The Limited Liability Partnership Act of 2008 introduced Limited Liability Partnerships (LLP) in India to provide flexibility for small enterprises, promote the service sector and bring together business synergies. The basic premise behind the introduction of Limited Liability Partnership (LLP) is to provide a form of business organization that is simple to maintain while at the same time providing limited liability to the owners. Taking into consideration the various benefits surrounding the LLP structure, it is certainly worth converting your existing partnership firm into a Limited Liability Partnership. Here are some of the major reasons why you should consider the conversion of Partnership firm into LLP.
Limited Liability for Partners
One of the main drawback with respect to a Partnership firm is that the partners in a partnership are personally liable to the creditors. Therefore, many entrepreneurs hesitate to become a partner of a partnership firm and prefer a Private Limited Company. However, in a Limited Liability Partnership, the partners are liable only to the extent of their contributions to the firm and thereby are not personally liable to outside creditors. Hence, Limited Liability for the Partners is a major reason for the conversion of your existing partnership firm into a Limited Liability Partnership.
The existence of a partnership firm is limited and can be dissolved on the death of a partner or all partners but one becoming insolvent or a partner becoming insane in the absence of any contract to the contrary. Limited Liability Partnerships, on the other hand, have perpetual existence and is a separate juristic person whose existence does not depend on the partners. The partners of an LLP may keep changing from time to time and it will not affect the LLP’s continuity. Therefore, converting your existing partnership firm into an LLP can ensure continued existence for your business separate from that of the partners.
In a partnership firm, the minimum number of partners must be two, while the maximum number can be 10 in case of banking business and 20 in all other types of business. However, in the case of a Limited Liability Partnership, there is no limit regarding the maximum number of partners. Also, a Limited Liability Partnership requires a minimum of two partners to form an LLP; but only in the case of a number of partners falling below two for six months, the remaining partner in the continuing LLP becomes personally liable.
Better Access to Credit
Typically banks and investors provider easier bank loans for Limited Liability Partnerships because the LLP is a separate corporate body and has clear demarcation of assets and liabilities from that of the partners. Further, Limited Liability Partnerships have better Governance and professional management due to the mandatory audits required for Limited Liability Partnerships (LLPs require a mandatory audit if its turnover exceeds, in any financial year, Rs.40 lakhs or its contribution exceeds Rs.25 lakhs.) which is preferred by banks and investors.
Potential for Growth
In today’s business environment, mergers and amalgamation are commonplace with many businesses merging or amalgamating with other businesses to unlock business synergies. Partnership firms cannot be a merger or amalgamated with other partnership firms; whereas, LLP can merge or amalgamate with other LLPs in order to continually grow and share synergies with other business. Therefore, the ability of LLPs to undergo merger or amalgamation is another reason for converting your Partnership firm into an LLP.
Pre-requisites for conversion of company into LLP
- There is no security interest in its assets subsisting or in force at the time of application.
- The partners of the LLP to which it comprises all the shareholders of the Company and no one else.
- No eForms should be pending for payment or processing in respect of the Company.
- No open (unsatisfied) charges should be pending against the Company.
- At least one balance sheet and annual return should have been filed by the Company after its incorporation.
Taxation on Conversion of Company Into LLP
Conversion of Company into LLP is allowed under the provisions of the Companies Act, 2013 and the Limited Liability Partnership Act, 2008 but it really important to understand the tax implications of the same as well. Now, one may opine that the conversion of Company into a LLP may attract capital gain tax as there shall be transfer of assets but a similar issue has been discussed in various judicial forums (Gujarat High Court in DCIT v. R L Kalathia (2016) and CIT v. Well Pack Packaging (2014) that conversion is not a “transfer” as defined under the IT Act and hence no capital gain tax shall be levied thereof. Further, in accordance with the Section 47(xiiib) of the Income Tax Act, 1961, conversion of Company into LLP will not attract capital gain tax subject to following conditions:
All the assets and liabilities of the Company become the assets and liabilities of the LLP;
All the shareholders of the Company become partners of the LLP and that the capital proportion and profit sharing ratio are in the same proportion as that of the shareholding in the Company;
The shareholders do not receive any benefit, directly or indirectly in the LLP, except by way of capital contribution and profit sharing ratio.
The aggregate of the profit-sharing ratio of the shareholders of the Company in the LLP shall not be less than fifty per cent, at any time during the period of five years from the date of conversion (i.e. you can add new partners to the LLP but the aggregate of profit sharing ratio of previous partners shall not fall below 50%)
The total sales, gross receipts and turnover in any of the three-preceding year from the date of the conversion does not exceed Rs. 60 Lacks;
No amount, is paid either directly or indirectly, from the accumulated profits to any of the partners for a period of three years from the date of conversion;
The total value of assets as appearing in the books of account of the Company in any of the previous three years does not exceed Rs. 5 crores.