CONVERSION OF PARTNERSHIP FIRM INTO LLP
CONTENT OF ARTICLES
A.
Background
B. Important Terms under
Act.
C. Condition for Conversion
D. Key Requirements.
E. Why LLP is better than
Partnership Firm.
F. Procedure for Conversion
of Partnership Firm into LLP
G. Effect of Conversion.
H. Advantage of LLP\
BACKGROUND:
A firm may convert
into a Limited Liability Partnership in accordance with the provisions of Section-
55 of LLP Act, 2008 read with Second
Schedule.
Partnership firms are
at a Disadvantage when compared to the newly introduced Limited
Liability Partnership (LLP) as they do not provide limited liability protection
for the partners, separate legal entity status, ability to take on unlimited
number of partners and ease of
ownership transfer.
The introduction of LLP’s
through the Limited
Liability Partnership Act, 2008 has made LLPs the premier choice for small and
medium sized businesses. Inciting tremendous interest among Partners of an
existing Partnership firms to convert their firms into LLP. In this article we
look at the process for conversion of partnership into LLP.
For Conversion of Partnership Firm into LLP first we need to understand
following terms:
“FIRM” As per Para 1 (a) of
the Second Schedule of the LLP Act states that, unless the context otherwise
requires, a ‘firm’ means a firm as defined in Section 4 of the Indian
Partnership Act, 1932. It, thus, only the registered partnership firm would
be eligible for conversion into a LLP.
“CONVERT” As per Para 1 (b) of
the Second Schedule of the LLP Act states that, unless the context otherwise
requires, ‘convert’, in relation to a firm converting into a LLP, means a
transfer of the property, assets, interests, right, privileges, liabilities,
obligations and the undertaking of the firm to the LLP in accordance with the
Second Schedule of the LLP Act.
Eligibility
Criteria for conversion: On Conversion, Partners
of Limited Liability Partnership “LLP”
“All the Partners of the Partnership firm will be partner
of LLP”
“No person except Partners of firm will be partner of LLP”
This is one of the
major requirements for the conversion of Partnership into LLP is that the LLP
formed from the Partnership have the same Partners as the original Partnership.
The LLP formed cannot have new or less Partners than the Partnership firm.
Therefore, if any Partners are to be added to the LLP, the Partnership should
first be converted into a LLP and then Partners must be added to the newly
formed LLP. On the other hand, if Partners are to be removed, it is best to
remove them prior to starting the process for conversion of Partnership into
LLP.
Conditions for Conversion:
§
The firm should be registered as Partnership.
§
There should be consent of all the Partners.
§
All the Partners become partner in the LLP, in the same
proportion in which their capital accounts stood in the books of the Firm on
the date of the conversion.
§
Every partner should contribute to the LLP.
§
DPIN (Knows as DIN) should be acquired for all the
designated Partners.
§
DSC (Digital Signature Certificate) should be acquired for
two designated Partners.
Key requirements:
§
Upto date filing of
Income tax returns
§
Consent of all the unsecured creditors for the proposed conversion
§
Minimum 2 Designated Partners
§
Atleast 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.
Why LLP is better than Partnership
§
There is no limit to
number of partners in a LLP; a partnership willing to have more than 20
partners can benefit through this
§
The liability of the
partners is limited to the amount of capital contributed
§
There is no limit on
the minimum amount of capital to be contributed
§
LLP is a Body
Corporate
§
LLP has a perpetual
succession unlike partnership which depends upon the will of the partners Separate
legal entity
§
LLPs enjoy higher
creditworthiness compared to Partnerships; therefore are able to obtain better
financing.
§
Complete flexibility
in managing the business, partners may run the business according to the terms
defined in the LLP Agreement
§
Foreign Direct
Investment (FDI) in LLPs allowed.
§
Now, multidisciplinary
LLPs are allowed wherein professionals of varied disciplines can work together
which is an exclusive advantage of LLP
§
Further CA firms are
now allowed to convert themselves into LLP and increase their scale of
operations.
§
LLP structure is also
suitable for PE funds, joint ventures and venture capital funds which is not
the case in partnership form
§
LLPs can enter into
compromise, arrangement, merger or amalgamation with other LLPs whereas
partnerships cannot merge with other firm
PROCEDURE FOR CONVERSION OF PARTNERSHIP INTO LLP
A. Apply for DIN:
First requirement on
conversion is to Obtain DPIN (DIN) for the Partners of Company. Full process
for obtaining the DIN is given in Article Series No.38.
If anyone want article for DIN Application mail me at
csdiveshgoyal@gmail.com . . . . .
B.
APPLY FOR DSC (DIGITAL SIGNATURE CERTIFICATE):
Getting DSC for
Designated Partners for digital authentication of the Incorporation documents. You can use only the valid Digital Signatures
issued to you. It is illegal to use Digital Signatures of anybody other than
the one to whom it is issued. Link for more information on DSC.
