7 Advantages of Converting a Partnership into Limited Liability Partnership

Last Updated at: Oct 30, 2020
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A few years back, a new type of company registration was introduced by the government of India. These companies were called a Limited Liability Partnership. This article purposes to explain some of the primary paybacks business owners get by converting a partnership firm into an LLP in the hope to make the decision smarter.

A few centuries ago, businesses were typically owned by members of the same family that worked together and reaped returns of their collective hard work. The structure changed with technical expertise, resources and contacts becoming key business assets and partnerships were fostered with new people and business owners. Just about ten years ago, a hybrid between a company and partnership style of business came about, known as Limited Liability Partnership.

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The following are the advantages of converting a general partnership into a limited liability partnership, also known as LLP.

  1. Reduced risk exposure – Limited liability of partners
    As the name suggests, Limited Liability Partnership borrows the distinctive feature of company form of business of limited liability. What this means for the partners, is that they cannot be personally held liable for fulfilling the debts of the firm, even though the financial obligation may be solicited or contracted by them. In this way, personal assets like land, property, jewellery, and other valuables belonging to the partner are ring-fenced from being sold to service debts of the firm.

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  1. Ideal for expanding the business – No limit on the number of partners
    Another advantage is that while a traditional partnership necessitates a minimum of two and a maximum of 20 partners, the limited liability partnership can have an unlimited number of partners and hence, is a worthwhile option when the business is expanded and multiple experts in varied fields may be required.
  1. Audit procedures, governance and better investor confidence
    In case the turnover of the limited liability partnership exceeds the prescribed limit of 25 lakhs of contribution or turnover exceeds 40 lakhs rupees in any financial year, it has to mandatorily undergo an audit. The advantage of this is improved governance, management, and record-keeping, which also makes it easier to apply for licenses and loans. Also, this improves the confidence of various stakeholders in the entity and enhances the creditworthiness of the company and increases access to resources.
  1. Perpetual succession
    Since partnership is not treated as a separate entity, it’s existence depends on the will of the partnership (except in the case of a partnership limited by time). However, the limited liability partnership is clothed as a separate legal entity having its own seal and perpetual succession, which means that the exit or demise of one or more partners will have no effect on the continuity of the partnership.
  1. No capital gains tax on conversion
    While conversion of a partnership firm into a limited liability partnership is effected; there arises no capital gains taxation on the same.
  1. Carry forward of losses allowed
    In case there were any losses incurred during any year while the general partnership was in existence, which have not been set-off against gains in any year, the same become eligible for set-off under the new limited liability partnership’s accounts.
  1. Ability to undergo mergers, amalgamations
    Unlike a partnership firm, a limited liability partnership has the legal capacity to merge with another limited liability partnership or have a compromise, arrangement or joint venture with another firm.

In conclusion, a hybrid between a company and a partnership style of business is termed as a Limited Liability Partnership. The major merits of an LLP have reduced risk exposure, perfect for expanding the business, and the ability to undergo mergers or amalgamations easily, unlike in a partnership company.

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Avani Mishra is a graduate in law from the National Law Institute University, Bhopal. She qualified the Company Secretary course with an All India Rank 1 and is a recipient of the President’s Gold Medal for her academic distinctions. She also holds a B.Com degree with a specialization in Corporate Affairs and Administration.