Partnership to LLP Conversion in India

Converting a traditional partnership to a Limited Liability Partnership (LLP) offers several key advantages. The most significant is limited liability, which protects your personal assets from business debts. Unlike a traditional partnership where partners are personally responsible, an LLP shields you from the actions of other partners and the firm's financial obligations.

This structure also provides more flexibility in management and a separate legal identity, making it easier to build trust with clients and investors.

Additionally, LLPs offer better access to funding and remain cost-effective with a lower compliance burden compared to a private limited company, while still retaining the simplicity of a partnership.

The conversion process is governed by Section 55 of the LLP Act, 2008, read with the Second Schedule, which lays down the legal framework for a smooth and compliant transition from a traditional partnership to an LLP.

Here’s a comparative overview highlighting the differences between an LLP and a traditional Partnership Firm in India:

Converting or choosing an LLP over a traditional Partnership Firm offers several significant benefits, primarily related to liability, legal status, flexibility, and longevity:

1. Limited Liability Protection

This is the most crucial benefit. In an LLP, the personal assets of the partners are protected from the debts and liabilities of the business. Each partner's liability is limited to their agreed contribution to the LLP. In contrast, partners in a traditional partnership have unlimited liability, meaning their personal assets can be used to settle business debts.

2. Separate Legal Entity

• An LLP is a separate legal entity, which means it is different from its partners.
• It can own property, sign contracts, and file or face legal cases in its own name.
• In a traditional partnership, the law does not legally distinguish the business from its partners.
• Therefore, partners are personally responsible for the firm's actions and debts.

3. Perpetual Succession

An LLP has perpetual succession, meaning its existence is not affected by the death, retirement, insolvency, or change of partner. The business continues to operate seamlessly. A traditional partnership firm, on the other hand, typically dissolves upon the exit or death of a partner unless the partnership deed explicitly provides for continuation.

4. Flexibility in Management

LLPs offer greater flexibility in defining the roles and responsibilities of partners through the LLP Agreement. It allows for designated partners to handle day-to-day operations, while other partners can contribute capital without being actively involved in management. In a traditional partnership, all partners generally have an equal say in management.

5. No Limit on Number of Partners

An LLP must have at least 2 partners to start, but there is no upper limit on the number of partners it can have.

This makes LLPs a highly scalable option for growing businesses that may need to add more partners over time.

In comparison, a traditional partnership firm in India can have a maximum of 50 partners, which can be a restriction as the business expands.

6. Enhanced Credibility and Global Recognition

Being a registered entity with a separate legal identity, an LLP generally enjoys greater credibility among clients, investors, and financial institutions, both domestically and internationally.

Also, after registration, the LLP gets a unique number called LLPIN (Limited Liability Partnership Identification Number). This number helps in verifying the LLP’s legal status and increases its professional image and trustworthiness.

7. Tax Benefits

Both LLPs and partnership firms are taxed at a flat rate of 30% on their income, plus applicable surcharge and cess.

But LLPs have one big advantage. They don’t have to pay Dividend Distribution Tax (DDT) when giving profits to partners. This makes it more tax-friendly than companies.

8. Ease of Transferability

In an LLP, adding a new partner or transferring ownership is usually easier. It mainly requires an update to the LLP Agreement.

On the other hand, in a traditional partnership firm, this process is more difficult as it often needs approval from all existing partners.

To convert a partnership firm into a Limited Liability Partnership (LLP), the firm must first fulfill specific eligibility requirements.

1. Registration Under Indian Partnership Act, 1932: The partnership firm must hold an official registration under this Act.
2. Partner Agreement and Continuity:

• • All partners of the existing firm must agree to the conversion; unanimous consent is mandatory.
  • The LLP, at the point of conversion, must comprise the identical set of partners as the original partnership firm.
  • Alterations to the partner composition (e.g., adding or removing partners) are permissible post-LLP formation, in accordance with the LLP agreement.