C. APPLY FOR NAME
APPROVAL:
File e-form LLP-1
with ROC.
Attachments: Addition of the word
“LLP” at the end is allowed in the existing name of the Firm to be converted.
Information required
being mention in form LLP-1:
§
The Name of LLP
§
State in which the Registered office of the LLP is to be
situates;
§
The address of the registered office of the LLP;
§
Business to be carried on by the LLP;
§
Summary of partners/ designated partners ( i.e. number of
partners, number of designated partners, number of designated partners resident
in India).
§
Number of individuals as partners and their details;
D. The registrar will approve the name
applied for provided the name is not either undesirable in the opinion of the
Central Government or that is identical with or that which too nearly resembles
to the name of any existing partnership firm or a LLP or a body corporate or a
trade mark registered or pending registration under the Trade Marks Act, 1999.
E.
Draft the LLP agreement
CONTENTS OF AGREEMENT ARE:
- Name
of LLP
- Name
of Partners & Designated Partners
- Form
of contribution
- Profit
Sharing ratio
- Rights
& Duties of Partners
- Proposed
Business
- Rules
for governing the LLP
It is not necessary to
have the LLP Agreement signed at the time of incorporation, as the details of
the same needs to field in e-form 3 within 30 days of incorporation but in
order to avoid any dispute between the partners as to the terms &
conditions of the agreement after the conversion into LLP.
F.
Filling of form with ROC: Following below mention forms along with attachments are required to file
with ROC for Conversion of Partnership firm into LLP.
I.
Form- 17 : Application for
conversion in Form 17 is required to be filed by the partners along with the
following ATTACHMENTS:
§
Statement of partners
§
List of all unsecured creditors along with their consent to
conversion
§
Statement of assets & liabilities of the company duly
certified by a CA.
§
Approval from any other body/authority as may be required
II.
Form- 2 : Application for in
Form 17 is required to be filed by the partners along with the following ATTACHMENTS:
§
Individual Consent/ Statement from Shareholders
§
Proof of address of registered office of LLP
§
Subscribers' sheet including consent
§
Detail of LLP(s) and/ or company(s) in which partner/
designated partner is a director/ partner (if applicable)
Note:
In accordance with Section 11(1) (c)A Statement in
the prescribed form to the effect that all the requirements of the LLP Act and
the rules made there under have been complied with, in respect of incorporation
and matters precedent and incidental thereto. Such statement shall be made by
the following persons:
§
An Advocate, or a Company Secretary or a Chartered
Accountant or a Cost Accountant, who is engaged in the formation of the LLP;
and
§
Anyone who subscribed his name to the incorporation
document.
G. ISSUE OF CERTIFICATE OF REGISTRATION:
Section 58(1) of the
LLP Act provides that the Registrar, on satisfying that a firm has complied
with the provision of the Second Schedule shall subject to the provisions of
the LLP Act and the rules made there under, register the documents submitted
under such schedule and issue a certificate of registration.
Sub-rule (1) of rule
32 of the LLP Rules provides that the Registrar shall on conversion of a firm
into a LLP, issue a certificate of registration under his seal in Form- 19.
H.
FILLING OF E-FORM-3:
This form provides
information in respect to the LLP Agreement entered into between the partners. ATTACHMENT: LLP Agreement
I.
Intimate the Registrar of Firms
As per paragraph 5 of
the Second Schedule, the LLP shall, within 15 (fifteen) days of the date of
registration, inform the Concerned Registrar of Firms with which it was
registered under the provisions of the Indian Partnership Act, 1932, about the
conversion and of the particulars of the LLP in Form – 14 along with following attachments:
§
Copy of Certificate of Incorporation of LLP.
§
Copy of Incorporation documents submitted in form-2
EFFECT OF CONVERSION:
v Once all the above
steps have been complied with, the Partnership Firm shall be converted into Limited Liability
Partnership (LLP) and shall follow rules & regulations as
applicable to LLPs.
v Section 58(2) of the
LLP Act provides that upon such conversion, the partners of the firm, the LLP
to which such firm has converted, and the partners of the LLP shall be bound by
the provisions of the Second Schedule of the LLP Act.
v Transfer of Licenses, Registrations and Property:
§
Licenses, approvals, permits or registrations issued in the
name of the Partnership firm will not be transferred automatically to the LLP.
§
If there were any properties registered under the
Partnership firm prior to the conversion, the LLP must approach the concerned
authorities and take steps as prescribed to transfer the assets to the LLP.
