One chooses a business entity as a sole proprietor, partnership firm or a Company depending on the needs of the business. Partnership firms are created by way of partnership deed between the partners. The drawback is that firms do not have a separate legal entity status and the liability of the partners is unlimited. Whereas a Company gets incorporated and has a separate legal entity distinct from its shareholders. It has perpetual succession but the compliance procedures are cumbersome. To provide a midway between the two, the Government introduced the Limited Liability Partnership (LLP) concept through the LLP Act, 2008 (LLP Act) with the LLP rules notified in 2009. The LLP is a unique form having partners and legally recognised as a corporate entity. Thus, LLP integrates the features of both Company and partnership firms. Small business and startups are opting for LLP registration as it is easy to start with minimum capital, tax benefits of no minimum alternate tax or dividend distribution tax.
LLP works out to be an ideal form of organization, however, a Company is still more acceptable as an established form of organization. As and when the businesses expand, LLPs may have to be converted into a Company owing to various reasons. For example:
Section 366 of the Companies Act, 2013 (Cos Act) provides a one way street for conversion of LLP into a Company. This section provides that “Company” includes any partnership firm, limited liability partnership, cooperative society, society or any other business entity formed under any other law for the time being in force and such entities may apply for registration by following the specified procedure laid down in Companies (Authorised to Register Rules), 2014. A few of the conditions are as follows –
Although it is possible to convert a LLP into a Company, there are still certain areas where clarity may be required as follows:
Recently, the government has taken various steps with respect to ease of doing business in India; however it would be a welcome step if the government clarifies the issues discussed above.
Some other alternatives for migration from an existing LLP structure to a Company structure are as follows –
Given the constant changes in the tax and regulatory laws, one may need to examine the implications arising from such migrations.
[i] [i]As per RBI/2016-17/89 A.P. (DIR Series) Circular No. 7 dated 20 October, 2016, FVCI’s can invest in equity or equity linked instrument or debt instrument issued by an Indian ‘startup’ irrespective of the sector in which the startup is engaged. A startup will mean an entity (private limited company or a registered partnership firm or a limited liability partnership) incorporated or registered in India not prior to five years, with an annual turnover not exceeding INR 25 crores in any preceding financial year.
Views expressed are personal to author. Article includes inputs from Manjit Bhimajiani, Associate Director, PwC India and Pradeep Sethia and Nihal Rajendran