Converting a Partnership Firm into an LLP: Procedure and Effect

Many established businesses in Kerala run as partnership firms. As they grow, the partners’ unlimited personal liability becomes a concern, and banks, clients and investors increasingly prefer a body with separate legal existence. Conversion of the firm into a Limited Liability Partnership (LLP) keeps the partnership structure while limiting liability, and the LLP Act, 2008 allows it to be done without winding up the firm.

This article explains the conditions for conversion, the procedure, the effect on assets, contracts and licences, and the tax position.

Why convert to an LLP

• Partners’ liability is limited to their agreed contribution, except in cases of fraud or wrongful acts.
• The LLP is a separate legal entity, which can own property, sue and be sued in its own name, and continues irrespective of changes in partners.
• Compliance is lighter than for a company, and there is no requirement of audit below the prescribed turnover and contribution thresholds.
• The LLP is taxed like a firm, and profits shared by partners are not taxed again in their hands.

See LLP vs private limited compliance.

Conditions for conversion

• The firm must be registered under the Indian Partnership Act, 1932. An unregistered firm should first be registered with the Registrar of Firms.
• All the partners of the firm, and only those partners, must become the partners of the LLP. No new partner can be admitted at the time of conversion; one can be admitted afterwards.
• All partners must consent to the conversion.
• Consent of secured creditors is required where the firm has secured borrowings, and creditors should generally be informed.

Procedure

1. Name: reserve the LLP name through RUN-LLP or within the incorporation form. The firm’s existing name can usually be used with “LLP” added, subject to the naming rules.
2. DSC and DPIN: digital signatures for the designated partners, and Designated Partner Identification Numbers, which can be allotted in the incorporation form.
3. Incorporation and conversion: file Form FiLLiP for incorporation along with Form 17 for conversion of the firm, attaching the consent of all partners, a statement of assets and liabilities certified by a chartered accountant, the consent of secured creditors where applicable, and the firm’s registration certificate and partnership deed.
4. Certificate: the Registrar issues a certificate of registration stating that the LLP is registered by conversion of the firm.
5. Intimate the Registrar of Firms: within 15 days of registration, the LLP must inform the Registrar of Firms, Kerala, about the conversion in the prescribed form.
6. LLP agreement: execute the LLP agreement, stamped under the Kerala Stamp Act, and file it in Form 3 within 30 days of incorporation.

Effect of conversion

• All tangible and intangible property, assets, interests, rights, privileges, liabilities and obligations of the firm, and its whole undertaking, are transferred to and vest in the LLP without further act.
• The firm is deemed dissolved and removed from the records of the Registrar of Firms.
• Pending proceedings by or against the firm may be continued by or against the LLP.
• Contracts, agreements and employment entered into by the firm continue with the LLP.
• Existing approvals, permits and licences of the firm are transferred to the LLP on the same terms, but in practice each authority must be informed and its records updated.
• Partners remain personally liable for the firm’s obligations that arose before conversion.

Post-conversion steps in Kerala

• Obtain a PAN and TAN for the LLP, and a new bank account in its name.
• Apply for a new GST registration and transfer unutilised input tax credit from the firm’s registration in Form ITC-02.
• Update the local body trade licence, Kerala Shops and Commercial Establishments registration, profession tax enrolment and any sector licences.
• Get land and building records, vehicles and other registered assets mutated in the LLP’s name. The stamp duty position on vesting of immovable property should be checked under the Kerala Stamp Act before the transfer is recorded.
• Inform clients, suppliers and banks, and update letterheads, invoices and contracts.

Tax position

Both a partnership firm and an LLP are assessed as firms under the Income-tax Act, so the conversion is generally treated as tax-neutral, without capital gains, where the assets and liabilities are carried over at book value and the partners’ interests remain the same. The conditions and the tax treatment of any revaluation or change in profit-sharing should be examined before conversion.

Frequently asked questions

Can an unregistered partnership firm be converted into an LLP?

The firm should first be registered with the Registrar of Firms. Alternatively, a new LLP can be incorporated and the business transferred to it, which has different tax and stamp duty consequences.

Can a new partner join at the time of conversion?

No. All partners of the firm, and no one else, must be the partners of the LLP on conversion. New partners can be admitted after conversion.

Do licences need to be applied for afresh?

Under the Act, licences and approvals transfer to the LLP, but each authority’s records need to be updated. Some, such as GST, require a fresh registration in the LLP’s name.

ചുരുക്കം (Summary in Malayalam)

രജിസ്റ്റർ ചെയ്ത പാർട്ണർഷിപ്പ് സ്ഥാപനത്തെ LLP ആക്ട്, 2008 പ്രകാരം ലിമിറ്റഡ് ലയബിലിറ്റി പാർട്ണർഷിപ്പായി മാറ്റാം. സ്ഥാപനത്തിലെ എല്ലാ പങ്കാളികളും മാത്രമേ LLP-യിലെ പങ്കാളികളാകാവൂ; എല്ലാവരുടെയും സമ്മതം വേണം. FiLLiP, Form 17 എന്നിവ ഫയൽ ചെയ്യണം. രജിസ്ട്രേഷൻ കഴിഞ്ഞ് 15 ദിവസത്തിനകം രജിസ്ട്രാർ ഓഫ് ഫേംസിനെ അറിയിക്കണം; 30 ദിവസത്തിനകം LLP എഗ്രിമെന്റ് ഫയൽ ചെയ്യണം. സ്ഥാപനത്തിന്റെ ആസ്തികളും ബാധ്യതകളും കരാറുകളും LLP-ക്ക് കൈമാറും. GST രജിസ്ട്രേഷൻ പുതുതായി എടുക്കണം.

This article gives a general overview of conversion of a partnership firm into an LLP. Forms, procedures and tax rules are revised from time to time; for accurate and current requirements, refer to the LLP Act and rules as amended and the MCA portal. The article is not advice on any particular case.