
• Limited risk taking capacity of partner: The risk taking capacity of the partners
becomes limited. Every decision relating to important business matters is made with
the consultation of other partners, which restricts the risk taking activities which
may yield much higher profits.
• Financing in case of expanding business: As far as the operations of business are
limited to small or medium scale, there is no problem in financing the expansion of
business operation. But when business gets expanded to a large scale, then it will be
suitable to adopt a company form of organization because partnership can be
formed up to such number as may be prescribed but not exceeding 50.
• Partners’ unlimited liability: Partner’s liability is unlimited and recovery can be done
from his personal assets also. It may also happen that one partner becomes liable
for the acts of another. Therefore, a partner is liable for the wrongs of another
partner if it is done within the legal limits.
• Limitation on deduction of remuneration and interest: In the new scheme of
assessment of partnership firms, the share of partners is exempt from tax under
Section 10(2A) but the partners remuneration and interest, subject to limit
mentioned in Section 40(b), is taxable in the hands of the partners under the head
profits and gains of business or profession. Also, the firm cannot claim deduction in
respect of interest payable to partners in excess of 12% per annum
• Sudden closure: A partnership may come to a sudden closure of business on account
of death, lunacy or insolvency. In the case of a business running efficiently and
profitably, such happening will cause a great loss. Also, dissolution will attract
section 45(4) which imposes tax liability in respect of capital gain arising on transfer
of capital asset from the firm to partners.
NOTE: Entrepreneurs now have an alternative and innovative form of business organization i.e.
Limited Liability Partnership (LLP) which combines the benefits of company and general partnership
form of business organizations. LLP has separate legal entity, perpetual succession and limited
liability of partners. From income tax point of view it is treated same as general partnership firm
therefore its profits will be taxed in the hands of the LLP not in the hands of its partners.

CONCEPT OF LLP
A. DEFINITION OF “LIMITED LIABILITY PARTNERSHIP”
According to Section 3 of the LIMITED LIABILITY PARTNERSHIP ACT 2008,
“An LLP is a body corporate, formed and incorporated under the Act. It is a legal entity
separate from its partners.”
(It is an alternative corporate business form that offers the benefits of limited liability to
the partners at low compliance costs. It also allows the partners to organize their
internal structure like a traditional partnership)
B. MEANING
• Limited liability partnerships (LLPs) allow for a partnership structure where each
partner's liabilities is limited to the amount they put into the business.
• Having business partners means spreading the risk, leveraging individual skills and
expertise, and establishing a division of labor.
• Limited liability means that if the partnership fails, creditors cannot go after a partner's
personal assets or income.
• LLPs are common in professional business like law firms, accounting firms, and wealth
managers.
C. DESIGNATED PARTNER
(1) Every limited liability partnership shall have at least two designated partners who are
individuals and at least one of them shall be a resident in India.
(2) States that each of the partners from time to time of limited liability partnership is to be
designated partner, every such partner shall be a designated partner;

D. KEY TAKEAWAY:
▪ A Limited Liability Partnership (LLP) is a partnership in which some or all partners have
limited liability. It therefore exhibits elements of partnerships and corporations. In an LLP,
one partner is not responsible or liable for another partner’s misconduct or negligence.
▪ The government will come out with a one-time settlement scheme for Limited Liability
Partnerships (LLPs) that will provide more time to submit their pending documents as well
as immunity from prosecution for defaults.
▪ A limited liability partnership comes mid-way between partnerships and corporations and
is an up and coming area that investors are making use of. It has several benefits to rise in
popularity amongst entrepreneurs.
▪ LLPs restrict liability by making sure that the personal assets and belongings of the
partners do not get involved in the payment of debts inherited by the company.
▪ Such limited liability partnerships are governed by the Government as of April 2009 and
are also a popular concept in foreign nations such as the UK and Australia.
▪ Every LLP shall mandatorily have at least two designated partners. One of the partners
must be a resident of India, which means he/she must have stayed in India for at least 182
days.
E. STATUTORY COMPLIANCE REQUIREMENTS FOR AN LLP
LLP is easy to maintain, relative to a private limited company. For example, you need not have
an auditor until you cross Rs. 40 lakh in turnover or have a paid-up capital of over Rs. 25 lakh.
But LLPs do have some COMPLIANCE REQUIREMENTS, like –
▪ filing of annual returns,
▪ statement of accounts and solvency,
Every LLP is required to comply with the provisions of the LLP Act 2008; in case of non-
compliances LLP along with its designated partners, shall be punishable with the fine
and penalties. Proper compliances result in transparency, and even an LLP who has not
commenced any business would have to file the returns to avoid penalty and to
maintain the compliances.

