Treatment of reserve & surplus of pvt. ltd. co. into llp
This query is : Resolved
11 October 2016
Sir, we have converted our pvt. ltd. company into LLP, we had reserve & surplus in Pvt. Ltd. approx. 6 crore but after conveted into LLP, we cant't distribute reserve & surplus to Partners upto 3 year then where we have to show accumulated reserve & surplus in LLPfirm in Balance Sheet and Income tax return under Contribution & Liabilities or reserve & surplus under other reserve or any other item and we have to distribute current year full profit in sharing ratio to Partner's capital, pl. advice the treatment and effect ?, thank.
02 August 2025
Great question about the treatment of **Reserve & Surplus** on conversion of a Pvt. Ltd. company into an LLP!
---
### Key Points & Treatment:
1. **Background:**
* When a **Pvt. Ltd. company converts into an LLP**, the accumulated **Reserve & Surplus** in the company doesn’t get distributed immediately.
* As per LLP Act, **reserves are not distributable to partners for 3 years from the date of conversion**.
* This restriction is to ensure the LLP maintains a buffer for business continuity.
2. **Where to show Reserve & Surplus in LLP Balance Sheet?**
* Since the accumulated **reserve & surplus cannot be distributed immediately**, it should be shown as **‘Other Reserves’ or a separate head called ‘Reserve & Surplus (Non-distributable)’** under the **‘Partners’ Funds’** section in the Balance Sheet.
* It should **not be shown under ‘Capital Contribution’** because it is not new capital but accumulated earnings.
* So, effectively:
```
Balance Sheet (LLP)
--------------------
Partners’ Funds
- Capital Account (partners’ contributions)
- Reserves & Surplus (Non-distributable)
```
3. **Tax Treatment in Income Tax Return:**
* In the **Income Tax Return of LLP**, the accumulated reserves can be shown under **‘Reserves and Surplus’**.
* It is **not income** for the LLP; it’s just brought forward earnings from the company.
* Any **current year profit** should be **distributed (or credited) to the partners’ capital accounts as per sharing ratio**.
4. **Distribution of Current Year Profit:**
* The LLP can distribute the **current year profits fully** to partners in the agreed sharing ratio.
* The **reserve & surplus from the company is to be kept aside as non-distributable for 3 years** as per the LLP Act.
* After 3 years, this reserve can be considered for distribution or otherwise as per partners’ agreement.
5. **Effect:**
* Reserves kept in LLP strengthen partners’ funds but are **not distributable immediately**.
* Helps LLP maintain financial stability.
* Ensures compliance with LLP regulations.
* Proper disclosure in Balance Sheet avoids confusion and maintains transparency.
---
### Summary Table:
| Item | Treatment in LLP Balance Sheet | Tax Treatment | Distribution |
| ------------------------------ | ----------------------------------------------------------------------- | ------------------------------------- | ---------------------------------- |
| Accumulated Reserves & Surplus | Shown as ‘Reserves & Surplus (Non-distributable)’ under Partners’ Funds | Not taxable; carried forward earnings | Not distributable for 3 years |
| Current Year Profit | Credited to Partners’ Capital Accounts | Taxed in LLP as business income | Distributable fully as per sharing |
---
If you want, I can help draft the journal entries or formats for the Balance Sheet showing this treatment. Would you like that?
---
### Key Points & Treatment:
1. **Background:**
* When a **Pvt. Ltd. company converts into an LLP**, the accumulated **Reserve & Surplus** in the company doesn’t get distributed immediately.
* As per LLP Act, **reserves are not distributable to partners for 3 years from the date of conversion**.
* This restriction is to ensure the LLP maintains a buffer for business continuity.
2. **Where to show Reserve & Surplus in LLP Balance Sheet?**
* Since the accumulated **reserve & surplus cannot be distributed immediately**, it should be shown as **‘Other Reserves’ or a separate head called ‘Reserve & Surplus (Non-distributable)’** under the **‘Partners’ Funds’** section in the Balance Sheet.
* It should **not be shown under ‘Capital Contribution’** because it is not new capital but accumulated earnings.
* So, effectively:
```
Balance Sheet (LLP)
--------------------
Partners’ Funds
- Capital Account (partners’ contributions)
- Reserves & Surplus (Non-distributable)
```
3. **Tax Treatment in Income Tax Return:**
* In the **Income Tax Return of LLP**, the accumulated reserves can be shown under **‘Reserves and Surplus’**.
* It is **not income** for the LLP; it’s just brought forward earnings from the company.
* Any **current year profit** should be **distributed (or credited) to the partners’ capital accounts as per sharing ratio**.
4. **Distribution of Current Year Profit:**
* The LLP can distribute the **current year profits fully** to partners in the agreed sharing ratio.
* The **reserve & surplus from the company is to be kept aside as non-distributable for 3 years** as per the LLP Act.
* After 3 years, this reserve can be considered for distribution or otherwise as per partners’ agreement.
5. **Effect:**
* Reserves kept in LLP strengthen partners’ funds but are **not distributable immediately**.
* Helps LLP maintain financial stability.
* Ensures compliance with LLP regulations.
* Proper disclosure in Balance Sheet avoids confusion and maintains transparency.
---
### Summary Table:
| Item | Treatment in LLP Balance Sheet | Tax Treatment | Distribution |
| ------------------------------ | ----------------------------------------------------------------------- | ------------------------------------- | ---------------------------------- |
| Accumulated Reserves & Surplus | Shown as ‘Reserves & Surplus (Non-distributable)’ under Partners’ Funds | Not taxable; carried forward earnings | Not distributable for 3 years |
| Current Year Profit | Credited to Partners’ Capital Accounts | Taxed in LLP as business income | Distributable fully as per sharing |
---
If you want, I can help draft the journal entries or formats for the Balance Sheet showing this treatment. Would you like that?
You need to be the querist or approved CAclub expert to take part in this query .
Click here to login now
Click here to login now
Similar Resolved Queries
Unanswered Queries
- Transport service POS
- GST Registration Application -Rejected
- E INVOICE, E-WAY, INVOICE
- GSTR 9C- Table 9
- To Whom the Invoice should be Raise to
- INCOME TAX NOTICE QUESTION
- Sale Proceed of Urban Agri. Land received in Advance in FY 24-25 but Registry is made in next year
- PLACE OF SUPPLY FOR COMMISSION AGENT
- Whether to file ITC 03 for downward GST rate revision - Reg.
- Query Regarding Error in Establishing Connection with Traces WebSocket eSigner
- Capital gain on sale of resident house by non-resident Indian
- Regarding claiming exemption under section 54ec
- EXCESS CREDIT REALTED GST REVERSAL
- Export invoice not reported
- CA Articleship Extension Matter
- GST OFFICER WRONG NOTICE
- "Please ensure that the Total of the Deductions u/s 54F match the same in Table D in Sch CG"
- Composition Dealer GST Annual Return Filing process
- Revision under Section 264 in The Income Tax Act, 1961
- TDS under section 195.
Trending Online Classes
-
Live Course on GSTR 9 & 9C for FY 24-25(Detailed discussions, FAQ, Case studies and Live demo of GSTR 9/9C on GST Portal)
Industry Expert16 November 2025
CAclubindia
