Tax Implications on conversion of Partnership Firm into Limited Liability
Partnership
Bird’s Eye View
• LLP’s will be treated as Partnership Firms for the purpose of Income Tax w.e.f
assessment year 2010-11.
•
No surcharge will be levied on income tax.
•
Profit will be taxed in the hands of the LLP and not in the hands of the partners.
•
Minimum Alternate Tax and Dividend Distribution Tax will not be applicable for LLP.
•
Remuneration to partners will be taxed as “Income from Business & Profession”.
•
No capital gain on conversion of partnership firms into LLP.
•
Designated Partners will be liable to sign and file the Income Tax return.
•
LLP shall not be eligible for presumptive taxation.
Taxation aspect of Limited Liability Partnership
The Budget 2009-10 has introduced the provisions regarding taxation aspect of the newly
introduced form of business Limited Liability Partnership.
As per the Budget 2009-10, LLP will be treated as Partnership firms for the purpose of
Income Tax and will be taxed like a partnership firm.
Tax rate:
•
30% flat tax rate + 3% education cess
•
No Minimum Alternate Tax & Dividend Distribution Tax
Eligibility (section 184) :
In order for Limited Liability Partnership to be assessed as firm as Income Tax Act, it has
to
satisfy the following criteria
•
The LLP is evidenced by an instrument i.e. there is a written LLP Agreement.
•
The individual shares of the partners are very clearly specified in the deed.
•
A certified copy of LLP Agreement must accompany the return of income of the LLP of
the previous year in which the partnership was formed.
•
If during a previous year, a change takes place in the constitution of the LLP or in the
profit sharing ratio of the partners, a certified copy of the revised LLP Agreement shall be
submitted along with the return of income of the previous years in question.
•
There should not be any failure on the part of the LLP while attending to notices given by
the Income Tax Officer for completion of the assessment of the LLP.
Implications for conversion of partnership firm into LLP
Limited Liability concept combines the organizational flexibility of a partnership firm
coupled
with the advantage of limited liability for its partners. The key features of the LLP such
as a
separate legal entity with unlimited number of partners, no partner being liable on
account of
the independent or unauthorized actions of other partner(s), liability of partners being
limited
to the respective stake of each partner in the LLP, are a distinct advantage over other
form of
organization.
Such distinct features would be the key drivers for forming LLP, rather than, partnership
firm for
planning different structures.
A.
Major advantages of conversion:
•
There is no limit to maximum number of partner, therefore gives you opportunity to
expand your business
•
The liability of Partners is limited to the amount which is agreed between the partners to
be contributed towards the LLP. If One partner has agreed to pay Rs 10,000, his liability
will be limited to Rs 10,000 only.
•
Partners can decide between themselves as to how the business will be managed.
•
No exposure to personal assets of the partners
•
Partners are not agents of other partners.
•
Business will be recognized by the name of LLP and not individual partners, therefore
LLP can create goodwill of its own.
•
Recognized as body corporate therefore it will be easy to attract finance from market
•
LLP will be taxed as Partnership firms and therefore no Mat & dividend distribution tax
despite of the fact, that LLP is a body corporate.
•
Ideal for partners , who wish to invest money but are not willing to take part in the
management or business
•
Partners can transfer their right to share profits to anyone else.
•
Foreign Investment is also allowed, therefore it will be possible to access to foreign
expertise.
•
Partners can decide between themselves as to how the business will be managed.
•
Partner can enter Joint Ventures with other parties in the name of LLP, which is
otherwise not feasible in case of partnerships
B.
Status upon conversion.
It is essential to note that on conversion, all the partners of the partnership firm shall
become the partners of the LLP. It is provided that no other person would become
partner on conversion into an LLP for the simple reason that on conversion, it should be
a mirror image.
On conversion, all the tangible (movable and immovable) property and the intangible
property, all assets, interest, rights, privileges, liabilities, obligations of the firm/Company
shall stand transferred to, and vest in, the LLP. Also, the firm so converted into an LLP
shall cease to exist upon conversion.
C.
Liability of the Partners after conversion
Every partner of the partnership firm that is converted into an LLP shall continue to be
personally liable (jointly and severally) for the liabilities and obligations of the
partnership
which were incurred prior to the conversion or which arose before the conversion.
Such provisions are not applicable in the case of conversion of a company into an LLP,
presumably since liability of shareholders in a company is anyway limited.