Conversion to LLP

September, 2009 Income Tax Review
SPECIAL STORY

Conversion to LLP
CA Paras Savla

New form of business organisation emerged This article covers an overview of the key
with the passage of the Limited Partnership conversion procedure and regulatory issue
Act 2008 (Act). Various provisions of the that arise on the migration to LLP. Taxation
Act were notified on 1-4-2009. However aspect has been covered elsewhere in this
provisions pertaining to the conversion of issue.
existing other form of organisations to
limited liability partnership (LLP) came into Conversion provision
force only from 31-5-2009. The Act provides for the conversion of
LLP is a supple form of business entity general partnership firm, private limited &
combining the advantages of corporate unlisted public company only. Act does not
entity and general partnership firm. LLP is prescribe any procedure for conversion of
a corporate entity with perpetual succession sole proprietory concerns, trusts into LLP.
but at the same time it does not demand Provisions of section 58(4) are very
strict compliance as are required by significant. It being a notwithstanding
companies and also irons out certain tax clause has overriding effect on various laws
inefficiencies of corporate structure. Given for the time being in force. As per the said
the operational and structural flexibility, it clause, all the property, assets and liabilities
may make sense for a firm or private/ of the firm/company converted into LLP
unlisted company to migrate themselves gets vested in the LLP without any further
into the new LLP structure. However, act /deed and erstwhile firm/company
migration of existing entities to the LLP stands dissolved.
may give rise to host of tax (including
stamp duty), regulatory issues.
Particulars Partnership Firm Private Limited Unlisted
Company Public Company
Applicable to Firms as defined u/s. 4 of Company as Company which
conversion of Indian Partnership Act 1932 defined u/s. 3(1) is not a listed
(iii) of Companies company
Act 1956
Statutory
provisions:
a) Section 55 56 57
b) Schedule
to Act Second Third Fourth
c) Rules +
38 39 40

42 Conversion to LLP SS-VI-34

Income Tax Review September, 2009

Eligibility Partners of the converted LLP a) No security interest subsists at
comprises of all the partners the time of application and
of the firm. b) Partners of the converted LLP
comprises of all the
shareholders of such private /
unlisted public company
Filings a) A application in format a) A application in format
provided in Part A of provided in Part A of Form 18
Form 17 comprising infor- comprising information such as
mation such as name, name, registration number and
registration number and date of registration of private /
date of registration of firm unlisted public company along
along with statement of with statement of shareholders
partners in format in format provided in Part B of
provided in Part B of Form 18
Form 17
b) Fees prescribed in b) Fees prescribed in Annexure
Annexure ‘A’ ‘A’
c) Incorporation documents c) Incorporation documents &
& statements referred in statements referred in section
section 11. 11.
Certificate of On conversion of firm On conversion of any private /
registration registrar shall issue certificate unlisted company registrar shall
of registration in From 19 issue certificate of registration in
From 19
Information to The LLP within 15 days shall The LLP within 15 days shall
concern regis- inform the concern Registrar inform the concern Registrar of
tering authority of firms about conversion of Companies about conversion of
firm into LLP in form 14 private / unlisted public company
into LLP in form 14
Refusal for a) Registrar may refuse to register such proposed LLP, in case it is
registration not satisfied with the particulars and other information
provided along with the registration.
b) Against such refusal appeal may be preferred before tribunal.
Effect of a) LLP as per name specified a) LLP as per name specified in
registration in the registration certifi- the registration certificate
cate comes into existence. comes into existence.
b) All assets movable / b) All assets movable /
immovable tangible / immovable tangible /
intangible, interest rights, intangible, interest rights,
privileges, liabilities obli- privileges, liabilities obligations
gations relating to firm, relating to such private /
whole of the undertaking unlisted public company, whole
of the firm shall be trans- of the undertaking of such

