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CONVERSION OF A PARTNERSHIP FIRM INTO LLP | Company Vakil


PARTNERSHIP FIRM:

A Partnership firm is a type of firm where two or more people come together to run an organisation with a view to making profit. The individuals who jointly come together to run the business are called as ‘partners’. They voluntarily agree to work together and create a contract as to how they would conduct the business and share the profits.

LIMITED LIABILITY PARTNERSHIP (LLP):

LLP or Limited liability partnership is an alternative form of business which is a mixture of corporations and partnership as it contains both firm’s aspects. It offers limited liability of a company and benefits of the partnership firm as well. Unlike the partnership firm, each partner is not liable for other partners’ misconduct or wrong decisions. 

The main difference between a partnership firm and LLP is the liability. In a partnership firm, the partners have unlimited liability whereas in LLP, the partners have limited liability. Unlimited liability is when the partners are fully responsible for all of the business debts. Limited liability is liability limited to the agreed condition. The partners are only concerned with their share of liability and are not responsible for other partners’ liabilities. 

As LLP is a combination of both, partnership structure and corporation structure, it is considered as a hybrid between company and partnership. 

LLP, in the recent times, is being highly preferred than the partnership firm by the small and medium enterprises due to its many advantages. Let us see some of the advantages of a LLP firm:

  • It is easy to form and manage the business according to the agreement between the partners. There are not many legal formalities to be followed as compared to a company. 
  • There is no minimum capital required in a LLP firm. It can be started with any amount of capital or in the form of tangible or intangible assets.
  • LLP may have as many partners as it wishes without any restriction on the number. In a company or partnership firm, there are restrictions on to the number of partners of the business. 
  • As compared to other companies, the cost of registration of LLP is lower. 
  •  There is no necessity for LLP to get their accounts audited. Audits are mandatory only when the contributions of the LLP exceed Rs. 25 lakhs or; when the annual turnover of the LLP exceeds Rs. 40 lakhs. 

Thus these are some merits which make LLP more attractive and favourable choice of firm. 

What is the process of converting a Partnership firm into LLP?

There are some conditions laid down as to who is eligible for the conversion and how the process of conversion takes place. Let us understand these in depth.

ELIGIBILITY FOR CONVERSION OF PARTNERSHIP INTO LLP:

  1. The partnership firm must be registered under the Indian Partnership Act, 1932.
  2. All partners should give consent to this and if any partner is not willing to continue with the LLP firm then he will cease to exist as a partner. In case of new addition, new partners shall be admitted only after the formation of LLP. 

CONVERSION OF PARTNERSHIP INTO LLP:

  1. Digital Signatures:

The partners of the partnership firm shall have to obtain a digital signature. A digital signature is a technique used for validating authenticity of a document. It provides the origin, identity and status of the document and recognises the consent of the partners.  

Designated Partner Identification Number (DPIN OR DIN):

A DPIN or a DIN (Director Identification number) are a unique number given to each partner or the director of LLP. This unique number is issued only once and can be used for throughout this lifetimes without any renewal or modification. DPIN and DIN can be used interchangeably for a LLP firm.

 
Approval of Firm Name:

After obtaining the DPIN/DIN, the next step is to apply and get the name approved by the Ministry of Corporate Affairs. Only after obtaining the name, you can start filing the forms for the conversion of partnership into LLP.

 
Filing LLP Form 17:

Form 17 i.e. the Application and statement for conversion of a firm into Limited Liability Partnership (LLP) is to be filled along with the incorporation application.   

It must contain the following documents:

  • Statement of consent of partners of the firm.
  • Statement of assets and liabilities of the firm certified as true and correct by the Chartered Accountant in practice.
  • Copy of acknowledgement of latest income tax return.
  • Approval of any regulatory body or authority (mandatory).
  • List of all secured creditors along with their consent for conversion.
  • A No Objection Certificate (NOC) or a clearance certificate from tax authorities.
  • Filing for Incorporation and Conversion of Partnership into LLP:

Along with LLP Form 17, LLP Form 2 and LLP Form 3 are also required to be filed for the conversion of firm into LLP. 

Form 2 consists of incorporation statement and subscriber’s statement along with the following documents-

  • Proof of address of registered office of the LLP
  • The subscriber’s sheet with their consent
  • In principle an approval of regulatory authority, if required
  • Detail of LLPs and/or companies in which the partner or designated partner is a director or partner (if any). 

The LLP Form 3 contains the initial Limited Liability Partnership Agreement. This form can be filed after the Partnership firm is converted into LLP or while filing for the conversion of Partnership firm into LLP. The LLP Agreement must be attached with the LLP Form 3.

SUCCESSFUL CONVERSION OF PARTNESHIP FIRM INTO LLP

After the partnership firm is successfully converted into a LLP, the Registrar would issue a Certificate of Incorporation of LLP and the previous Partnership firm would be considered dissolved. All the properties, assets, interests, rights, privileges, liabilities, etc. would be transferred to LLP on conversion. So now, the whole undertaking of the firm is transferred to LLP.       

However, the approvals, permits, licenses issued under any law of the Partnership Firm would not be directly transferred to the LLP. Fresh licenses or registrations may be required which is an important aspect to be considered before the conversion process.   

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