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Conversion of Partnership Firm into LLP


Conversion of Partnership Firm into LLP

The Limited Liability Partnership Act of 2008 introduced Limited Liability Partnerships (LLP) in India to provide flexibility for small enterprises, promote the service sector and bring together business synergies. The basic premise behind the introduction of Limited Liability Partnership (LLP) is to provide a form of business organization that is simple to maintain while at the same time providing limited liability to the owners. Taking into consideration the various benefits surrounding the LLP structure, it is certainly worth converting your existing partnership firm into a Limited Liability Partnership. Here are some of the major reasons why you should consider the conversion of Partnership firm into LLP. 

Limited Liability for Partners

One of the main drawback with respect to a Partnership firm is that the partners in a partnership are personally liable to the creditors. Therefore, many entrepreneurs hesitate to become a partner of a partnership firm and prefer a Private Limited Company. However, in a Limited Liability Partnership, the partners are liable only to the extent of their contributions to the firm and thereby are not personally liable to outside creditors. Hence, Limited Liability for the Partners is a major reason for the conversion of your existing partnership firm into a Limited Liability Partnership.

Perpetual Existence

The existence of a partnership firm is limited and can be dissolved on the death of a partner or all partners but one becoming insolvent or a partner becoming insane in the absence of any contract to the contrary. Limited Liability Partnerships, on the other hand, have perpetual existence and is a separate juristic person whose existence does not depend on the partners. The partners of an LLP may keep changing from time to time and it will not affect the LLP’s continuity.  Therefore, converting your existing partnership firm into an LLP can ensure continued existence for your business separate from that of the partners.

Unlimited Partners

In a partnership firm, the minimum number of partners must be two, while the maximum number can be 10 in case of banking business and 20 in all other types of business.  However, in the case of a Limited Liability Partnership, there is no limit regarding the maximum number of partners. Also, a Limited Liability Partnership requires a minimum of two partners to form an LLP; but only in the case of a number of partners falling below two for six months, the remaining partner in the continuing LLP becomes personally liable.

Better Access to Credit

Typically banks and investors provider easier bank loans for Limited Liability Partnerships because the LLP is a separate corporate body and has clear demarcation of assets and liabilities from that of the partners. Further, Limited Liability Partnerships have better Governance and professional management due to the mandatory audits required for Limited Liability Partnerships (LLPs require a mandatory audit if its turnover exceeds, in any financial year, Rs.40 lakhs or its contribution exceeds Rs.25 lakhs.) which is preferred by banks and investors.

Potential for Growth

In today’s business environment, mergers and amalgamation are commonplace with many businesses merging or amalgamating with other businesses to unlock business synergies. Partnership firms cannot be a merger or amalgamated with other partnership firms; whereas, LLP can merge or amalgamate with other LLPs in order to continually grow and share synergies with other business. Therefore, the ability of LLPs to undergo merger or amalgamation is another reason for converting your Partnership firm into an LLP.