Conversion of a Private Limited Company to LLP

​SYNOPSIS

LLP is a simpler, more convenient, and easy to use form of an organization over a company considering the compliance and taxation point of view. It may be more beneficial for small entrepreneurs and professionals particularly operating in small and medium-sized businesses. The conversion from an existing company can easily be made to an LLP while retaining the advantages of limited liability, ease of operations, and fewer compliances.  

Perquisites and procedure

An Overview of Limited Liability Partnership

Limited Liability Partnership (LLP) as the name suggests, refers to a partnership wherein the partners are having limited liability. This is contrary to the normal partnership model wherein the liability of a partner is unlimited. Limitation of liability leads to ease of doing business as the individual stakes of partners are not at stake. Further coupled with the benefits of a company, the model of LLP is a viable option for medium-sized businesses, who may be willing to avail of the benefits of a company model without the hassles of typical corporate-related compliances. This is in addition to the taxation benefits to an LLP.

LLP is governed by the Limited Liability Partnership Act, 2008 which came into effect on 1st April2008. This act was proposed for promoting the micro, small & medium enterprises, but has become popular among entrepreneurs. An LLP model combines the best features of both a company and a partnership firm. Small & medium-sized businesses normally prefer this model. LLP has the advantages of self-governance with minimal compliance as compared to other types of corporate entities, thus making it popular among business owners.

PREREQUISITES OF CONVERSION

• Obtain Director Identification Number (DIN)- The minimum required number of designated partners for the incorporation of an LLP is two, of which one must be an Indian resident. DIN (Directors Identification Number) is allotted at the time of incorporation or while adding a person as a director or designated partner in a company or an LLP. Such members require to be added as a director in the company to obtain DIN. Designated partners in an LLP would require obtaining DIN. Application for DSC also needs to be made before applying for DIN. A Body corporate may also opt to be a partner in an LLP through a nominee.

• Meeting of Board of Directors of the company: A meeting of the Board of Directors(BOD) of the company needs to be arranged wherein a requisite resolution needs to be passed for conversion of the company to LLP. A resolution needs to be passed to authorize any director to file the requisite forms with MCA (Ministry of Corporate affairs).

• Availability of Name: The company shall need to apply for reservation of the name of LLP and get the name approval certificate from the registrar of companies. This would ensure that the name is not already in use and would allow the company to reserve its proposed name in advance, before the completion of formalities.

PROCESS OF CONVERSION

1. Filing of incorporation form with requisite documents: The company needs to file FILLIP (Form for incorporation of Limited Liability Partnership) with Registrar of companies(ROC).The following attachments are essential-

• Address and address proof of the registered office of proposed LLP
• The subscription sheets in the LLP
• Consent to act as designated partners/partners in the proposed LLP
• Identity and resident proofs of designated partners
• Details of other LLP(s) or company(s) in which the partner is already a designated partner.

2. Filing of Application for Conversion into LLP: Form 18 is the requisite form that needs to be filled up for the conversion of a company into an LLP. It needs to be submitted with Form for incorporation itself. This form has all the details about the conversion of the company into LLP such as-

1. Whether the consent of all the shareholders of the company has been obtained for the conversion of a company into the LLP.
2. Whether all the partners of the proposed LLP consist of all the shareholders of the company and no one other than those.
3. Income-tax return filed must be complete as per Income Tax Act, 1961.
4. All Documents such as the latest balance sheet and annual returns under the Companies Act, 2013 must have been filed with MCA.
5. Validation of any demand, conviction, ruling, order, or judgment of any Court, Tribunal, or any other authority made in favor of or against the company is subsisting as on date.
6. Confirmation as to any security interest in the assets of the company is subsisting or still in force.
7. Whether any previous application for conversion of the said company into LLP has been refused by the Registrar and on what grounds.
8. Confirmation of any secured creditors in the company.

3. Filing of E-form- 18 with Registrar of Companies(ROC), The form must be accompanied by the following documents-

• A Statement of the consent of all the existing shareholders of the company.
• A Statement of accounts of the company must be filed which should be certified as true and correct by an independent auditor.
• A list of all the secured creditors of the company along with their consent to be filed.
• Copy of acknowledgment of last return filed under the Income Tax Act.

4. Issue of Certificate of Incorporation as LLP from ROC:

Once all the requisite formalities are compiled by the company and further approved by the Ministry of Corporate Affairs (MCA), ROC (registrar of companies) issues a COI (certificate of incorporation). The certificate acts as proof of conversion of the company to an LLP.

PROCESS POST-CONVERSION

• Drafting of Limited Liability Partnership (LLP) Agreement

Once the basic formalities as to conversion are completed and certificate of incorporation for the LLP is received, the agreement for the LLP must be drafted.

Contents of the Agreement shall be as follows:

1. Name of LLP. The earlier reserved name may be used and it must be the name by which the certificate of incorporation is received.
2. Names of Partners & Designated Partners in the LLP.
3. Form of the contribution of the partners/ designated partners in the LLP.
4. Profit-Sharing ratio of the partners/ designated partners.
5. The rights & duties of Partners/ designated partners must be clearly defined.
6. The proposed businesswhich the LLP wishes to conduct.
7. Fundamental rules for governing an LLP is to be defined in the agreement.

• Subsequent Filing of E-Form-3 to ROC

Form E-3 provides detailed information about the LLP agreement which has been entered into between the partners. The same needs to be filed within 30 days from the date of conversion of the company into an LLP. The agreement entered must be submitted along with the form E3.

• Filing of E-Form -14 (Intimation to ROC)

Once the certificate of incorporation has been received, E-form-14 has to be filed within 15 days of the date of conversion. The same would consist of the following enclosures:

1. Copy of Certificate of Incorporation (COI) of LLP.
2. Copy of incorporation document submitted in E-Form FILLIP to ROC.

OTHER ASPECTS OF CONVERSION

• Taxation aspects on conversion

The entire process of conversion of a company into an LLP will not attract capital gain tax as this is not treated as a “transfer” as defined under the Income Tax Act.

The conversion shall not attract capital gain tax subject to the following conditions:

1. The assets and liabilities of the company shall become the assets and liabilities of the LLP.
2. All the shareholders of the Company shall become partners of the LLP.
3. The capital contribution proportion and the profit-sharing ratio of partners in LLP are in the same proportion as that of the shareholding in the company.
4. The shareholders of the company do not receive any benefit, directly or indirectly in the LLP, other than the capital contribution and profit-sharing ratio.
5. The total sales, gross receipts, and turnover in any of the three preceding years from the date of conversion of the company should not exceed Rs.60 Lakhs.
6. That the value of assets as appearing in the books of account of the Company, in any of the preceding three years does not exceed Rs.500 Lakhs.

• Statutory impact of conversion

The following are the effects of the conversion of the company to LLP:

1. Removal of the name of a private limited company from the register of the ROC.
2. The conversion will not impact and affect already existing obligations, agreements, contracts, liabilities, and continued employment contracts.
3. The Company must inform all the concerned statutory authorities about the conversion and make necessary amendments in all the licenses & registrations.

ADVANTAGES OF CONVERSION

Following are the advantages of conversion of a private limited company to an LLP-

• Upon conversion of a private limited company to LLP, the assets and liabilities of the company will convert to those of the LLP.Neither any instrument of transfer is required, nor will there be any stamp duty implications on such transfers.
• There is no limit to the number of partners in the case of LLP; as compared to in the case of private limited companies.
• No process compliance for holding a minimum number of meetings and maintaining statutory records is there for LLP. The statutory compliances in the case of LLP are minimal.