§
It is important for the Entrepreneur to keep in mind
various other aspects and clarify procedural aspects with the concerned
licensing or registration authorities prior to beginning the process for conversion
into LLP.
v Pending proceedings:
§
As per Paragraph 9 of the Second Schedule of the LLP Act
provides that all the proceedings by or against the firm which are pending
before any Court or Tribunal or before any authority on the date of
registration may be continues, completed and enforced by or against the LLP. In
other words, all proceeding by or against the erstwhile firm shall stand vested
into the LLP, as it is.
v Section 58(4) of the LLP provide that on and from the date of
registration;
§ There shall be LLP by the name
specified in the Certificate of Registration.
§ The assets, liabilities, rights,
privileges, obligations of the Partnership firm are considered to be wholly
transferred to the LLP and the conversion doesn’t affect any existing
contracts, employment, agreement, etc.
§ The Partners will enjoy limited
liability protection for all transactions conducted after the conversion of
partnership into LLP. However, the Partners will continue to be personally
liable for all business conducted as a Partnership prior to the conversion into
LLP.
v Partner liable for liabilities and obligation of a firm before conversion:
§ As per paragraph 16(1) of the Second
Schedule of the LLP Act provides that notwithstanding anything in every partner
of a firm that has converted into a LLP shall continue to be personally liable
for the liability and obligation of the firm:
o
Which were incurred
prior to the conversion; or
o
Which arose from any
contract entered into prior to the conversion.
v
***As per Second Schedule Paragraph 17(1) : the
LLP shall ensure that for a period of 12 (twelve) months commencing not later
than 14 (fourteen) days after the date of registration, every official
correspondence of the LLP bears the followings:
§
A statement that it was, as from the date of
registration, converted from a firm into LLP; and
§
The name and registration number, if applicable,
of the firm from which it was converted.
Advantages of LLP:
Limited
Liability for Partners
The Limited Liability
Partnership Act of 2008 introduced Limited Liability Partnerships (LLP) in
India to provide flexibility for small enterprises, promote the service sector
and bring together business synergies. The basic premise behind the
introduction of Limited Liability Partnership (LLP) is to provide a form of
business organization that is simple to maintain while at the same time
providing limited liability to the owners. Taking into consideration the
various benefits surrounding the LLP structure, it is certainly worth
converting your existing partnership firm into a Limited Liability Partnership. Here
are some of the major reasons on why you should convert your Partnership firm
into a Limited Liability Partnership.
Perpetual
Existence
The existence of a partnership
firm is limited and can be dissolved on the death of a partner or all partners
but one becoming insolvent or a partner becoming insane in the absence of any
contract to the contrary. Limited Liability Partnerships on the other hand have
perpetual existence and is a separate juristic person whose existence does not
depend on the partners. The partners of a LLP may keep changing from time to
time and it will not affect the LLP’s continuity. Therefore, converting your
existing partnership firm into a LLP can ensure continued existence for your
business separate from that of the partners.
Unlimited
Partners
In a partnership firm
the minimum number of partners must be two, while the maximum number can be 10
in case of banking business and 20 in all other types of business. However, in
the case of a Limited Liability Partnership, there is no limit regarding the
maximum number of partners. Also, a Limited Liability Partnership requires a
minimum of two partners to form a LLP; but only in the case of number of
partners falling below two for six months, the remaining partner in the
continuing LLP becomes personally liable.
Potential
for Growth
(Author – CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES Company Secretary in Practice from Delhi and can be contacted at csdiveshgoyal@gmail.com)
Disclaimer: This Document is a copyright of Divesh Goyal. The entire contents of this document have been developed on the basis of relevant statutory provisions. Thought the author has made utmost efforts to provide authentic information however, the author expressly disclaim all and any liability to any person who has read this document, or otherwise, in respect of anything, and of consequences of anything done, or omitted to be done by any such person in reliance upon the contents of this documents. This is only a knowledge sharing initiative and author does not intend to solicit any business or profession…
Mr. Devesh, an unregistered firm can also be converted into LLP
ReplyDeleteYes
DeleteDear Sir, can unregistered firm also be converted into LLP or not.
ReplyDeleteNo. firm needs to be a registered firm
DeleteYes. Unregistered firm can also be converted into LLP
DeleteNo..An unregistered firm cannot be converted into LLP. Sec4(a) of 2nd Schedule of LLP Act defines it.
DeleteSir, Sec4(4) of 2nd Schedule is an ambiguity statement. (Written as if applicable)
DeleteSir is there any tax liable in the conversion from partnership firm to LLP???
ReplyDeleteSir, my unregistered partnership firm's year of incorporation date as per PAN card is 2010...Can I get the same incorporation year if we decide to convert now or will it be 2017 ? Having old incorporation year is important to us...
ReplyDeleteAlso name of our firm is "The Elite.........". Can we drop "The" while naming the LLP ? would new PAN be required ? Thanks in advance.
Will PAN no change in case of Conversion of Firm to LLP
ReplyDeleteYES
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