Conversion of a Private Limited
into a LLP
Background:
LLP
is a unique form of legally recognized corporate entity, which integrates the
features of both the limited corporations and the traditional partnership
firms. As it is a unique Hybrid Combination of both Company and Partnership,
this LLP is especially suitable for small to medium-sized business enterprises
and professionals.
LLP is governed by
Limited Liability Partnership Act- 2008 which came in to force on 1st day of April
2008.
CONVERSION OF PRIVATE LIMITED COMPANY INTO LLP:
Under
Companies Act, 2013 there are very much compliance and many complications,
which are cost consuming for small enterprises. Therefore, Small enterprises
are thinking to switch their Companies into Limited Liability Partnership
(LLP’s) Firm.
In
India, formation, registration, and regulation of an LLP is exclusively
governed and controlled by the rules, provisions, and regulations provided in
the LLP Act of 2008 and the LLP Rules of 2009.
RELEVANT
PROVISIONS OF LLP ACT-2008
Section-56:
A private company may convert into a Limited Liability partnership is
accordance with the provisions of this Chapter and the Third Schedule.
Conditions for conversion of private companies
into Limited Liability Partnership (LLP):-
The following are
the Conditions for conversion of private companies into Limited Liability
Partnership (LLP): –
1. There is no security
interest in its assets subsisting or in force at the time of application; and
2.
The
partners of the limited liability partnership to which it converts comprise all
the shareholders of the company and no one else.
3.
Consent
of all the shareholders of the company have to be obtained for conversion of
the company into the limited liability partnership.
4.
All
the partners of the limited liability partnership comprise all the shareholders
of the company and no one else.
5.
Up
to date filing of Income-tax return under the Income-tax Act, 1961.
6.
Up
to date Annual filings under the Companies Act 2013.
7.
There
should not be any pending prosecution initiated against or show cause notice
received by the company for alleged offences under the Companies Act,
1956/2013.
8. There should not be
any pending proceeding by or against the company pending in any Court or
Tribunal or any other Authority
Documents required for conversion of private
companies into Limited Liability Partnership (LLP):
The
following are the documents required for conversion of private companies into
Limited Liability Partnership (LLP): –
1. Copy of Board Resolution for Name Availability
2. LLP Agreement
- Proof of Address of Registered office of LLP.
- Subscription sheet signed by all the
Shareholders.
- Notice of Consent & Appointment of
Designated Partners with their personal details.
6. Detail of LLP(s)
and/ or company(s) in which partner/ designated partner is a director/ partner
7.
Consent Statement of all shareholders.
8.
Statement of Assets and Liabilities of
the company duly certified as true and correct by the auditor.
9.
List of all the secured creditors along
with their consent.
10. Approval/NOC from any other body/authority, if any.
11. Copy of acknowledgement (ITR-V) of income tax return for
previous 3 Financial Years.
Upon
such conversion, the company, its shareholders, the limited liability
partnership into which the company has converted and the partners of that
limited liability partnership shall be bound by the provisions of Schedule-III
of LLP Act.
Income Tax Implication
on conversion of Pvt Company To LLP:
Exemption for
Capital Gain Taxation:
The
finance Act, 2010 has inserted a new Clause (xiiib) in section-47 and a new
sub-section (4) in section 47A of the Act with effect from assessment
year-2011-12.
