Conversion of Private Limited Company into Limited Liability Partnerships(LLP’s)

Conversion of Private Limited Company into Limited Liability Partnerships(LLP’s)

blog

Nov 09

2019

Posted by: CS Shilpi Thapar

  1. INTRODUCTION:-

Limited Liability Partnership (LLP) is a term introduced in Indian Corporate world on 1st April 2009 via much awaited Act Limited Liability partnership Act 2008, with the idea of providing the Indian Corporate world with a relatively new & innovative business vehicle and an alternative that integrates the features of limited liability of the company along with flexibility of traditional partnership firm for designing the Internal structure of the entity.                                     .

LLP  is essentially a body corporate having a legal entity distinct from its partners and has perpetual succession. Being a separate legislation the provisions of the Indian Partnership Act, 1932 are not applicable to a LLP and it is regulated by the mutually agreed partnership agreement known as LLP Agreement.

A limited company in India (Private or Public) has a lot of complex formalities and incurs additional overheads for managing affairs including mandatory board meeting, maintenance of statutory records, filing of e-forms with MCA etc. hereby there is a significant rise in number of companies who are opting for converting themselves into LLP.

All the firms/Companies whether listed or unlisted public or private are allowed to convert themselves into LLP according to provisions as given under LLP Act, 2008. The LLP Act contains enabling provisions pursuant to which a firm (set up under Indian Partnership Act, 1932) and private company or unlisted public company (incorporated under Companies Act) would be able to convert themselves into LLPs. Provisions of Section 56 & 58 and Schedule III to the Act provide procedure in this regard with regards to private companies.

ELIGIBILITY:-

  • There is no security interest in its assets subsisting or in force at the time of application; and
  • The partners of the limited liability partnership to which it converts comprise all the shareholders of the company and no one else.

  PREREQUISITES:-

  • No Pending of E-forms filed by Company.
  • No charge should subsist at MCA site.
  • One Financial Year must be completed.
  • Update income tax filings.
  • The partners of the limited liability partnership to which it converts comprise all the shareholders of the company and no one else.

 CHECKLIST:

Sr. No. Particulars

 

Form to be uploaded
1. Call Board Meeting for the Following Purpose:

·     Pass Resolution for Conversion of Company into LLP

·       Pass Resolution to authorize any director to Apply for Name of LLP

N.A.

 

2. File Application For Name Availability with ROC Form 1

(Attachments as per Foot Note No. 1)

 

3. Obtain name Approval Certificate from ROC. N.A.

 

4. Filling Of Incorporation Documents with ROC

 

 

Form 2

(Attachments as per Foot Note No. 2)

5. Filling of application for conversion:

 

Form 18

(Attachments as per Foot Note No. 3)

6. After all formalities and filings been complied with by the applicants and approved by the Ministry, registrar of LLP to issue a Certificate of Registration in Form no. 19 as to conversion of the LLP. The Certificate of Registration issued shall be the conclusive evidence of conversion of the LLP.

 

 
7. Limited liability partnership to file within 15 (fifteen) days of the date of registration, information to the concerned Registrar of Companies with which it was registered under the provisions of the Companies Act, 2013 (1 of 2013) about the conversion and of the particulars of the limited liability partnership in within 15 days of conversion into LLP.

 

Form 14

(Attachments as per Foot Note No. 5)

8. Filling Of LLP Agreement within 30 days of approval of above forms Form 3

(Attachments as per Foot Note No. 4)

Foots Notes:

  1. Attachments to Form 1 ;
  • Board Resolution passed by the Company approving the conversion into LLP shall be attached with the aforesaid form
  1. Attachments to Form 2 ;
  • 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.
  1. Attachments to Form 18 ;
  • 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 authorities and 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.
  • Rejection letter of Registrar of any earlier application for conversion.
  • Particulars of convictions, rulings, orders, judgment of Courts in favour or against the private limited company which are subsisting.
  • Other optional attachments as may be required.
  1. Attachments to Form 3 ;
  • Signed LLP Agreement (On Stamp Paper)
  1. Attachments to Form 14 ;
  • Copy of Certificate of Incorporation of LLP formed.
  • Copy of incorporation document submitted in Form 2.
  • Other optional attachments as may be required.
  1. NOTICE OF CONVERSION:- The LLP shall ensure that for a period of 12 months commencing not later than 14 days after the date of registration , every official correspondence of the LLP bears the following namely :(a).A Statement that it was , as from the date of registration , converted from a company into a LLP,(b).the name and registration number of the company from which it was converted
  1. EFFECT OF REGISTRATION:-

