Switch to an LLP from a proprietorship
To change your business structure from a proprietorship to a Limited Liability Partnership (LLP), you'll need to follow specific steps and fulfil certain legal requirements.An overview of the procedure is provided below:
Understand the LLP Structure: Familiarise yourself with the concept and benefits of a Limited Liability Partnership. An LLP combines the features of a traditional partnership and a limited liability company, providing partners with limited liability protection.
Obtain Designated Partners: Identify partners who will be part of the LLP. A minimum of two selected partners are required for LLPs, and at least one of them needs to be an Indian citizen.
Obtain Digital Signature Certificates (DSC): All designated partners must obtain their individual DSCs, as they are required for filing electronic documents with the Ministry of Corporate Affairs (MCA). These are the legal requirements.
Obtain Director Identification Number (DIN): If the designated partners don't already have DINs, they need to apply for them through the MCA portal. DIN is a unique identification number issued to individuals who wish to be directors in Indian companies.
Reserve a Name: Choose a suitable name for your LLP and check its availability on the MCA portal. The name should comply with the Limited Liability Partnership naming guidelines and should not be identical or too similar to existing LLPs or trademarks.
Prepare LLP Agreement: Draft an LLP agreement that outlines the rights, duties, and responsibilities of the partners and the internal workings of the Limited Liability Partnership. It should comply with the LLP Act and be executed on stamp paper. These are the legal requirements.
File Form 1: File Form 1 (Application for reservation or change of name) with the Registrar of Companies (RoC) through the MCA portal to reserve the proposed name for your LLP. Include the required documentation and pay the required price.
File Form 2: Once you receive approval for the name, file Form 2 (Incorporation Document and Subscriber's Statement) with the RoC. This form contains details such as the LLP agreement, partners' information, and registered office address. Include the necessary paperwork, and pay the requisite price.
Obtain Certificate of Incorporation: Upon verification of the documents, the RoC will issue a Certificate of Incorporation. This document signifies the conversion of your proprietorship into an LLP.
Update Statutory Requirements: After obtaining the Certificate of Incorporation, complete additional compliance requirements, such as obtaining a new PAN (Permanent Account Number), updating your business bank account details, and fulfilling any other regulatory obligations.
It's important to note that the exact process and requirements may vary based on your jurisdiction and the current regulations. It is advisable to consult a professional chartered accountant, company secretary, or lawyer to guide you through the specific steps and ensure compliance with all legal requirements.
Advantages of switching from a proprietorship to an LLP
distinct legal status
An LLP differs from a general partnership firm in that it is a distinct legal entity that is independent of its partners. A Limited Liability Partnership can therefore maintain assets, enter into contracts under its own name, and, in the event of a conflict, file a lawsuit against a third party.
Owners' Limited Liability
Partners in an LLP are only responsible for the capital contribution specified in the LLP Agreement. As a result, even during the dissolution process, partners cannot be held accountable for any losses or obligations sustained by the LLP. Furthermore, individual partners are not responsible for the careless or improper conduct of other partners.
Operational Flexibility
The LLP agreement, which is chosen by the partners, governs the management and activities of an LLP. As a result, the partners are free to divide tasks and responsibilities anyway they see fit, resulting in a very flexible management structure. Other corporate forms frequently make it impossible to have this amount of independence.
Lower Compliance Standards
Comparing an LLP to a Private Company, the criteria for compliance are far less strict. Less audit obligations are part of this; statutory audits are only required once the LLP reaches a certain amount of contribution or turnover. Additionally, some clauses, including those requiring regular partner meetings and resolution-based decision-making, are not always necessary and are loosened under an LLP.