Conversion of a Private Company to a LLP

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

3. Proof of Address of Registered office of LLP.
4. Subscription sheet signed by all the Shareholders.
5. 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.

Notice Of Board Meeting
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