Conversion of Sole Proprietorship to LLP

What is Conversion of Sole Proprietorship to LLP?

A Limited Liability Partnership, more commonly known as LLP is an entity that combines the advantages offered by both a Company and a Partnership Firm into its organizational structure. The new entity thus acts as a good alternative corporate vehicle to a traditional partnership firm with respect to the liability of its members. That is to say, a Limited Liability Partnership will have the added advantage of limited liability of its members as opposed to that of a traditional partnership firm having unlimited liability, but continues to allow its members the flexibility of organising its internal structure as a partnership on the basis of a mutually arrived agreement.

The present article is an attempt to shed more light on the concept of a Limited Liability Partnership and its key features, and further provide a comparative analysis with a partnership and a sole proprietorship to show how its organisational structure proves more advantageous than the latter two. Most importantly, however, the article aims to provide a step-by-step procedure for the conversion of a firm to an LLP.

The most distinct advantage that an LLP has over a partnership firm is with regards to the liability of the partners. A partner’s liability in an LLP is limited to the amount of their contribution to the capital, and further, the partners are not personally liable for the liabilities of the partnership. The LLP and its partners, therefore, constitute separate legal entities with the former having a perpetual existence unless it gets dissolved by the promoters.

On the other hand, in a traditional partnership, the partners have unlimited liability and are personally liable for the liabilities incurred by the partnership firm. Therefore, the partners and the firm are not regarded as separate legal entities, and no perpetual existence can be attributed to the latter. Secondly, taking into consideration that an LLP forms a distinct legal entity by itself, it acts like a real person capable of owning property and funds, which is not the property of the partners. Therefore, in case of any dispute, the partners of the LLP are not entitled to make any claim on the property of the LLP. For the same reason, an LLP can sue and can be sued. Another point of distinction that can be made between a traditional partnership and an LLP is that the partners in the latter are not agents of the firm, and hence no liability can be imputed on them for the individual acts of the other partners.

It is due to these significant advantages observed in the LLP structure that the organizational structure is also seen to be ideal for various Small and Medium Enterprises (SMEs) which would otherwise have opted for either a proprietorship or a Private Limited Company structure. For instance, an LLP structure proves to be more beneficial than a proprietor-type organisation because, being a regulated entity unlike the latter, it is easier for the former to attract investments from Private Equity Investors and financial institutions. Similarly, an LLP is more beneficial as an organisational set-up in comparison to a Private Limited Company as it has very little regulatory compliances to adhere to.

SALIENT FEATURES OF AN LLP

A Limited Liability Partnership is governed by the Limited Liability Partnership Act, 2008. As I have already mentioned, the distinct feature of an LLP lies in the fact that it is a body corporate whose legal entity is separate from that of its partners, whose liability is limited to the capital contributed by them to the corporate, and who are not personally liable for acts of the partnership.

Secondly, the mutual rights and duties of the partners of a Limited Liability Partnership inter-use and those of the partners and the LLP are generally governed by an agreement as concluded between themselves or between the LLP and the partners of the firm subject to the provisions of the LLP Act, 2008.

Where there is no such agreement, however, the mutual rights and duties are governed by the provisions laid down under the Act.

Thirdly, every LLP must have at least two partners and at least two designated partners who are individuals, of whom at least one is resident in India in accordance with Section 7 of the Act and the duties of such designated partners are those prescribed under Section 8 of the same Act.

HOW TO CONVERT A FIRM INTO AN LLP?

The conversion of a firm into a Limited Liability Partnership is governed by the provisions of Section 55 of the LLP Act, 2008 read along with the Second Schedule. This provision is applicable in the conversion of both a Partnership Firm and a Sole proprietorship Firm into a Limited Liability Partnership. But first, when addressing the question of how the process of conversion of a firm into an LLP works, it is pertinent to know what exactly the said conversion entails. For this purpose, a definition for ‘convert’ has been provided in the Second Schedule of the Limited Liability Act, 2008.

To mean a transfer of the property, assets, interests, rights, privileges, liabilities, obligations along with the undertaking of the firm to the LLP in accordance with the same Schedule.

One of the primary requirements for the conversion of a firm into an LLP is that the LLP that is formed out of the Partnership is required to consist of the same partners as were present in the original Partnership in the same proportion in which their capital accounts stood in the books of the Firm as on the date of conversion. Therefore, the LLP cannot have more or fewer partners than the extant Partnership Firm, and any changes in the number of partners are to be made only after conversion into the LLP. Secondly, prior to conversion, the Firm is required to have an up-to-date filing of all their Income Tax Returns and also obtain the consent of all the unsecured creditors for the proposed conversion.

The Firm, in addition, is also required to obtain Digital Signature Certificates (DSC) for digital authentication of the Incorporation documents for all the Designated Partners as well as a Directors Identification Number.

Designated Partnership Identification Number (DIN/DPIN) issued by the Ministry of Corporate Affairs. Once the DIN has been obtained from the Ministry of Corporate Affairs, the first step in the conversion process is to apply for name reservation from MCA. Approval of the name of the LLP from MCA is mandatory before any documents regarding the conversion into an LLP are filed. The approval of the name is to be done by filling e-form LLP-1 with the Registrar of Companies. The form is to include the name of the LLP, the State in which the registered office of the LLP is to be situated, the address of the registered office of the LLP, the business that is to be carried on by the LLP, a summary of the partners and designated partners such as the number of partners, number of designated partners, the number of designated partners resident in India, and other such details as required. The Registrar will approve the name applied for, provided it is not undesirable in the opinion of the Central Government or identical with or that which too nearly resembles the name of any existing partnership firm or LLP or body corporate or trademark registered, or which is pending registration under the Trade Marks Act, 1999.

Once the name has been made available to the Registrar, LLP Form-17 is required to be filed containing the Application and Statement of conversion of the Firm into an LLP along with certain attachments which include the statement of partners, list of all unsecured creditors along with their consent for the conversion, statement of all assets and liabilities duly certified by a Chartered Accountant, duly stamped LLP Agreement, a copy of acknowledgement of latest Income Tax Return, a Clearance Certificate from the Tax Authorities and approval from any other Body or Authority as may be required. Along with Form-17, certain other forms are also to be filed with the ROC including Form-2 containing the Incorporation document and subscriber’s statement, and Form-3 containing the LLP Agreement entered into between the partners.

The Registrar, on satisfying that the firm has complied with the provisions contained in the Second Schedule shall, subject to the provisions of the LLP Act and the rules made thereunder, register the documents submitted under the Schedule and issue a certificate of registration.

Rule 32(1) of the LLP Rules also provides that the Registrar shall on conversion of a firm into an LLP, issue a certificate of registration under his seal in Form- 19. Lastly, in accordance with paragraph 5 of the Second Schedule, the LLP so formed, within fifteen days of the date of registration, is required to inform the concerned Registrar of Firms with which it was registered under the provisions of the Indian Partnership Act, 1932, about the conversion and of the particulars of the LLP in Form – 14 and attach along with it a copy of the Certificate of Incorporation of the LLP as well as a copy of the Incorporation documents submitted in Form-2.

References:

1. Section 3, Limited Liability Partnership Act, 2008.
2. Section 23(1), Limited Liability Partnership Act, 2008.
3. First Schedule, Limited Liability Partnership Act, 2008.
4. Para 1(b) of Second Schedule, Limited Liability Partnership Act, 2008.
5. Id.
6. A Directors Identification Number is a unique number given to every Director or Designated Partner of a Company or a Firm including an LLP. Once it has been issued, it can be used for a lifetime without any renewal.
7. Section 58(1), Limited Liability Partnership Act, 2008.

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