Limited Liability concept combines the organizational flexibility of a partnership firm coupled with the advantage of limited liability for its partners. The key features of the LLP such as a separate legal entity with unlimited number of partners, no partner being liable on account of the independent or unauthorized actions of other partner(s), liability of partners being limited to the respective stake of each partner in the LLP, are a distinct advantage over other form of organization.
Such distinct features would be the key drivers for forming LLP, rather than, partnership firm for planning different structures.
The added advantage towards conversion of a partnership firm into an LLP should be tax neutral, as one understands is the legislative intent. This is on the ground that there is no transfer of any assets to a third party on conversion, but an internal reorganization taking place through a statute. Similar reorganizations like conversion of a proprietary/partnership into a company, or registration of a firm as a company under Part IX of the Companies Act, 1956, are treated as tax-free, for which there exists legislative/judicial precedence.
Major advantages of conversion:
- There is no limit to maximum number of partner, therefore gives you opportunity to expand your business
- The liability of Partners is limited to the amount which is agreed between the partners to be contributed towards the LLP. If One partner has agreed to pay Rs 10,000, his liability will be limited to Rs 10,000 only.
- Partners can decide between themselves as to how the business will be managed.
- No exposure to personal assets of the partners
- Partner are not agents of other partners.
- Business will be recognized by the name of LLP and not individual partners, therefore LLP can create goodwill of its own.
- Recognized as body corporate therefore it will be easy to attract finance from market
- LLP will be taxed as Partnership firms and therefore no Mat & dividend distribution tax despite of the fact, that LLP is a body corporate.
- Ideal for partners , who wish to invest money but are not willing to take part in the management or business
- Partners can transfer their right to share profits to anyone else.
- Foreign Investment is also allowed , therefore it will be possible to access to foreign expertise.
- Partners can decide between themselves as to how the business will be managed.
- Partner can enter Joint Ventures with other parties in the name of LLP, which is otherwise not feasible in case of partnerships
- Being regulated form of business, LLP will attract investment from PE Firms and other investors.
Status upon conversion.
It is essential to note that on conversion, all the partners of the partnership firm shall become the partners of the LLP. It is provided that no other person would become partner on conversion into an LLP for the simple reason that on conversion, it should be a mirror image.
On conversion, all the tangible (movable and immovable) property and the intangible property, all assets, interest, rights, privileges, liabilities, obligations of the firm/Company shall stand transferred to, and vest in, the LLP. Also, the firm so converted into an LLP shall cease to exist upon conversion.
Liability of the Partners after conversion
Every partner of the partnership firm that is converted into an LLP shall continue to be personally liable (jointly and severally) for the liabilities and obligations of the partnership which were incurred prior to the conversion or which arose before the conversion. Such provisions are not applicable in the case of conversion of a company into an LLP, presumably since liability of shareholders in a company is anyway limited.
Check procedure to convert into LLP
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