If
the following conditions are satisfied, then the transfer of capital asset or
intangible asset to LLP or any transfer of share or shares held in company by a
shareholder on conversion of Company into LLP shall not be regarded as
transfer:
(a) all the assets and
liabilities of the company immediately before the conversion become the assets
and liabilities of the limited liability partnership;
(b) all the shareholders
of the company immediately before the conversion become the partners of the
limited liability partnership and their capital contribution and profit sharing
ratio in the limited liability partnership are in the same proportion as their
shareholding in the company on the date of conversion;
(c) the shareholders of
the company do not receive any consideration or benefit, directly or
indirectly, in any form or manner, other than by way of share in profit and
capital contribution in the limited liability partnership;
(d) the aggregate of the
profit sharing ratio of the shareholders of the company in the limited
liability partnership shall not be less than fifty per cent at any time during
the period of five years from the date of conversion;
(e) the total sales,
turnover or gross receipts in the business of the company in any of the three
previous years preceding the previous year in which the conversion takes place
does not exceed sixty lakh rupees;
(f)
the
total value of the assets as appearing in the books of account of the company
in any of the three previous years preceding the previous year in which the
conversion takes place does not exceed five crore rupees; and
(g) no amount is paid,
either directly or indirectly, to any partner out of balance of accumulated
profit standing in the accounts of the company on the date of conversion for a
period of three years from the date of conversion
If
all the above conditions (a) to (g) are complied with, the conversion shall not
attract capital gains tax either for the company or the Successor LLP or for
the shareholders of the Company, who became partner in the successor LLP and
get share of profits and capital in the LLP in lieu of their shares in the
company.
If
any of the above conditions (a) to (g) is not
complied with, then as per provisions of Section 47 A (4) such transfer
of Capital Assets & Intangible assets deemed to be liable to Capital gains
of the successor LLP or the Shareholders of the predecessor company in the
previous year in which such non-compliance took place.
Carry forward of
losses & unabsorbed depreciation Section 72A (6A):
Where
there has been reorganization of business whereby a private company or unlisted
public company is succeeded by a limited liability partnership fulfilling the
conditions laid down in the proviso to clause (xiiib) of section 47, then,
notwithstanding anything contained in any other provision of this Act, the
accumulated loss and the unabsorbed depreciation of the predecessor company,
shall be deemed to be the loss or allowance for depreciation of the successor
limited liability partnership for the purpose of the previous year in which
business reorganization was effected and other provisions of this Act relating
to set off and carry forward of loss and allowance for depreciation shall apply
accordingly.
If
any of the conditions laid down in the proviso to clause (xiiib) of section 47
are not complied with, the set
off of loss or allowance of depreciation made in any previous year in the hands
of the successor limited liability partnership, shall be deemed to be the
income of the limited liability partnership chargeable to tax in the year in
which such conditions are not complied with.
Benefits under
Income Tax Law:
ü Dividend
Distribution Tax shall not be applicable
ü Exemption from
applicability of MAT provisions.
ü Partners
Remuneration is not treated as Salary income and thus TDS provisions, which
otherwise applicable to employees salary, shall not be applicable.
ü Tax Audit is not
applicable until LLP reaches a threshold turnover limit of Rs. 1 Crore in case
of business or Rs. 25 lakhs in case of profession.
Benefits of LLP as compared to
corporate form:
Particulars
|
LLP
|
Private Company
|
Minimum Members
|
2
Partners
|
2
Members (Max. 200 members)
|
Liability
|
Limited
(Except in case of Fraud and wrongful Act)
|
Limited
|
Forms to be filled
Annually
|
e-Form-8
& e-Form-11
|
e-Form
- AOC 4 & e-Form MGT 7
|
Transfer/
Inheritance of Shares
|
Transfer,
But subject to LLP Agreement
|
Transfer
is restricted
|
Easy to Form, Run
and manage
|
Minimum
Compliance
|
Moderate
Compliance
|
Requirement as to
maintenance of Statutory Records
|
Minimum
Compliance
|
It
is must to maintain statutory records as per Companies Act-2013.
|
Audit of Accounts
|
Require
only if Turn over above 40 lacs or Capital Contribution more than 25 lacs.
|
Audit
is Compulsory.
|
MINIMUM COMPLIANCE LEVEL &
COST SAVING:
After
commencement of Companies Act, 2013 cost of compliance has increased many fold
in the case of Companies, while a LLP has to comply with a very few
compliances.
The comparative
chart of compliances to be made by a company and LLP is given below.
