Advantages of conversion of partnership firm into LLP
There are numerous advantages of conversion of partnership firm into LLP. In order to proceed, it is crucial to comprehend the concept of an LLP. An LLP also known as a Limited Liability Partnership is a business structure under which each partner’s culpability is limited to the contribution they made to a business and no individual is liable for the wrongdoings of another partner. In this article, you will learn about Limited Liability Partnership (LLP), its key characteristics, and the Advantages of conversion of partnership firm into LLP.
The concept of LLP
LLP is a legal entity created and established under the Limited Liability Partnership Act, 2008. The liability of each person in a Limited Liability Partnership (LLP) is restricted to the amount they invested in the company. In an LLP, no partner is responsible or liable for the crime or negligence of another partner. LLP was introduced in order to protect business partners from increasing liabilities. It is a mixture of corporates and partnership.
When a company forms a partnership, all partners are responsible for any unlawful acts committed by any one of them. One of the advantages of conversion of partnership firm into LLP is that the members are shielded from joint liability. The misconduct of others cannot be held against anyone.
Key characteristics Of an LLP
- It has a separate legal entity
- For an LLP to be formed in India, it is mandatory to have at least 2 individuals as partners, one of whom must be a resident of India. Though, there is no upper restriction for partnership into LLP.
- Partners are only partially liable for the debts owed by a company.
Reason for switching to an LLP
The advantages of conversion of partnership firm into LLP are plenty as it may turn out to be a more efficient corporate structure than traditional partnerships. Due to this reason, a lot of entrepreneurs prefer LLP over any other business structure. Limited liability, minimal compliance, independent legal entity, good audit process, and no limit to the number of partners are a few advantages of conversion of partnership firm into LLP.
8 Advantages of conversion of partnership firm into LLP
It is crucial to converting a partnership firm into an LLP in order to protect the partners from the actions of others. More than 1 lakh partnership firms in India have registered as LLPs due to the various advantages of conversion of partnership firms into LLPs.
1. Effective Audit Process–In India, almost all businesses are mandated to have their financial statements audited. This assists the organization in identifying potential risks and enhances the faith of its partners.
However, one of the advantages of conversion of partnership firm into LLP is better to audit procedures.
The audit process in the case of an LLP is far superior to that of any other business structure, making it the preferred choice of most entrepreneurs. In the case of a Limited Liability Partnership, an audit is required only if the following two conditions are met:
- When the LLP partner’s contribution outpaces Rs. 25 lakhs
- When the annual revenue exceeds Rs. 40 lakhs.
2. Limited Liability–In a business organization, limited liability assists a partner in protecting themselves against the liabilities, malpractice, and misconduct of other partners. When a company is sued, it is common for a partnership partner to be the initial target of the lawsuit. Thus, transforming a company into a Limited Liability Partnership protects the business members’ personal possessions, including real estate, money, jewelry, and so forth.
3. Perpetual Succession – An LLP is a separate legal body with perpetual succession. The existence of an LLP is unphased by bankruptcy, insanity, a partner’s death, or retirement. Even after that, a limited liability partnership can continue to exist.
4. Taxation– Another one of the great advantages of conversion of a partnership firm into an LLP is its taxation policies. Limited Liability Partnership Firms have significant tax advantages over other general partnerships. The LLP is exempt from certain taxes, including the Dividend Distribution Tax. Furthermore, when compared to other business structures, the tax rate on LLP is low.
5. Flexibility– An LLP, in contrast to a company, offers flexibility without incurring complex legal and procedural constraints. The management framework is decided by the partners.
6. Low-Cost – An LLP has substantially reduced registration and formation costs, and its minimal legal requirements indirectly save a lot of money.
7. Convenient- The LLP agreement is customized in a way that meets the partner’s choice. The agreement specifies each partner’s duties and privileges.
8. Infinite Partners– An LLP must have at least 2 partners. At least one of the members should be a resident of India according to the Indian LLP Act. However, an LLP can have an infinite amount of partners.
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LLP is increasingly becoming one of the most favored business structures in India. More than 1 lakh companies in India have converted their firms to Limited Liability Partnerships (LLP), and the number is rapidly rising. The above article gives you a brief about LLP and the advantages of conversion of partnership firms into LLP.
You can consult Odint Consultancy for more advice if you want to launch your own business or if you already run one and want to transform it into an LLP.
Companies convert their firms to LLPs due to their limited liability, low compliance requirements, separate legal status, reliable auditing procedures, and unlimited amount of partners.
The following advantages are provided by the Limited Liability Partnership:
- Limited liability
- Effective audit system
- Infinite partners
- Perpetual succession
- Separate legal bodies
- Effective taxation
- A Limited Partnership (LP) is a type of corporate entity that consists of both general and limited partners whereas, in a limited liability partnership (LLP), each partner is only partially personally liable for the partnership’s obligations and claims.
- Only general partners are personally accountable in a Limited Partnership (LP), shielding the limited partner from liability whereas, in the case of a Limited Liability Partnership, all members are given limited liability to protect them from another person’s misconduct (LLP).
Azhar Ansari is a company formation specialist with 8+ years of expertise in international business. Financial planning, risk management, and other related areas.