Why Consider Converting Your Partnership to an LLP?

Converting a traditional partnership to a Limited Liability Partnership (LLP) offers several key advantages. The most significant is limited liability, which protects your personal assets from business debts. Unlike a traditional partnership where partners are personally responsible, an LLP shields you from the actions of other partners and the firm’s financial obligations.

This structure also provides more flexibility in management and a separate legal identity, making it easier to build trust with clients and investors.

Additionally, LLPs offer better access to funding and remain cost-effective with a lower compliance burden compared to a private limited company, while still retaining the simplicity of a partnership.

The conversion process is governed by Section 55 of the LLP Act, 2008, read with the Second Schedule, which lays down the legal framework for a smooth and compliant transition from a traditional partnership to an LLP.

Differences Between a Partnership and an LLP

Advantages of LLP Over Partnership Firm

1. Limited Liability Protection
   Protects personal assets; liability limited to capital contribution.

2. Separate Legal Entity
   LLP can own property, sue or be sued independently from partners.

3. Perpetual Succession
   LLP continues despite changes in partnership.

4. Flexibility in Management
   Roles defined by LLP Agreement; designated partners manage operations.

5. No Limit on Number of Partners
   Scalable business structure with unlimited partners.

6. Enhanced Credibility and Global Recognition
   Registered entity with LLPIN number boosts trust and credibility.

7. Tax Benefits
   No Dividend Distribution Tax (DDT) on profit sharing, unlike companies.

8. Ease of Transferability
   Easier addition or transfer of partners through LLP Agreement updates.

Eligibility Criteria for Partnership to LLP Conversion

To convert your partnership firm into a Limited Liability Partnership (LLP), your firm must meet the following eligibility requirements:

• Registered Partnership Firm: The firm must be officially registered under the Indian Partnership Act, 1932.

• Unanimous Partner Consent: All existing partners must agree to the conversion. The LLP at the time of conversion should have the same partners as the original firm.

• Post-Conversion Partner Changes: Changes in partner composition (adding/removing partners) are allowed after LLP formation as per the LLP agreement.

• No Security Interests: The partnership firm’s assets must be free of security interests (mortgages, charges) when applying for conversion.

• Minimum Designated Partners: LLP must have at least two designated partners who are natural persons.

• Digital Signature Certificates (DSC): All partners must hold valid DSCs for signing documents digitally.

• Designated Partner Identification Number (DPIN): At least two designated partners must have a DPIN (also known as DIN).

• Legal Compliance: The firm must have filed all pending tax returns and financial statements and comply with applicable laws.

• No Partner Disqualification: No partner should be disqualified under any legal provisions, including Section 5 of the LLP Act, 2008.

Process for Converting Your Partnership to an LLP

Step 1: Name Approval and Digital Signature Certificate (DSC)

• Name Approval:

  • Register and log in to the MCA portal.

  • Go to “MCA Services” → “RUN – LLP” → “Conversion of Firm into LLP.”

  • Submit two proposed names with supporting documents and pay ₹200.

  • Name reservation is valid for 90 days.

• Digital Signature Certificate (DSC):

  • Designated partners must obtain DSCs before filing any forms.

  • All e-forms must be digitally signed by designated partners.

Step 2: Filing Forms with Registrar of Companies (RoC)

• Form 17 – Application for Conversion:

  • Provide details such as the SRN from RUN-LLP, LLP name, partnership firm details, partners, capital, secured creditors, and attachments including partner consent, CA-certified assets & liabilities, recent income tax returns, and secured creditors’ consents.

• Form FiLLiP – LLP Incorporation Application:

  • Contains details auto-filled from RUN-LLP, registered office address, jurisdictional RoC, business activities, partner information (DIN/DPIN, PAN), and attachments such as address proof, consent letters, NOC from property owner, and regulatory approvals if applicable.

Step 3: Certificate of Registration

• Upon RoC approval, a Certificate of Registration for the LLP will be issued.

Step 4: Execution of LLP Agreement

• File Form LLP-3 within 30 days of incorporation to submit the LLP Agreement including partner details, capital, profit-sharing, and operating rules.

Step 5: Notify Registrar of Firms

• File Form 14 within 15 days of LLP incorporation to notify the Registrar of Firms, attaching:

  • LLP’s Certificate of Incorporation

  • Incorporation documents submitted through FiLLiP

Documents Required for Conversion

Documents from Partners

• PAN Card or Passport (for foreign nationals/NRIs)

• Aadhar Card, Voter ID, Passport, or Driver’s License

• Recent bank statement, telephone/mobile bill, or electricity/gas bill

• Passport-sized photographs

• Specimen signatures (scanned)

• Note: One partner must self-attest the first three documents.