F. ADVANTAGES
G. DISADVANTAGES

LLP VS PARTNERSHIP FIRM

OVERVIEW
CONVERSION OF PARTNERSHIP INTO LLP
The concept of Limited Liability Partnership has enjoyed an upper hand over the traditional
Partnership structure. An LLP is a separate legal entity and combines the benefit of a Private
Company and Partnership Firm. It means that this business format provides flexibility in the
internal control and operations of a firm, an area where a Partnership lacks. Therefore, the
conversion of Partnership into LLP is considered to be a good business choice to secure the
rights and liabilities of partners.
CONVERSION……
Different type of entities can be converted into a Limited Liability Partnership (LLP) under the
provisions of the Limited Liability Partnership Act, 2008. It can be broadly covered under :
A. Conversion of Partnership Firm to LLP
B. Conversion of Private Company to LLP
“Conversion” means:
“Conversion” in relation to a firm converting into a LLP, means a transfer of the property,
assets, interests, rights, privileges, liabilities, obligations and the undertaking of the firm to the
LLP. (Paragraph 1(b) of the Second Schedule)
BENEFITS/REASONS TO CONVERT PARTNERSHIP
FIRM INTO LLP
The hybrid structure of the company and partnership form has promoted LLP over partnership
due to the flexibility of running a business without being bound by legal norms. Start-ups made
it the most desirable form of organization for small to medium-scale businesses. LLPs are free
to make their own rules of management, unlike companies.

OTHER BENEFITS ARE:
1. Body Corporate: LLP, has a character of being a separate legal entity and can sue and
be sued. Members are considered distinct from the organization. It can also dispose of
and hold property in its own name. LLP is also a body corporate, which means it has its
own existence as compared to the partnership. LLP will know by its own name and not
the name of its partners.
2. Liability: The unlimited liability of a partner has been a noticeable predicament that
has been overcome by LLP over a partnership. LLP is a distinct identity from its
members thus liability lays on the firm and not on its owners. No partner shall be
asked to pay from his personal assets after he has paid an amount to the extent of his
share in the capital.
3. Freedom of management: The LLP agreement is not largely influenced by the Limited
Liability Partnership Act, 2008. The act gives the partners the flexibility to choose the
way to manage their affairs and regulate their functions.
4. No Audit requirements: LLPs have to comply with audit requirements only when the
capital contribution exceeds Rs.25 lakhs and the annual turnover exceeds Rs.40 lakhs.
This is a factor of relief for small businessmen.

5. Attracts Investors: Financial institutions and venture capital firms are readily
interested in investing in an LLP. This is an advantage contrasting to the difficulty of
funding in partnership and sole proprietor firms.
6. Partners not agents: Unlike in Partnership, partners in LLP have the individual
interests they are not agents of other partners and are not liable for the acts of other
partners.
7. Formalities of Incorporation: There is the ease of incorporation in LLP as all the forms
are available online.
8. Whistle blowing: Partnership Act has no provisions concerning whistle blowing,
however, to protect the interests of employees and for proper investigation provisions
for whistle blowing have been made.
9. Investment Attraction: Venture Capitalists and Foreign Investors consider LLPs as a
beneficial Investment Opportunity. This is because an LLP has the features of
corporate structure and organization flexibility.
10. No Stamp Duty: All movable and immovable properties of the firm automatically vest
in the LLP. No instrument of transfer is required to be executed and hence no stamp
duty is required to be paid.
11. Continuation of Brand Value: The goodwill of the firm and its brand value is kept
intact and continues to enjoy the previous success story with legal recognition.
12. Carry Forward/Set Off: The accumulated loss and unabsorbed depreciation of firm is
deemed to be loss/depreciation of the successor LLP for the previous year in which
conversion was effected. Thus such loss can be carried for further eight years in the
hands of the successor LLP.
13. A LLP has 'PERPETUAL SUCCESSION': that is continued or uninterrupted existence
until it is legally dissolved. A LLP, being a separate legal person, is unaffected by the
death or other departure of any Partner but continues to be in existence irrespective
5existence as compared to the partnership. LLP and its Partners are distinct entity in
the eyes of law. LLP will know by its own name and not the name of its partners.

LLP: CONVERSION & COMPLIANCE
ELIGIBILITY:
Eligibility criteria under LLP Act for conversion of Firm into LLP, LLP Act permits:
Conversion of a Firm into LLP as per section 55 of the LLP Act. This provision is applicable in the
conversion of both a Partnership Firm and a Sole proprietorship Firm into a Limited Liability Partnership.
KEY REQUIREMENTS:
▪ Consent of all the unsecured/secured creditors for the proposed conversion.
▪ Minimum of 2 designated partners.
▪ Up to date filing of Income tax returns.
▪ At least 1 of the designated partners shall be an Indian Resident.
▪ The partners and Designated partners can be same person.
▪ There is no concept of share capital, but there has to be some sort of contribution from
each partner.
CONDITION FOR CONVERSION:
NOTE: All the partners of the firm shall be the partners of LLP,
which means that there shall be no new partners & existing
partners cannot cease to be partners, while making application.