SS-VI-35 Special Story – Limited Liability Partnership 43


ferred to and shall vest in private / unlisted public
the LLP without further company shall be transferred to
assurance, act or deed and shall vest in the LLP
c) Firm shall be deemed to without further assurance, act
be dissolved and if regis- or deed
tered under Indian c) Such private / unlisted
Partnership Act, 1932 public company shall be
removed from the records deemed to be dissolved and
maintained thereunder. removed from the records of
the Registrar of Companies.
Registration in If any property/asset If any property /asset (e.g. tangible
relation to (e.g. tangible assets like assets like immovable property,
property immovable property, intangi- intangibles like patent, trademark,
bles like patent, trademark, copy rights) of the private/
copy rights) of the firm are unlisted company are registered
registered with any authority, with any authority, LLP as soon as
LLP as soon as practicable practicable after the date of
after the date of registration registration shall take necessary
shall take necessary steps as steps as required by the relevant
required by the relevant authority (e.g. immovable property
authority (e.g. property registration authority, trademark/
registration authority, trade- copyright/patent authority) to
mark / copyright / patent notify the conversion of firm and
authority) to notify the con- particulars of LLP in such form as
version of firm and particulars relevant authority may specify
of LLP in such form as rele-
vant authority may specify.
Pending All the pending proceedings All the pending proceedings before
proceedings before any court, tribunal or any court, tribunal or any authority,
any authority, by or against by or against the such private /
the firm, on the date of regis- unlisted public company, on the
tration may be continued, date of registration may be
completed and enforced by or continued, completed and enforced
against LLP by or against LLP
Continuation of Any conviction, ruling, order Any conviction, ruling, order or
conviction, or judgement of any Court, judgement of any Court, Tribunal
ruling, order or Tribunal or other authority in or other authority in favour or
judgement favour or against the firm may against such private / unlisted
be enforced by or against public company may be enforced
the LLP by or against the LLP
Existing Every agreement to which firm Every agreement to which such
agreements was party immediately before company was party immediately
its registration as LLP, before its registration as LLP,
whether or not such rights/ whether or not such rights /
liabilities under the agreement liabilities under the agreement



could be assigned, after could be assigned, after registration
registration shall have effect shall have effect as LLP were a
as LLP were a party to such party to such agreement and
agreement and reference to reference to the such company shall
the firm shall mean LLP mean LLP
Existing All deeds, contracts, schemes, All deeds, contracts, schemes,
contracts etc. bonds, agreements, applica- bonds, agreements, applications,
tions, instruments and instruments and arrangements
arrangements subsisting subsisting immediately before the
immediately before the registration of such company as
registration of firm as LLP, LLP, shall be enforceable by or
shall be enforceable by or against LLP as LLP was named
against LLP as LLP was therein or party thereto instead of
named therein or party thereto such company.
instead of firm.
Continuation of Every contract of employment Every contract of employment
employment continues to be in force on or continues to be in force on or after
after registration as if such registration as if such LLP were
LLP were employer there employer there under instead of
under instead of the firm. such company.
Existing a) Every appointment of the a) Every appointment of such
appointments firm in any role or capa- company in any role or
city which is in force capacity which is in force
immediately before the immediately before the date of
date of registration shall registration shall take effect
take effect and operate and operate from the
from the registration date registration date as if LLP were
as if LLP were appointed. appointed.
b) Any authority or power b) Any authority or power
conferred on the firm conferred on the such company
prior to the registration prior to the registration as LLP
as LLP shall take effect shall take effect and operate
and operate from the from the registration date as if
registration date as if LLP LLP was conferred
was conferred
Liability of Every partner of the converted No such provision for liability on
existing partner firm shall continue to be erstwhile shareholders
/share holders personally liable (jointly &
severally along with LLP) for
the liabilities and obligations
of the firm which were
incurred prior to the conver-
sion or which arose from any
contract entered into prior to
the conversion



Notice of a) LLP shall ensure that for a a) LLP shall ensure that for a
conversion period of 12 months from period of 12 months from the
the date of registration date of registration every
every official correspon- official correspondence shall
dence shall bear bear
o Statement that it was o Statement that it was
converted into LLP converted into LLP from a
from a date of date of registration
registration o Name and registration
o Name and registration number as per Partnership
number as per Partner- Act, if applicable
ship Act, if applicable b) LLP contravening above
b) LLP contravening above provisions may be punishable
provisions may be puni- with the fine
shable with the fine o Minimum – Rs 10,000
o Minimum – Rs 10,000 o Maximum – Rs 1 lakh
o Maximum – Rs 1 lakh c) In case continuing default
c) In case continuing default o Minimum Rs 50 &
o Minimum Rs 50 & o Maximum Rs 5,000 for
o Maximum Rs 5,000 every day of default
for every day of default
+
Limited Liability Partnership Rules 2009
Typical steps for the conversion of firm / private or unlisted company into LLP
S. Steps Particulars
No.

1 Deciding partners & • Firm / company which desires to convert
designated partners itself into LLP shall decide about designated
partners

• All the partner of the existing general
partnership firm or the shareholders of the
company are required to become the partners
of converted LLP

• Other criteria
o Minimum 2 partners
o Minimum 2 designated partners & one of
the designated partner is a Indian
resident (resident means a person who
has stayed in India for the period of not
less than 182 days during immediately
preceding one year.