Particulars
|
LLP
|
Private Company
|
Maintenance of
Statutory Records
|
Minimum
Requirement
|
Many Registers are Required to
Maintain Under Company as per Companies Act- 2013
|
Addition or
Deletion of Directors
|
Require
to amend LLP Agreement and File e-form- 3 & e-form-4.
|
Require to Pass Resolution in
General Meeting, File e-form-DIR-12 and require many documents from the
person who is appointed as Director. (As per Section-152 of Companies
Act-2013.)
|
Change in
Registered Office
|
Require
to amend LLP Agreement and File e-form Form-15
|
There is Complete lengthy process
for change in registered office of company as Per Section-13 of Companies
Act-2013
|
Increase in Capital
|
Only
require to amend LLP Agreement and File e-form Form-3.
|
Require to Pass Ordinary resolution
in General Meeting and file form SH-7.
|
Annually form
filling requirement
|
e-form-
8 (Statement of Accounts) and e-form-11 (Annual Return)
|
MGT-7, AOC 4 along with bulky
disclosure documents.
|
Disclosure of
Interest
|
No
such requirement
|
Require to Take disclosure from
director under Section-184(1)
|
Convening of
Meetings
|
No
such requirement
|
Require to hold Meetings as per
Section- 173. (At least Two Board Meeting and one Annual General Meeting for
Small Company and At least four Board Meeting and One Annual General Meeting
for other then Small company).
|
Audit of Accounts
|
Require
only if Turn over above 40 lacs or Contribution more than 25 lacs.
|
Audit is Compulsory.
|
Loans &
borrowings
|
As
per LLP Agreement. No other requirements
|
There is Cap for Loans and
Borrowings as per section 179 & 180, Require to hold Board Meeting and
file form with ROC.
|
Related Party
Transactions
|
No
Restrictions
|
Transaction to be at arm’s length
price only and as per provisions of Secton-188 of Companies Act-2013
|
PROCESS
OF CONVERSION OF COMPANY INTO LLP
1. Convene the Board Meeting:
- Call meeting of Board of Director.
- Pass Resolution for Conversion of Company
into LLP.
- Pass Resolution to authorize any director to
Apply for Name of LLP.
- Call EGM to pass a special resolution for
Conversion into LLP
2. Convene the Extraordinary General Meeting:
- Call meeting of Members.
- Pass Special Resolution for Conversion of
Company into LLP.
- Pass Resolution to authorize any director to
Apply for Name of LLP and to do &
to sign to do all such acts necessary for conversion into LLP.
- File e-Form MGT-14
within 30 days and before conversion.
3. File e-form LLP-1
with ROC for Name Reservation.
Attachments: Extracts of board Resolution
4. Obtain name Approval Certificate from ROC.
5. File e-Form- 2 with
ROC along with following documents:
- Proof of Address of Registered office of LLP.
- Subscription sheet signed by the promoters.
- Notice of Consent & Appointment of
Designated Partners with their personal details.
- Detail of LLP(s) and/ or company(s) in which
partner/ designated partner is a director/ partner.
6. File E-FORM- 18 with
ROC along with following documents:
- Statement of shareholders.
- Incorporation Documents & Subscribers
Statements in Form 2 filed electronically.
- Statement of Assets and
Liabilities of the company duly certified as true and correct by the
auditor.
- List of all the Secured creditors along with
their consent to the conversion.
- Approval of the governing council (In case of
professional private limited companies)
- NOC from Income tax authority & Copy of
acknowledgement of latest income tax return.
- Approval from any other body/authority as may
be required.
- Particulars of pending proceedings from any court/Tribunal etc.
7. After all
formalities and filings being done by the applicants and approved by the
Ministry, registrar will issue a certificate of registration upon conversion of
the LLP. The Certificate of Registration issued shall be the conclusive
evidence of conversion of the LLP.
8. Drafting & execution of limited liability partnership agreement.
9. Filling Of LLP Agreement within 15 Days of LLP Registration.
E Form 3
10. Intimate all the
statutory authorities about the change status of the entity.
