Partnership Firm into LLP: Expanding the Business Horizon

Forms of Business

In India, various business models exists like proprietorship, company, limited liability partnership (LLP), HUF etc. among these Partnership Firm is one of the popular and widely accepted form of business where two or more person intends to carry on any business activities. Where more than one or two person are willing to start business, sole proprietorship may not be appropriate form whereas formation of Company requires ample amount of fund and calls for various compliances, thus in such scenario forming a Partnership Firm turns out to be best alternative.

Since partnership as a form of business has its own limitation like no separate legal entity, no limited liability, capital funding crunches etc., partners are now inclining towards conversion of their partnership firm into a Limited Liability Partnership having features similar to a corporate.

Why Partnership Firms opt to convert into LLP?

The major reason behind converting a Firm to Limited Liability Partnership is to get high credibility and to move a ladder up in the corporate sector.

LLP is a form of body corporate and gives more brand recognition and increases value in the market when compared to the image of a partnership firm in the business field.

It is certain that any investor or banks gives more preference to a LLP in comparison to an unregistered or registered firm. Further conversion into LLP gives the firm status of a separate legal entity and the same gets registered in the database of Ministry of Corporate Affairs.

Limited Liability Partnership at a Glance

A partnership which got itself registered under The Limited Liability Partnership Act, 2008 whereby partners intends to carry an objective clearly mentioned through an agreement is known as an arrangement of Limited Liability Partnership.

Below given are some features of LLP as provided under LLP Act, 2008.

  1. Status of body corporate: LLP is a body corporate which enjoys status of separate legal entity and perpetual succession meaning thereby partners of LLP are considered separate from LLP and partners may come and go but LLP will remains in existence.
  2. Designated Partners and Partners: LLP shall have at least two designated partners who are individuals and at least one should be resident in India, Body corporates can also be members of LLP where nominee of such body corporates will be considered as designated partner.
  3. LLP Agreement: All the mutual rights and liabilities of partners will be governed by LLP agreement including its objectives, duties, manner of induction and cessation, termination and other important clause.
  4. Partner Status: Every Partner of LLP is an agent of LLP for the purpose of carrying business of LLP.
  5. Liability: Partners are not held personally liable directly or indirectly solely for the reason of being partners, unless they have acted without authority and breached clauses of partnership by wrongful act.

Difference in Firm and LLP

Particular Limited Liability Partnership Partnership Firm
Registration  LLP comes into existence only after registration It is not necessary to register a partnership firm.

Partners may or may not register their Firm

Act LLP is governed by LLP Act, 2008 Partnership Firm is governed by Partnership Act, 1932
Perpetual Succession It enjoys perpetual succession Does not have perpetual succession
Status Separate Legal Entity No Separate Legal Entity
Designated Partner Minimum two designated partners required No concept of Designated Partner

Residency

One partner must be resident in India

No such requirement

Public interface Documents can be available after payment of certain fees to the Ministry of corporate affairs No such facility for partnership firm
Compliance Various compliances are required including annual return, filing statement of asset and liability etc. Comparatively less compliance

Process to convert Partnership Firm into LLP

Section 55 of Chapter X and second schedule of LLP Act, 2008 mentions the provisions for conversion of firm into LLP.

A partnership firm may apply to convert itself into LLP in accordance with second schedule after following  below given procedure:

  1. Partners to have valid class two digital signature and DIN/DPIN.
  2. Partners to prepare a LLP agreement to chalk out the management and working of LLP and to decide particulars to be included in agreement and file details for incorporation like registered office, profit sharing ratio etc.
  3. Partnership Firm to apply for name in form RUN_LLP with Central Registration Centre, governed and controlled by MCA.
    After approval of name apply for incorporation or DIN (if do not have DIN) of LLP in Form FiLLiP.
    Alternatively, Firm can directly file form FiLLiP as it also gives option of name reservation in the form along with incorporation and DIN approval.
  4. File E Form 17 for application for conversion and filing statement for conversion of a Firm into LLP.
  5. File E Form 3 for providing information of LLP agreement with the Central Registration Centre.
  6. After approval of incorporation and Form 17is required to be filed for intimating the Registrar of Firms about conversion of firm into LLP.

Pre requisites for Conversion

  • All partners of the Firm to become partners of LLP and no else cannot be partner at the time of application.
  • Consent of all secured creditor is to be obtained prior to making application for conversion.
  • All applicable clearances, approvals and permissions for conversion of the firm into LLP For example if any firm is registered with any institutional body like Institute of Company Secretaries of India (ICSI) then it should seek approval from ICSI for such conversion.

Points to Remember

  • All property, asset, liability, interest, rights , privileges, obligations of the Firm will be transferred to the LLP.
  • All proceeding pending against the firm will continue against the LLP.
  • Any conviction, order, judgment, ruling of any court, tribunal or any other authority in favour or against the Firm may be enforced by or against LLP.
  • LLP will be deemed to be a party of any agreement which was entered into by Firm initially.
  • Every contract of employment shall continue to remain in force after conversion into
  • If firm is appointed anywhere for some role or capacity it will continue to remain with LLP as if LLP was appointed for such role.
  • Every partner of the Firm will remain personally liable for the acts conducted prior to the conversion of Firm into LLP.
  • Any approval or licence issued in the name of the firm will remain effective and valid for the LLP post conversion subject to the any other provision prescribed by authority permitting such approval or licence.

Clarification by Ministry on some Issue

Ministry of Corporate Affairs vide its circular dated 09/2013 clarified regarding below given points for conversion of Firm to LLP:

  1. Provisions for LLP Act,2008 specifies for conversion of Firm into LLP, it is not allowed to convert to or more firms into one LLP.
  2. If an Auditor Firm, being auditor of some Company, gets converted into LLP then such LLP would be deemed to be the Auditor of the Company and appointee Company shall note of the same through Board Resolution.

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