2 Obtaining DPIN & • Every designated partner (in the proposed
Digital signature LLP) is required to obtain Designated
Partners Identification Number (DPIN), and
• Any one designated partner to obtain digital
signature for the purpose of signing e-forms

3 Name availability • Application for the reservation of name of the
proposed LLP in e-form1 along with
prescribed fees as mentioned in Annexure ‘A’

4 Drafting of LLP agreement • This is a vital document which governs the
mutual rights and duties amongst the various
partners inter se and also with the LLP.

• In absence of specific provisions in LLP
agreement matters relating to mutual rights
and duties of the partners & LLP and its
partners shall be governed by the first
schedule to Act.

• Due care and consideration should be given to
exercise flexibilities in respect of various
clauses of LLP agreement especially powers,
duties and authority of the partner &
designated partner, contribution of money or
property, admission, retirement, expulsion of
partner, succession, right in goodwill, terms of
retirement, valuation at the time of retirement
& admission of partner, dispute resolution &
arbitration, usage of property of partner,
indemnity, loans, profits sharing ratios etc.

• Various details of the LLP agreement are
required to be given in e-form 3 within 30 days
from the date of registration.

5 Filing of incorporation § Online filing of incorporation documents in
documents e-form 2

6 Filing of conversion • Application for the conversion of the existing
application firm / company to be filed in e-form 17(firm) /
18 (company)

7 Registration Certificate • On completion of all the formalities if Registrar
is satisfied, he may issue registration certificate
or may refuse registration.



• Appeal may be preferred before Tribunal on
refusal of the registration.

8 Submission of information • In case existing partnership firm company
registrar of firm/company is registered as LLP, LLP shall within 15 days
from the date of conversion shall submit form
14 with the concern registrar of firms or
company as the case may be.

9 E-Form / forms / Documents • E-Form 1-Name Availability Application
involved • E-Form 2-Incorporation Document
• E-Form 3- Details of LLP Agreement
• E-Form 4-Consent of Partners
• E-Form 7-Application for Designated Partners
Identification Number
• E-Form 14- Intimation of conversion to
Registrar of Firms / companies
• E-Form 17-Application for Conversion
• Subscription Sheet
• LLP Agreement duly stamped as per relevant
Stamp Act of the State.
• Proof of Address of Registered Office
• Consent of partners
• Statement of partners
• Statement of Assets and Liabilities of the
company duly certified as true and correct by
the auditor
• List of all the unsecured creditors along with
their consent.
• Approval from any other body authority, if
any required

Certain issues
• Act provides that all the partners of the firm or shareholders of the company as the
case may be shall become the partner of the LLP on conversion. However there
is no time limit specified upto which they should continue to remain partner in the
LLP.



Hence, in absence of any such time limit conversion should not be affected even if
any of the partners retire immediately on conversion.

• Second Schedule to the Act provides that firm willing to convert itself as LLP should
provide details as to date of registration & registration number allotted at the time of
registration and post registration inform concern registrar of firms about its
registration of LLP. Registration of firm is optional under Partnership Act.

Issue here may arise whether unregistered firm would not be allowed to convert
itself into LLP? Further registration is only the criteria or all amendments to the
partnership deed should have been filed & registered with the registrar of firms?
What if application had been filed for registration but firm is not registered for one
or the other reasons?

• Act provides that on conversion LLP shall inform concerned registering authorities
where asset was originally registered in the name of firm or company as the case
may, as soon as practicable. No specific time frame as been prescribed. Hence the
term ‘as soon as practicable’ would be subject to various interpretations.

• Foreign Direct Investment (FDI) Regulations currently doesn’t recognise LLP as an
entity to accommodate FDI. Consequently, LLP structure may not work where FDI is
involved. Foreign Exchange Management Act (FEMA) requires specific permission
from RBI for foreign investment in partnership concerns. FEMA is yet to clarify
whether LLP would be considered as partnership or corporate entity.

• A Company with more than Rs 1 crore capital does not get protection under Bombay
Rent Act. However, in case such company migrates to LLP, it may be entitled for
protection under Rent Act. This may act against the landlord, who may not agree for
such conversion.

• Chartered Accountants, Company Secretary, etc. are allowed to practice either in
individual capacity or as a partnership concern. Currently these professional
institutes do not recognise LLP.

LLP being an agile entity would certainly be a winner as compared to any other form
of organisation. However conversion of existing entity to LLP would not take off
unless and until other Ministries, State Government, Regulators amend the respective
laws, regulation to recognise LLP as new form of business organisation and erase the
ambiguity that may arise due to the lack of specification and clarity. It is imperative
for the government to address issues upfront.


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