If you plan to convert a partnership firm to an LLP, then there are certain things that you have to keep in mind. Read on to know more about it!
Overview
It is very common to form a partnership firm as it requires fewer compliances and costs. Partnership firms are governed by the provisions of the Income Tax Act 1961. When there arises any dispute or the business grows positively, they tend to convert to LLPs. If you wish to convert them into Limited Liability Partnerships (LLPs) under Section 44AB of the IT Act 1961, then you must follow some specific procedures. In this blog, you shall see how it is possible to convert a partnership firm into an LLP with the same GSTIN?
Convert a Partnership Firm Into an LLP with the Same GSTIN: Introduction
Can a Partnership Firm be transformed into an LLP while retaining the same GSTIN? Before addressing this query, it’s important to recognize the growing prevalence of Limited Liability Partnerships (LLPs) in recent years. LLPs have gained popularity due to their enhanced flexibility compared to other organisational structures, such as unlimited partnerships. One of the key attractions of LLPs is their limitation on liability, which shields partners from personal asset risks beyond their investment in the business.
The transition from a traditional partnership to an LLP presents several advantages, primarily stemming from the LLP’s characteristics of limited liability and perpetual succession. Limited liability protects partners from personal financial liability beyond their invested capital, which can alleviate concerns about potential business risks.
Moreover, LLPs offer the benefit of perpetual succession, ensuring that the business can continue its operations seamlessly even in the event of partner changes or succession. This feature enhances the stability and longevity of the business entity, which may be appealing to partners considering the conversion.
Considering these advantages, converting a Partnership Firm into an LLP while retaining the same Goods and Services Tax Identification Number (GSTIN) is indeed feasible and may be advantageous for partners seeking to enhance their business structure’s flexibility and liability protection.
Key Differences Between an LLP and a Partnership Company
Key differences to learn to convert a partnership firm into an LLP
Limited Liability Partnership (LLP):
- Has a separate legal entity
- Liability is limited to the investment
- Follows a corporate structure and prepares books of account
- No maximum partners limit
- DSC is issued to all the partners.
Partnership:
- Does not have a separate legal entity
- Liability is unlimited and can extend up to personal assets
- No mandatory structure
- Limited to a maximum of 20 partners
- No DSC requirement.
Why Choose LLP Over a Partnership Company?
1. The flexibility of ownership:
There are many advantages to a limited liability partnership over a partnership firm. A limited liability partnership shares the liability equally among the partners. This means that all of the partners are able to take advantage of running their business without having to worry about going out of business or losing money on each transaction. Also, partnerships have limitations on how much management control each partner can exercise over the company. For instance, in some cases, one partner could be restricted from transferring ownership of the company because they hold more than half of the voting rights.
2. The convenience of succession:
A perpetual succession refers to a process where one business is passed down through generations. LLP has the ability to keep a business intact and continuing, while partners in partnerships are only around for the length of their contract.
3. The ease of investment:
As an investment, the LLPs are more likely to attract investors, which increases the chances of a successful deal. Additionally, it is much easier for VCs to conduct business with LLP with its corporate structure than with a partnership firm.
Conditions and Pre-requisites to form an LLP
Conditions:
- Unanimous agreement among all partners for the LLP conversion.
- Partners’ equity in the new LLP mirrors their capital shares in the partnership firm.
- Mandatory contribution from each partner to the LLP.
- Exclusively existing partners of the partnership firm can become LLP partners.
Prerequisites:
- Updated filing of income tax returns.
- Approval from all unsecured creditors for the conversion proposal.
- Minimum of 2 Designated Partners, with at least 1 being an Indian Resident.
- The possibility of overlap between Partners and Designated Partners.
- Although share capital isn’t obligatory, each partner must contribute to the LLP.
Procedure to Convert a Partnership Firm to LLP
Step 1: Name Reservation Begin by submitting the web-based form RUN LLP to reserve the name for the proposed LLP. Ensure that the chosen name includes either “LLP” or “Limited Liability Partnership” at the end. The approved name remains valid for 90 days from the approval date.
