A partnership is a business arrangement in which two or more people mutually decide to cooperate to advance their mutual interests. Partners agree to share profits or losses in a firm but,a partnership is not a legal entity and therefore has no legal status until it gets legally documented under specific protocols. Partnerships are governed by the Partnership Act of 1890.
A limited liability partnership (LLP) is a business structure that combines the features of a partnership and a company. Like a partnership, an LLP is a collection of individual partners who run the business with a view to profit. Like a company, an LLP has a separate legal identity from its partners. This means that the LLP can enter into contracts, own property, and sue or be sued in its name. The main advantage of the process of conversion is that the liability of the partners is limited. This means that if the LLP gets into financial difficulty, the partners will not be personally liable for the debts of the LLP.
Did You Know? Unlike a Partnership, in LLP, the partners can continue to operate the business, and they will not have to set up a new partnership.
Reasons for Converting of Partnership to LLP
There are many reasons for converting a partnership firm into an LLP. Some of the reasons are as follows:
1. Limited liability: One of the main advantages of LLP is that the liability of the partners is limited. In a partnership firm, the partners are personally responsible for the firm's debts and liabilities. However, in an LLP, the liability of the partners is restricted to their agreed contribution.
2. Flexibility: LLP provides more flexibility to the partners than a partnership firm. The partners can decide their roles and responsibilities, and they can also decide the profit-sharing ratio as per their agreement.
3. Tax benefits: LLP enjoys certain tax benefits. For instance, LLP is not required to pay tax on dividends. Also, the partners of LLP can avail the benefit of taxation on their individual income tax returns.
4. Better management: LLP provides a better framework for managing the business than a partnership firm. In an LLP, a designated partner is responsible for the overall management of the business.
5. Better credibility: LLP enjoys better credibility than a partnership firm. This is because LLP is a separate legal entity, and it is not affected by the personal liabilities of the partners.
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Documents required for conversion of Partnership Firm into LLP
These are the documents required for the conversion of the Partnership into LLP:
1. The partnership deed, which contains the names of all the partners, their contribution to the firm, and their rights and duties.
2. The Registration Certificate of the Partnership Firm.
3. The Income Tax Return (ITR) filed by the Partnership Firm for the last three financial years.
4. The partnership firm's latest balance sheet and profit & loss account.
5. The No Objection Certificate (NOC) from all the partners of the Partnership Firm.
6. The NOC from the landlord if the Partnership Firm is renting premises for its business.
7. The NOC from all the creditors of the Partnership Firm.
8. The NOC from the Local Municipal Authority if the Partnership Firm is running its business from commercial premises.
Procedure for Conversion of Partnership into LLP
The Procedure for Conversion of a Partnership Firm into an LLP is as follows:
1. The partnership firm should be registered with the Registrar of Companies (ROC).
2. The firm's partners must execute a partnership deed specifying the LLP's terms and conditions.
3. The partners must file an application with the ROC for the incorporation of the LLP.
4. The ROC will issue a certificate of incorporation after approving the application.
5. The LLP must submit an application with the Registrar of the LLP for the registration of the LLP.
6. The Registrar of LLP will issue a registration certificate after approving the application.
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Advantages of LLP Over Partnership Firm
LLP has many advantages over partnership firms:
1. LLP is a separate legal entity, whereas a partnership firm is not. This means that an LLP can enter into contracts, own property in its own name, and is liable for its debts. This separation of liability protects the partners' personal assets from being seized if the LLP is sued or unable to pay its debts.
2. LLP is a flexible structure that allows partners to decide how they want to share profits, losses, and liabilities. In a partnership firm, the partners are equally liable for the firm's debts, regardless of their share in the profits.
3. LLP has a lower compliance burden than a partnership firm. For instance, LLP is not required to get its accounts audited if its turnover exceeds ₹40 lakh, whereas a partnership firm must get its accounts audited if its turnover exceeds ₹25 lakh.
4. LLP is a more tax-efficient structure than a partnership firm. This is because LLP is taxed as a partnership firm, with the partners being taxed individually on their share of profits. In contrast, a partnership firm is taxed as a separate entity, with the firm liable for corporate taxes.
5. LLP offers limited liability protection to its partners, whereas a partnership firm does not. This means that the partners' personal assets are not at risk in the event of the LLP being sued or unable to pay its debts.
6. LLP is a relatively new legal structure introduced in India in 2008. As a result, it is less well-regulated than a partnership firm. Depending on the partners' comfort level with less regulation, this can be both an advantage and a disadvantage.
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Disadvantages of LLP Over Partnership Firm
There are a few critical disadvantages of an LLP over a Partnership Firm that should be considered before making a decision:
- An LLP must file annual reports with the Registrar of Companies, whereas a Partnership Firm is not. It proves a bit of a hassle, and also means that your financial information is more public.
- An LLP is taxed as a separate entity, whereas a Partnership Firm is not. And hence you will have to pay taxes on your profits and any dividends you distribute to your partners.
- An LLP must have a designated partner responsible for the daily management of the business.
- An LLP is required to have audited financial statements, whereas a Partnership Firm is not. You will need to hire an accountant to prepare your statements, which can be an additional expense.
Conclusion
A partnership firm is an association of two or more persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Whereas a limited liability partnership (LLP) is where some or all partners (but not all) have limited liability. And this combines the features of both a company and a partnership.
The conversion process of a partnership firm into an LLP is relatively easy. The first step is to prepare a deed of partnership, which all the partners must sign. This deed must state the name of the LLP, the names of the partners, the nature of the business, each partner's capital contribution, and the partnership's terms and conditions.
Once the partnership deed is prepared, the partners must apply with the Registrar of Companies (ROC) to register the LLP. The ROC will then issue a Certificate of Incorporation, which will be the LLP's proof of legal existence. Once the LLP is registered, the partners can start the business as usual. However, there are some important compliance requirements that an LLP must adhere to, such as filing annual returns and maintaining statutory books.
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