The Central Government has passed the Limited Liability Partnership Act, 2008 and rules.
Advantages of Converting a Partnership Into an LLP
The following are some of the important advantages of converting a General Partnership into a Limited Liability Partnership also known as an LLP:
1. Reduced risk exposure – Limited liability for partners
As the name implies, an LLP has limited liabilit namely that the partners cannot be held personally accountable for the firm’s debts, even if the financial obligation documents was signed by them. Their personal assets such as land, property, jewellery, bank accounts, cars, cash in hand, and other items belonging to the partner are protected from being auctioned to satisfy the firm’s debts.
2. Ideal for business expansion – No upper limit on the number of partners
Another advantage is that whereas a conventional partnership has a minimum of two and a maximum of 20 partners, a limited liability partnership can have an unlimited number of partners. This helps the LLP to grow when it needs expertise and higher capital investment.
3. Better audit procedures, governance, and greater investor confidence
When a limited liability partnership’s turnover surpasses the prescribed maximum limit of ₹25 lakhs of capital contribution or its turnover exceeds ₹40 lakhs in any fiscal year, its books of accounts must be audited.
This helps better governance, better management, transparency and record-keeping, making it easier for an LLP for financing. Moreover, mandatory audits boost the confidence of the stakeholders of the entity and also improves the company’s creditworthiness and access to resources. It must be noted that Tax Audit of the accounts is mandatory for an LLP with its annual turnover is ₹100 lakh or more (up to FY 2019-20). However, from FY 2020-21, it would be applicable for turnover above ₹500 lakhs.
4. Perpetual succession
Since a partnership is not treated as a separate entity, its existence depends on the will and survival of the partners or if a partnership limited by time. However, a limited liability partnership is a separate legal entity having its own seal and perpetual succession, which means that the exit or demise of one or more partners will have no effect on the continuity of the partnership.
5. No capital gains tax on the conversion
When a partnership firm is converted into a limited liability partnership, there is no capital gains taxation on the transaction of conversion.
6. Carry forward of losses allowed
In case any losses are incurred during any year which has not been set off against gains in any year during the existence of a general partnership, the same will become eligible for set-off under the new limited liability partnership’s account.
7. Ability to undergo mergers, amalgamations
Unlike a partnership firm, a limited liability partnership has the legal capacity to merge with another limited liability partnership or also to have a compromise, arrangement, or joint venture with another firm.
Thus the main benefits of an LLP are lower risk exposure, which is ideal for growth of the firm, and it also has the ability to undergo mergers or amalgamations, which is not possible with a partnership company
Effect after Conversion
The assets, liabilities, rights, privileges, obligations of the Partnership firm is considered to be wholly transferred to the LLP and the conversion does not affect any existing contracts, employment, agreements, etc.
Disclaimer
The information given in this document has been made on the basis of the provisions stated in the Limited Liability Partnerships Act, 2008 & Rules. It is based on the analysis and interpretation of applicable law & rules as on date. The information in this document is for general informational purposes only and is not a legal advice or a legal opinion. You should seek the advice of legal counsel of your choice before acting upon any of the information in this document. We are not responsible for any loss, claim, liability, damage(s) resulting from the use, omission or inability to use the information provided in the document.
CS Joseph Sequeira
B. Com, LL.B, FCS, MICA
Practicing Company Secretary
Delfina Apartments, S/F-2,
Opp. Rosary Church,
Caranzalem, Panaji, Goa - 403004
Phone: +91 8380087153
Email: josephcf@yahoo.com
Website: www.csjoseph.in
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