This article aims to clarify some of the key benefits that business owners receive by converting a partnership firm into an LLP in order to help them make a more informed decision.
Many businesses start as partnerships and as they grow face certain limitations. In that case, converting a partnership into an LLP is a great option.
Previously businesses were often owned by members of the same family who worked together and reaped the benefits of their joint hard work. Later on, technical talent, resources, and relationships which were essential company assets led to alliances formed with outside people and other business owners. This alliance was known as a partnership. However, partnerships suffered from unlimited liability and lack of proper regulation, which gave rise to the creation of the LLP model.
In light of this backdrop, the government of India introduced a unique type of company registration several years ago. These businesses were known as Limited Liability Partnerships. In simple terms, a mix of a company and a partnership model of business is known as a Limited Liability Partnership.
Advantages of Converting a Partnership Into an LLP
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 for partners
As the name implies, an LLP borrows from the company and partnership model of business forming the distinguishing attribute of limited liability. What this means for the partners is that they cannot be held personally accountable for the firm’s debts, even if the financial obligation was solicited or contracted by them. Personal assets such as land, property, jewellery, and other items belonging to the partner are thereby protected from being auctioned to satisfy the firm’s debts.
2. Ideal for business expansion – No upper limit on the number of partners
Another advantage is that, unlike a conventional partnership, which has a minimum of two and a maximum of 20 participants, a limited liability partnership can have an infinite number of partners, making it a viable alternative when the firm seeks to grow when expertise in different sectors is necessary.
3. Better audit procedures, governance, and greater investor confidence
If a limited liability partnership’s turnover surpasses the prescribed maximum limit of ₹25 lakhs of contribution or its turnover exceeds ₹40 lakhs in any fiscal year, it must face an audit. This allows for the advantage of increased governance, better management, and record-keeping, making it easier for an LLP to apply for licenses and financing. Moreover, mandatory audits boost the confidence of the stakeholders of the entity and also invariably improve the company’s creditworthiness and access to resources.
4. Perpetual succession
Since a partnership is not treated as a separate entity, its existence depends on the will and survival of the partners (except in the case of a partnership limited by time). However, a 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.
5. No capital gains tax on the conversion
When a partnership firm is converted into a limited liability partnership, there is no capital gains taxation on the transaction of conversion.
6. Carry forward of losses allowed
In case any losses are incurred during any year while the general partnership was still in existence, which has not been set off against gains in any year, the same will become eligible for set-off under the new limited liability partnership’s account.
7. 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 also to 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 a Limited Liability Partnership. The main benefits of an LLP are lower risk exposure, which is ideal for developing the firm, and additionally, there is also the capacity to readily undergo mergers or amalgamations, which is not possible with a partnership company.
If you’re looking to make the smart switch to an LLP, get in touch with our experts right away! Our team of experts will waste no time in getting your business on the legally sound wagon of compliance.
- Everything to know about converting LLP to private limited company
- Remuneration to LLP partners as per income tax act
- Documents required for LLP registration