Additional for Foreign Nationals/NRIs

• Notarized documents (if residing in India or a non-Commonwealth country)

• Apostilled documents (if residing in Commonwealth countries)

Documents for Registered Office

• Recent utility bill (bank, phone, electricity, or gas)

• Notarized rental agreement (if rented)

• No Objection Certificate (NOC) from property owner

• Sale deed/property deed (if owned)

Partnership to LLP Conversion Cost

1. Statutory & Government Fees

• Name Reservation (RUN-LLP): ₹200 (optional if applying via FiLLiP)

• LLP Incorporation Fee (FiLLiP):

  • Up to ₹1 lakh: ₹500

  • ₹1 lakh to ₹5 lakhs: ₹2,000

  • ₹5 lakhs to ₹10 lakhs: ₹4,000

  • Above ₹10 lakhs: ₹5,000 to ₹25,000

• LLP Agreement Filing (Form 3): Starting at ₹50; late filing penalty ₹100/day

• DPIN: Usually free when obtained with LLP incorporation

2. Professional & Digital Services

• Digital Signature Certificate (DSC): ₹800 – ₹1,500 per partner

• Professional Fees: ₹5,000 – ₹20,000+ (legal drafting, filings, compliance support)

• Notary & Attestation: ₹100 – ₹500

3. Other Variable Expenses

• Stamp Duty on LLP Agreement: Varies by state and capital, approx. 1%

• PAN & TAN Application Fees: PAN ₹66, TAN ₹77 (if new applications needed)

• Miscellaneous: ₹500 – ₹2,000+ (courier, printing, admin)

Taxation and GST Implications of Converting a Partnership Firm into an LLP

When you convert a partnership firm into a Limited Liability Partnership (LLP), it’s important to understand the tax and GST consequences involved.

Income Tax Implications

No Capital Gains Tax on Conversion (If Conditions Are Met)

Under Section 47 of the Income Tax Act, 1961, the conversion of a partnership firm into an LLP is not considered a transfer, so capital gains tax is not applicable provided all the following conditions are met:

• All assets and liabilities of the partnership become those of the LLP.

• All partners of the firm become partners of the LLP.

• Capital contributions and profit-sharing ratios remain unchanged.

• No amount is distributed to partners from accumulated profits or reserves for three years post-conversion.

• The firm’s total turnover/gross receipts in any of the preceding three years did not exceed ₹60 lakh.

• The total value of assets in any of the preceding three years did not exceed ₹5 crore.

If any of these conditions fail, the conversion will be treated as a transfer, triggering capital gains tax.

Carry Forward of Losses and Unabsorbed Depreciation

If the above conditions are fulfilled, the LLP can carry forward the business losses and unabsorbed depreciation of the firm as per Section 72A of the Income Tax Act.

PAN and Filing Requirements

• The LLP must obtain a new PAN after conversion.

• The LLP will file income tax returns as a separate legal entity from the date of incorporation.

GST Implications

New GST Registration

• The LLP must apply for a new GST registration as it is considered a new legal entity.

• The GST registration of the old partnership firm must be surrendered within 30 days of LLP conversion.

Transfer of Input Tax Credit (ITC)

• As per Rule 41 of CGST Rules, 2017, the partnership firm can transfer unutilized Input Tax Credit (ITC) to the LLP by filing Form GST ITC-02.

• The firm must declare the business transfer and specify the ITC amount being transferred.

Invoices and Contracts

• Post-conversion, all invoices and contracts should be issued in the name of the LLP.

• Any pending tax liabilities of the firm must be cleared before or during the conversion.

Post-Conversion Compliances

• Dissolution of Partnership: The original partnership firm is formally closed and removed from the Registrar of Firms.

• Establishment of LLP: The LLP is registered with a distinct legal identity and certificate of incorporation.

• Transfer of Assets and Liabilities: All assets, debts, rights, and responsibilities are transferred to the LLP.

• Continuation of Contracts: Existing contracts remain valid and binding on the LLP.

• Pending Legal Proceedings: Ongoing legal matters involving the firm continue with the LLP as the party.

• Limited Liability: Partners’ personal assets are protected from LLP debts, but partners remain liable for liabilities from the firm before conversion.

• Business Continuity: LLP can continue operations without interruption using the firm’s assets and legal standing.

• Disclosure: For a certain period (e.g., 12 months), LLP communications must disclose its prior status as a partnership firm.

Common Challenges in Conversion

• Documentation & Compliance: Missing or incorrect paperwork can cause delays or rejection.

• Partner & Creditor Consent: Unanimous agreement from all partners and creditors is essential.

• Transfer of Assets & Liabilities: Requires careful handling of contracts, licenses, and registrations.

• Financial & Tax Considerations: Understanding tax consequences and compliance.

• Employee Transition: Managing employee contracts and benefits smoothly.

• Stakeholder Communication: Informing clients, suppliers, and others to ensure a seamless transition.