Choosing the right business structure is critical for the success of an organisation. Are you looking out to convert your partnership firm into an LLP? If yes, it is important to weigh the pros and cons of such a conversion before making the decision to switch.
Indian legal system offers a wide range of business structures such as proprietorship, partnership, LLP, Company, etc. Each structure has its own benefits and disadvantages. A Limited Liability Partnership (LLP) is one such business structure that offers the limited liability protection of a corporation and the flexibility of a partnership.
However, there are also some disadvantages to consider before converting a partnership into an LLP. In this article, let’s understand the merits and demerits of this conversion with Vakilsearch to decide whether converting a partnership into an LLP is the right choice for your business.
What is a Partnership Firm?
A partnership is a type of business structure in which two or more individuals or entities come together to operate a business. They share the profits and losses of the business as per the terms of the Partnership Deed. It is governed by the Indian Partnership Act of 1932.
What is LLP?
A Limited Liability Partnership, or LLP, is a business structure that combines elements of both a partnership and a corporation. LLP is a separate legal entity distinct from its partners. Thus, in an LLP, the partners are not personally liable for the debts and obligations of the business. It is governed by the LLP Act, 2008.
Reach out to Vakilsearch to register your business as LLP or a partnership firm.
Brief Procedure for Conversion of Partnership into LLP
Section 55 of the LLP Act 2008 deals with the conversion of a partnership firm into an LLP. The process typically involves the following steps:
Step 1: Obtain DPIN (DIN) of designated partners
Step 2: Obtain Digital Signature Certificate
Step 3: Reserve a name using the RUN LLP application on the MCA portal
Step 4: File the LLP incorporation form “fiLLip” along with the requisite fee
Step 5: After approval, draft an LLP agreement and file it with MCA in Form 3 within 30 days of incorporation.
Benefits of LLP
- One of the main advantages of an LLP is the limited liability feature that protects its partners from the debts and obligations of the LLP over and above their contribution
- There is no upper limit for the number of partners in an LLP
- LLP being a separate legal entity, can exist distinct from its partners and can hold properties or even enter into contracts in its own name
- LLPs being subject to audit and governed by MCA leads to a more trustworthy organisation
- LLP has the feature of perpetual succession. LLP can continue to exist even after the death or retirement of its partners. New partners can continue the business without having to dissolve the LLP.
Disadvantages of LLP
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Public Disclosure of Financials
LLP is governed by the LLP Act, 2008, which mandates the submission of its financial information annually with MCA. This information can easily be accessed by any person by paying a small fee as they are public documents. Thus LLP does not have the benefit of confidentiality that is enjoyed by sole proprietorship or partnership firms.
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Limited Funding Alternatives
LLPs can raise funds only through limited opportunities, such as loans from financial institutions or partners. Venture capitalists or Angel investors normally are not interested in investing in LLP as they have to become partners of LLP to get a stake in it. As a partner of LLP has certain responsibilities, they don’t prefer to burden themselves with these responsibilities. There are more restrictions for FDI (Foreign Direct Investments) in LLP. Thus LLP is not an ideal choice for businesses that wish to grow fast by raising funds from VCs or FDI.
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Heavy Consequences of Non-compliance
Compared to traditional partnership firms, LLPs are more regulated. Thus they are bound to make certain compliances, such as filing Financial statements and Annual returns. Though the compliances are minimal, non-compliance of this could lead to a hefty penalty for both LLP and its partners.
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Presumptive Tax Scheme not Applicable
As per the Finance Act 2009, it is clarified that LLPs are treated on par with traditional partnership firms for the purpose of Income-tax. Thus the tax rates and other provisions of the income-tax Act apply in the same manner to LLP as it applies to partnership firms with one exception, which is section 44AD.
Section 44AD prescribes a presumptive taxation scheme that enables small businesses to pay tax on a presumptive basis instead of maintaining detailed records. This scheme is applicable only to individuals/HUF/partnership firms. LLP cannot avail of this benefit. Thus LLPs are subject to tax audit if their turnover exceeds 1 Crore in the previous year.
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Statutory Audit Applicability
In India, partnership firms are governed by the Indian Partnership Act of 1932. As per this Act, the audit of a partnership firm is voluntary. However, a Limited Liability Partnership is governed by the LLP Act, 2008. This Act specifies that if an LLP has a turnover of more than 40 lakhs or a contribution of more than 25 lakhs, then it is mandatory to get its accounts audited. Thus LLPs are subject to mandatory audits, whereas partnership firms are not.
Conclusion
In conclusion, while converting a partnership into a Limited Liability Partnership (LLP) can offer certain benefits, such as limited liability protection and flexibility in management, it is important for businesses to carefully consider the potential drawbacks before making the switch. It is advisable to seek the advice of a lawyer or chartered accountant before deciding whether this business structure is the right choice for your business.
With Vakilsearch, the Conversion of Partnership Firm into LLP can be easily done. We guide you through the complete process of conversion and provide our best efforts to within the scheduled time frame.
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