Step 2: Incorporation Form Filing Once the proposed LLP’s name is approved, proceed to file the eForm FILLIP along with necessary attachments, including:
- Utility bill (not exceeding two months) for the registered office, accompanied by a No Objection Certificate (NOC)
- Signed Subscribers Sheet
- Consent from all partners
- Proof of identity and address for all subscribers
- NOC of the existing partnership
- Details of LLP/Company where partners/Director/Partner hold positions
Step 3: Submission of eForm 17 Partners must apply conversion in eForm 17 along with the required attachments:
- Certified Statement of Assets & Liabilities by a practicing Chartered Accountant (CA)
- List of Creditors with consent for conversion
- Consent of all partners
- Necessary approvals from relevant authorities
- Statement of Partners in prescribed format
- Copy of the latest Income Tax Return acknowledgement
- Existing Partnership Deed
- Registration Certificate issued by Registrar of Firms (if applicable)
Step 4: Approval or Re-submission Upon approval, the Registrar issues a Certificate of Incorporation. In case of rejection, partners can appeal to the Tribunal for the Registrar’s refusal.
Step 5: Intimation to Registrar of Firms Within 15 days of conversion, intimate the Registrar of Firms using Form-14 along with attachments:
- Copy of LLP Certificate of Incorporation
- Copies of submitted Incorporation documents
Step 6: Filing of Form LLP-3 (LLP Agreement) File eForm LLP-3 with the Registrar within 30 days from the conversion date, attaching the LLP Agreement. After incorporation, the Partnership Firm is dissolved, and all its assets, liabilities, rights, and obligations are transferred to the LLP.
Conversion of Partnership to LLP: Conclusion
In the GST Act, when converting a partnership into an LLP, certain assets transfer tax-free, including stocks, under Schedule II. This exemption also applies to the transfer of a going concern, as per a 2017 CGST notification. Since an LLP has a different PAN card, it needs a separate GST registration. Therefore, during conversion, a new GST registration is required, with documents like the LLP agreement, new LLP PAN card, partner details, and address proofs like recent utility bills and an NOC from the owner. For more legal insights, visit Vakilsearch!
FAQs
How many partners are required for LLP?
A minimum of two partners are required to form an LLP, at least one of whom must be a resident of India.
What cannot be converted into LLP?
Entities that cannot be converted into Limited Liability Partnerships (LLPs) include sole proprietorships, companies, Hindu Undivided Families (HUFs), trusts, partnership firms with non-consenting partners, entities engaged in certain regulated activities, and those facing legal proceedings.
Why is LLP better than a partnership?
An LLP enjoys perpetual succession, implying that its continuity remains unaffected by the entry or departure of partners. In contrast, a partnership firm lacks perpetual succession, and its continuation hinges on the collective decision of its partners.
What is the minimum capital requirement for LLP?
There is no minimum capital requirement for registering an LLP.
Who is eligible for LLP registration?
To establish an LLP, a minimum of two partners is necessary, with no restriction on the maximum number of partners. Additionally, there must be at least two designated partners among them, all of whom must be individuals, and at least one of them must be an Indian resident.
Is profit from LLP taxable?
For LLPs, taxation is set at 30% for income up to 1 crore, with an additional 12% surcharge on total income exceeding 1 crore. Companies are subject to a tax rate of 25% if their turnover is up to 400 crores; otherwise, the rate increases to 30%.
What is the salary of partners in LLP?
The salary of partners in a Limited Liability Partnership (LLP) is not termed as salary but rather referred to as profit share or drawings. Unlike employees who receive fixed salaries, partners in an LLP typically withdraw funds from the LLP's profits based on the agreed-upon profit-sharing ratio outlined in the LLP agreement. The amount withdrawn by each partner is based on the LLP's profitability and the terms agreed upon among the partners. It's important to note that these withdrawals are not considered as salary but rather as a distribution of profits.
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