PROCEDURE FOR CONVERTING PARTNERSHIP FIRM INTO LLP

1. Requirement of Digital Signature Certificate (DSC)
Typically the Partners in a Partnership Firm do not have a digital signature
because it isn’t necessary for the registration of a partnership firm.
However, if the partners decide to convert the Partnership Firm into an
LLP, then the Digital Signature Certificate (DSC) is a mandatory
requirement for all the Partners.
2. Requirement of DINs or DPINs
All the partners of a partnership firm need to get DIN or DPIN. DIN is a
unique number granted by the Central Government. A DIN or DPIN is
issued only once and has lifetime validity. Once, a DIN/DPIN is issued, it
can be used without any renewal or any compliance filing for the lifetime.
3. Name Approval
The partners need to apply for the Name reservation of the proposed LLP
with the Ministry of Corporate Affairs. All the partners must obtain name
approval before converting a partnership firm into LLP. They need to file
Form- 17 (for conversion) and SRN for the Name Reservation (RUN) of LLP.
4. Filing of Form 17
Application and a Statement of the Conversion of Partnership Firm into LLP (Limited
Liability Partnership) i.e., Form 17 should be filed along with the incorporation
application and along with that they have to submit these documents:-
• A Statement of the consent of partners of the firm.
• A Statement of the assets and liabilities of the firm which is duly certified
as a true copy by a practicing Chartered Accountant.
5. Filing of Form 3
For the Conversion of a Partnership Firm into LLP, LLP Form 2 and LLP Form
3 must also be filed. LLP Form 2 contains the incorporation document.
LLP Form 3 contains the initial Limited Liability Partnership Agreement.
This form can be filed once the Partnership Firm is converted into an LLP or
while filing for the conversion of the Partnership Firm into LLP.
6. Certificate of Incorporation
After the conversion of Partnership into LLP, the Registrar grants a
certificate of incorporation of LLP. It means that all the assets, interests,
liabilities, rights, privileges, etc. of the firm are transferred to the LLP.
However, any license or permit issued to a firm will not directly be
transferred to the LLP. That means a new permit or license may be
required.

LLP AGREEMENT
(To be attached with FORM 3)
NOTE
An LLP agreement usually consists of
management policies, inclusion of new
partners, policy making strategies, and so on.

EFFECTS AFTER CONVERSION
1. A firm may convert into a limited liability partnership in accordance with the provisions
of this Chapter and the Second Schedule.
2. Once the Partnership is converted into a LLP, the Partnership firm is deemed to be
dissolved and the name of the partnership firm is removed from the register of Registrar
of Firms.
3. There shall be a limited liability partnership by the name specified in the certificate of
registration registered under this Act
4. The assets, liabilities, rights, privileges, obligations of the Partnership firm are
considered to be wholly transferred to the LLP without any further assurance and the
conversion doesn’t affect any existing contracts, employment, agreement, etc.
5. The Partners will enjoy limited liability protection for all transactions conducted after
the conversion of partnership into LLP.
6. However, the Partners will continue to be personally liable for all business conducted as
a Partnership prior to the conversion into LLP.
PENDING PROCEEDINGS
All proceedings by or against the firm which are pending in any Court or Tribunal or
before any authority on the date of registration may be continued, completed and
enforced by or against the limited liability partnership.
EXISTING AGREEMENTS
Every agreement to which the firm was a party immediately before the date of
registration, whether or not of such nature that the rights and liabilities thereunder
could be assigned, shall have effect as from that date as if—
(a) the limited liability partnership were a party to such an agreement instead of the
firm; and

(b) for any reference to the firm, there were substituted in respect of anything to be
done on or after the date of registration a reference to the limited liability partnership.
NOTICE OF CONVERSION IN CORRESPONDENCE
.(1) 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.
(2) Any limited liability partnership which contravenes the provisions of sub-
paragraph (1) shall be punishable with fine which shall not be less than ten thousand
rupees but which may extend to one lakh rupees and with a further fine which shall
not be less than fifty rupees but which may extend to five hundred rupees for every
day after the first day after which the default continues.

CONVERSION OF PARTNERSHIP FIRM INTO LLP

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CONVERSION OF PARTNERSHIP FIRM INTO LLP