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Before starting with the conversion of Proprietorship to LLP, let us understand what is limited Liability partnership:
A limited Liability Partnership means a business where the minimum two members are required and there is no limit on the maximum number of members. The liability of the members of an LLP is limited.
Main reason why the concept of LLP has evolved is because of its simplicity in formation and easy maintenance. It helps owners also to limit their liabilities. This is the biggest advantage of an LLP over a traditional partnership firm. LLP has a blend of the benefits of a Company and a Partnership Firm namely, limited liability feature of a company and flexibility of a partnership firm. No partner is liable on account of unauthorized actions of other partners, thus individual partners are shielded from joint liability created by another partner’s misconduct. LLP form of organization is usually preferred by Professionals, Micro and Small businesses that are family owned or closely-held.
Conversion of Proprietorship firm to LLP:
A sole proprietorship cannot be directly converted into a LLP as it has only one person. It can be either done by closing the proprietorship and registering an LLP or by including another person in the business and making him a partner and then converting it to an LLP.
Below are the benefits of converting Proprietorship into LLP:
Separate Legal Existence: Limited liability partnership is a separate legal entity, and its existence is separate from its partners, unlike the general partnership firm. This makes it possible to own assets and enter into contracts in the name of the LLP or sue a third party in case of any dispute.
Limited Liability of Owners: The liability of Partners is limited to the extent of capital contribution agreed by the partners in the LLP Agreement. The loss or debt of LLP cannot be assigned to partners even while the dissolution of LLP. Further, one partner is not held responsible for the actions of negligence or misconduct of any other partner.
Flexibility to Operate: The LLP is managed and run according to the LLP agreement. It’s the partners that decide how the LLP would function and divide the duties and responsibilities. Hence, it is a very flexible structure and the partners are free to create their own rules of management which is not possible in other business structures.
Lower Compliance Requirement: Compared to a Private Company, there is a lower compliance requirement in case of LLP, including the audit requirement. The requirement of statutory audit arises on reaching a certain level of turnover or contribution. Further, provisions such as the meeting of partners, operation through resolutions are relaxed and not mandatory in every case.
Capital Requirement: No minimum capital is required to form a LLP. no minimum capital contribution requirement. It can be registered even with Rs. 1000 as total capital contribution.
Below are the documents required:
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