3. Absence of Security Interest on Assets: There should be no existing security interests (such as mortgages or charges) on the partnership firm's assets at the time of submitting the conversion application.
4. Minimum Designated Partners: An LLP is mandated to have at least two designated partners, who must be natural persons.
5. Digital Signature Certificates (DSCs): All partners involved in the conversion process are required to possess valid DSCs.
6. Designated Partner Identification Number (DPIN): At least two designated partners must obtain a DPIN, also recognized as a Director Identification Number (DIN).
7. Adherence to Other Legal Requirements: The firm must comply with all other pertinent laws and regulations, including the timely submission of all pending tax returns and financial statements.
8. No Partner Disqualification: No partner should be disqualified under any applicable legal provisions, such as Section 5 of the LLP Act, 2008.

The following step-by-step process outlines how to convert a partnership firm into LLP in India:

Step 1: Name Approval and Digital Signature Certificate (DSC)

1. Name Approval

• • Begin by registering and logging into the Ministry of Corporate Affairs (MCA) portal.
  • Navigate to the “MCA Services” section and select “RUN – LLP” (Reserve Unique Name).
  • Choose the option “Conversion of Firm into LLP” from the dropdown menu.
  • Provide two proposed names for the new LLP.
  • Upload any supporting documents in PDF format and click the “Submit” button.
  • Proceed to the payment gateway to pay the application fee of ₹200.
  • The approved name will be reserved for 90 days.

2. Digital Signature Certificates (DSC)

• • Designated Partners must obtain their Digital Signature Certificates before moving forward.
  • All e-forms involved in the conversion process must be digitally signed using the DSCs of the Designated Partners.

Step 2: Filing Required Forms with the Registrar of Companies (RoC)

1. Form 17 – Application for Conversion

This form requires the following details:

• SRN (Service Request Number) from the RUN – LLP application.
• Proposed name of the LLP.
• Firm’s name, address, registration number, and partnership deed details.
• Information about the number of partners and capital contributions.
• Details of secured creditors.

Mandatory Attachments:

• Consent of all partners for the conversion.
• Statement of assets and liabilities certified by a practicing Chartered Accountant.
• Copy of the most recent Income Tax Return acknowledgment.
• List of secured creditors along with their written consent.
• Additional supporting documents, if applicable.

2. Form FiLLiP – LLP Incorporation Application

This form includes:

• Auto-filled details from the RUN – LLP form.
• Address and email ID of the LLP’s registered office.
• Jurisdictional RoC office.
• Description of proposed business activities.
• Details of all partners/designated partners, including DIN/DPIN, PAN, and contributions.

Attachments Required:

• Proof of registered office address.
• Consent letters from subscribers.
• NOC from the property owner and recent utility bills (not older than 2 months).
• Regulatory approvals, if needed.
• Details of other companies/LLPs where designated partners are involved.
• Identity and address proof of the applicants.
• In case of name similarity with existing entities, a Board Resolution or NOC from the concerned LLP or company.

Step 3: Certificate of Registration

Once the Registrar approves the submitted forms, a Certificate of Registration for the newly incorporated LLP is issued.

Step 4: Execution of LLP Agreement

Within 30 days of incorporation, Form LLP–3 must be filed with the Registrar to submit the LLP Agreement.

The agreement must include the following details:

• Name of the LLP
• Details of designated and other partners
• Capital contribution and profit-sharing ratio
• Rules and regulations governing the LLP
• Rights and responsibilities of the partners

Step 5: Notification to Registrar of Firms

The Registrar of Firms must be notified about the conversion within 15 days of incorporation using Form 14.

This form should be accompanied by:

• A copy of the LLP’s Certificate of Incorporation
• A copy of the incorporation documents submitted via Form FiLLiP

The following documents are necessary for the successful conversion of a partnership firm into a Limited Liability Partnership (LLP):

Documents to Be Submitted by the Partners

• PAN Card or Passport (for Foreign Nationals & NRIs)
• Aadhar Card, Voter ID, Passport, or Driver’s License
• Most recent bank statement, telephone/mobile bill, or electricity/gas bill
• passport-sized photograph
• Specimen signature (the partner’s signature on a blank sheet of paper, which will be scanned for use in digital applications).

