How to convert Partnership firm to LLP and their benefits?

Converting a partnership firm to a Limited Liability Partnership (LLP) in India involves several steps, and it can offer certain tax benefits. Here’s a general overview of the process and the tax advantages:

Partnership Firm to LLP Conversion Process:

1. Obtain Digital Signature Certificates (DSCs): All designated partners of the proposed LLP must have DSCs as the forms for conversion are filed online and require digital signatures.
2. Director Identification Number (DIN) or Designated Partner Identification Number (DPIN): If the partners of the firm don’t already have a DIN or DPIN, they need to apply for the same.
3. Name Approval: File an application for reservation of the LLP’s name using the ‘RUN-LLP’ (Reserve Unique Name – Limited Liability Partnership) form.
4. Incorporation of LLP: File ‘Form FiLLiP‘ for incorporation of the LLP with the Registrar of Companies (ROC). This form will also register the designated partners in the LLP.
5. File Form 17 (Application and Statement for conversion): Along with Form FiLLiP, Form 17 is required to be filed for the conversion of a partnership firm into LLP. This must be accompanied by a statement of consent of all partners, a statement of assets and liabilities of the firm duly certified by a Chartered Accountant, and approval from any authority/government body, if required.
6. File Form 3 (Information regarding LLP Agreement): Within 30 days of the date of registration, file information regarding the LLP agreement in Form 3.
7. Certificate of Registration: After the ROC is satisfied with the documents and forms submitted, it will issue a Certificate of Registration as to the formation of the LLP.
8. Publication of Notice: In some cases, you may need to publish a notice about the conversion in a newspaper.
9. Transfer of Assets and Liabilities: The assets and liabilities of the firm are transferred to the LLP post-conversion.
10. Informing Concerned Authorities: Inform tax authorities, banks, clients, suppliers, and other relevant parties about the conversion.

Taxation of LLP under Income Tax Act, 1961:

1. Taxation at Entity Level: Unlike the classic pass-through status in other jurisdictions, LLPs in India are taxed at the entity level. This means the LLP itself is liable to pay tax on its income.
2. Flat Rate of Taxation: LLPs are taxed at a flat rate of 30% on their total income. Additionally, a surcharge and cess may also be applicable depending on the level of income.
3. No Distribution Tax: While LLPs are taxed at the entity level, the distribution of post-tax profits to the partners is not taxed. This contrasts with the dividend distribution in companies, which can attract additional tax in the form of Dividend Distribution Tax (DDT), though DDT has been abolished in the Union Budget 2020 and replaced by the classical system of taxation.
4. No Double Taxation: Since the income distributed to the partners is not taxed again in their hands, it avoids the issue of double taxation. This is the key aspect where LLP taxation in India resembles pass-through taxation.
5. Compliance and Filing: LLPs are required to file their annual tax return and, if applicable, audit their accounts. Each LLP must also furnish a report of tax audit in Form 3CA/3CB and 3CD if their turnover exceeds the prescribed threshold.
6. Taxation of Partner’s Share: The share of profits received by the partners from the LLP is exempt from tax in their hands under Section 10(2A) of the Income Tax Act. This is because the income has already been taxed at the entity level.
7. Interest and Remuneration to Partners: While the share of profits is exempt in the hands of the partners, any interest, salary, bonus, commission, or remuneration by whatever name called, if paid to the partners, is taxable in their hands under the head “Income from Business or Profession”.
8. Deductions for Interest and Remuneration Paid: The LLP is allowed to claim a deduction for the interest and remuneration paid to the partners, subject to the conditions and limits specified under Section 40(b) of the Income Tax Act.

Tax Benefits of LLP:

1. Pass-Through Status: LLPs in India enjoy a pass-through status meaning the LLP itself does not pay taxes on its income. Instead, the individual partners pay tax on their share of profits in the LLP in the way as explained above.
2. No Dividend Distribution Tax (DDT): Unlike companies, LLPs are exempt from Dividend Distribution Tax. This can be a significant advantage over a corporate structure where DDT is applicable on dividends distributed to shareholders.
3. No Minimum Alternative Tax (MAT): LLPs are also exempt from Minimum Alternative Tax (MAT), which is applicable to companies.
4. Other Tax Benefits: Depending on the business activities and turnover, LLPs may enjoy other tax benefits under the Income Tax Act, 1961.

Considerations:

• Tax Implications on Conversion: There might be tax implications during the conversion process. It’s advisable to consult with a tax advisor to understand these implications.
• Compliance and Legal Requirements: Post conversion, the compliance requirements for an LLP differ from that of a partnership firm. Ensure you are aware of these new requirements.

Remember, this is a general guide, and it’s essential to consult with legal and financial professionals before proceeding with the conversion, as the process and implications can vary based on specific circumstances.