Company law and LLP · LLP and partnership firms
How can a partnership firm be converted into an LLP or a company, and what is the tax effect?
Short answer
A firm converts into an LLP by filing Form 17 with FiLLiP, where all partners become partners of the LLP and no one else joins. It can become a company by registration under Part I of Chapter XXI, or the business can be taken over by a new company. Conversion into a company is exempt from capital gains if all partners become shareholders in the same ratio, get only shares, and keep at least 50% for five years.
Firm into an LLP
- All partners agree, and all the firm's partners, and no one else, become the LLP's partners.
- Reserve the name and file FiLLiP together with Form 17 (conversion from a firm), with the consent of all partners and a statement of the firm's assets and liabilities, certified by a Chartered Accountant.
- The Registrar issues the certificate of registration. All the firm's property, rights and liabilities vest in the LLP by law.
- Within 15 days, inform the Registrar of Firms where the firm was registered (Form 14).
- File the LLP agreement in Form 3 within 30 days.
Firm into a company
- Registration under section 366 (Part I of Chapter XXI): a firm can apply to be registered as a company, using URC-1 with SPICe+, if it meets the conditions on the number of members and other requirements in the rules.
- Business takeover: a new company is incorporated, and the firm's business is transferred to it under an agreement.
Income-tax effect
| Conversion | Capital gains exemption |
|---|---|
| Firm to company (section 47(xiii), now section 70) | Exempt if all assets and liabilities pass to the company; all partners become shareholders in the same proportion as their capital; they get nothing other than shares; and they hold at least 50% of the voting power for five years |
| Private or unlisted public company to LLP (section 47(xiiib), now section 70) | Exempt if turnover in the last three years did not exceed ₹60 lakh, total assets did not exceed ₹5 crore, all shareholders become partners in the same ratio, and other conditions are met |
| Firm to LLP | No specific provision. Because the assets vest in the LLP by law, without consideration, the conversion is generally treated as not a transfer, but get advice on your facts |
If the conditions are broken later, the exemption is withdrawn and the gain is taxed.
Other points
- GST: the LLP or company takes a new GST registration and transfers unused credit through ITC-02.
- Contracts, licences and bank accounts must be moved into the new entity's name.
- Unabsorbed losses of a firm are not carried over automatically; check the conditions.
Legal basis
- Section 55 and Second Schedule, Limited Liability Partnership Act, 2008
- Section 366, Companies Act, 2013
- Section 47(xiii) and (xiiib), Income-tax Act, 1961, now section 70, Income-tax Act, 2025
Official sources
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