Note: One of the partners must self-attest the first three documents.

For Foreign Nationals and NRIs:

• If residing in India or a non-Commonwealth country, the documents must be notarized.
• If residing in a Commonwealth country, the documents must be apostilled.

Documents for the Registered Office

• Latest utility bill (bank statement, telephone/mobile, electricity, or gas bill)
• Notarized rental agreement in English (if the property is rented)
• No-Objection Certificate (NOC) from the property owner
• Sale deed or property deed in English (if the property is owned)

Converting a Partnership Firm to a Limited Liability Partnership (LLP) involves a range of costs.

1. Statutory & Government Fees

These are mandatory charges payable to the Ministry of Corporate Affairs (MCA) and other government bodies during the conversion process.

• Name Reservation (RUN-LLP): Rs. 200 (Fee to reserve your LLP name. Can be skipped if applying directly through the FiLLiP form.)
• LLP Incorporation & Conversion Fee (via FiLLiP): Based on the LLP’s capital contribution:
  • Up to Rs. 1 lakh – Rs. 500
  • Rs. 1 lakh to  Rs. 5 lakhs – Rs. 2,000
  • Rs. 5 lakhs to  Rs. 10 lakhs – Rs. 4,000
  • Above  Rs. 10 lakhs – Rs. 5,000 to Rs. 25,000
• Filing of LLP Agreement (Form 3): Varies by capital amount; starts from Rs. 50. Late filing invites a penalty of Rs. 100 per day.
• DPIN (Designated Partner Identification Number): Usually issued free when obtained during LLP incorporation.

2. Professional & Digital Services

These costs are associated with digital signatures and expert assistance throughout the conversion.

• Digital Signature Certificates (DSC): Rs. 800 – Rs. 1,500 per partner (Required for online filings. Two partners may cost Rs. 1,600 to Rs. 3,000.)
• Consultation & Professional Fees: Rs. 5,000 – Rs. 20,000+ (For legal drafting, documentation, compliance advisory, and end-to-end filing support.)
• Notary & Attestation Charges: Rs. 100 – Rs. 500 (For notarizing affidavits and required declarations.)

3. Other Variable Expenses

These are additional costs that vary based on location, capital, and specific case requirements.

• Stamp Duty on LLP Agreement: Depends on the registering state and capital contribution. In states like Delhi or Maharashtra, it’s usually 1% with a cap.
• PAN & TAN Application Fees: Rs. 66 (PAN), Rs. 77 (TAN) (Required if new PAN and TAN are being issued for the LLP.)
• Miscellaneous Costs: Rs. 500 – Rs. 2,000+ (Includes admin charges like courier, printing, and other incidental expenses.)

When a partnership firm is converted into a Limited Liability Partnership (LLP), it can have certain tax and GST implications.

Income Tax Implications

1. No Capital Gains Tax on Conversion (if conditions are met)

As per Section 47 of the Income Tax Act, 1961, the conversion of a partnership firm into an LLP is not treated as a transfer, and hence, no capital gains tax is levied if the following conditions are satisfied:

• • All assets and liabilities of the firm become assets and liabilities of the LLP.
  • All partners of the firm become partners of the LLP.
  • The capital contribution and profit-sharing ratio of partners remain the same in the LLP.
  • No amount is paid to partners from the accumulated profits or reserves after conversion for three years.
  • The total sales/turnover/gross receipts of the firm in any of the preceding three years did not exceed Rs. 60 lakh.
  • The total value of assets in any of the preceding three years did not exceed Rs. 5 crore.

If any of these conditions are not met, the conversion will be treated as a transfer, and capital gains tax will be applicable.

2. Carry Forward of Losses and Unabsorbed Depreciation

If all the above conditions are met, business losses and unabsorbed depreciation of the firm can be carried forward by the LLP under Section 72A of the Income Tax Act.

3. Same PAN and Filing Requirements

• A new PAN is required for the LLP after conversion.
• The LLP will need to file income tax returns as a separate legal entity from the date of incorporation.

GST Implications

1. New GST Registration

• • The LLP must apply for a new GST registration since the legal identity of the business changes.
  • The GST registration of the partnership firm should be surrendered once the new LLP registration is in place.

Note: The GST registration of the old partnership firm must be surrendered within 30 days from the date of conversion to LLP.

2. Transfer of Input Tax Credit (ITC)

• • As per Rule 41 of CGST Rules, 2017, the existing firm can transfer unutilized Input Tax Credit (ITC) to the LLP by filing Form GST ITC-02.
  • The firm must declare the transfer of business and specify the amount of ITC to be transferred.

3. Continuation of Invoices and Contracts

• • After conversion, invoices and contracts must be issued in the name of the LLP.
  • Any pending tax liabilities of the partnership firm must be discharged before or during the conversion.

• Dissolution of Partnership: The original partnership firm is officially closed down and taken off the records of the relevant government body, like the Registrar of Firms.
• Establishment of LLP: A brand new LLP is created with its own distinct legal identity, and its name is formally added to the registration certificate.
• Transfer of Assets and Liabilities: All possessions, debts, rights, and responsibilities of the old partnership firm are fully transferred to and become the property of the newly formed LLP.
• Continuation of Existing Contracts: Any existing agreements or contracts that the partnership firm had entered into remain valid and are now legally binding on the LLP.
• Pending Legal Proceedings: Any ongoing court cases or legal actions, whether started by or against the partnership firm, will now continue by or against the LLP.
• Limited Liability: Partners in the LLP benefit from limited liability, which generally means their personal belongings are safe from the business's debts and obligations. However, partners remain accountable for any liabilities of the old partnership that came about before the conversion.
• Continuity of Business: The LLP can carry on the business operations without any breaks, making full use of the assets, contracts, and legal standing that belonged to the former partnership.
• Specific Disclosures: For a certain period (for example, 12 months), the LLP must mention its previous status as a partnership firm in its official communications.

Converting a traditional partnership into an LLP can present several hurdles. These often include navigating complex legal paperwork, ensuring all documents are correct, and making sure the switch is smooth for everyone involved, especially partners and those owed money. A major difficulty is getting everyone, including all partners and creditors, to agree to the change, along with smoothly moving all assets and debts from the old partnership to the new LLP.

• Documentation and Compliance: A frequent issue is having missing or wrong paperwork, which can cause significant delays and even rejections. It's vital to meet all legal rules and regulations, and getting professional legal advice can be very helpful here.
• Partner and Creditor Consent: It's necessary to get the agreement of all partners and anyone the partnership owes money to. This might mean talking openly about the benefits of switching to an LLP and calming any worries they might have.
• Transfer of Assets and Liabilities: The conversion process involves moving all assets (like property), liabilities (debts), and contracts from the old partnership to the new LLP. This could mean rewriting some agreements and making sure licenses and registrations are properly transferred.
• Financial and Tax Implications: The tax effects of the conversion need careful thought. This includes how it might change income tax rates, what deductions are allowed, and any limits on getting funding for the LLP.
• Employee Transition: The conversion might impact employee contracts and benefits. This requires a smooth changeover plan and clear communication with all employees.
• Stakeholder Communication: It's important to tell clients, suppliers, and other key people about the conversion to ensure a seamless transition for everyone.

Overcoming Challenges

• Seek Professional Legal Advice: Getting advice from legal experts who specialize in LLP conversions can help you manage the complicated parts of the process.
• Detailed Partnership Agreement: Having a thorough partnership agreement that spells out responsibilities, how profits are shared, and how disagreements will be handled is crucial for a smooth transition.
• Transparent Communication: Being open and honest when talking with all partners, creditors, and other involved parties is essential for addressing concerns and ensuring a smooth change.
• Careful Planning and Execution: Careful planning and carrying out the conversion process, including handling all legal, financial, and operational aspects, are key to making it successful.

Pro Tip: A partnership firm cannot be converted into an LLP if it is engaged in any business that requires prior regulatory approval, like banking, insurance, or NBFCs, unless such approval is obtained before the conversion.