            On and from date of Registration specified in the certificate of registration issued :-

       a. There shall be a LLP by the name specified in the certificate of registration registered under this act;

     b.  All tangible (movable and immovable ) and intangible property vested in the Company , all assets , interests , rights , privileges , liabilities , obligations relating to the Company and the whole of the undertaking of the Company shall be transferred to and shall vest in the LLP without further assurance , act or deed ; and *

* however any property is registered with any authority , the LLP shall as soon as practicable , after the date of registration , take all necessary steps as required by the relevant authority to notify the authority of the conversion and of particulars of the LLP in such form and manner as the authority may determine.

c.The company shall be deemed to be dissolved and removed from the records of the ROC.

8.SOME OTHER CONSIDERATIONS :-

  • All proceedings by or against the company which are pending before any Court, Tribunal or other authority on the date of registration may be continued, completed and enforced by or against the LLP and any conviction, ruling, order or judgment of any Court, Tribunal or other authority in favour of or against the company may be enforced by or against the LLP.
  • every agreement to which the Company was a party immediately before the date of registration , whether or not of such nature that the rights and liabilities thee under could be assigned , shall have effect as from the date as if-
  1. the LLP were a party to such an agreement instead of the company ; and
  2. for any reference to the company , there were substituted in respect of anything to be done on or after the date of registration a reference to the LLP
  • All deeds, contracts, schemes, bonds, agreements, applications, instruments and arrangements subsisting immediately before the date of registration relating to the company or to which the company is a party shall continue in force on and after that date as if they relate to the limited liability partnership and shall be enforceable by or against the limited liability partnership as if the LLP were named therein or were a party thereto instead of the company.
  • Every appointment of the company in any role or capacity which is in force immediately before the date of registration shall take effect and operate from the date as if the LLP were appointed
  • Any authority or power conferred on the company on which is in force immediately before the date of registration shall take effect and operate from that date as if it were conferred on the LLP.
  • The above mentioned provisions shall apply to any approval, permit or license issued to the company under any other Act which is in force immediately before the date of registration of the limited liability partnership, subject to the provisions of such other Act under which such approval, permit or license has been issued.
  1. EVENT BASED COMPLIANCES:-
Compliance

 

Section E- Form Time Limit
Filing consent of Designated Partners 7(3) Form 4 Within 30 days of incorporation or subsequent appointments

 

Filing of change of Partners

 

25 (2) Form 3 & Form 4 Within 30 days of change
Changes in LLP Agreement

 

23(2) Form 3 Within 30 days  changes therein
Shifting of Registered Office

 

13 (3) Form 15 Within 30 days of compliance
Change of Name 19 Form 5 Within 30 days of compliance
  1. 1. ADVANTAGES OF LLP: –
  • Renowned form of business: Though the concept of Limited Liability Partnership has been recently introduced in India but it is very known concept in other countries of the world especially in service sector.
  • Easy to Form:It is very easy to form LLP, as the process is very simple as compared to Companies and does not involve much formality.
  • Body Corporate: Just like a Company, LLP is also body corporate , which means it has its own existence as compared to partnership. LLP and its Partners are distinct entity in the eyes of law. LLP will know by its own name and not the name of its  partners.
  • Liability: A LLP exists as a separate legal entity from your personal life. Both LLP and person, who own it, are separate entities and both functions separately. Liability for repayment of debts and lawsuits incurred by the LLP lies on it and not the owner. Any business with potential for lawsuits should consider incorporation; it will offer an added layer of protection.
  • Perpetual Succession:An incorporated LLP has perpetual succession. Notwithstanding any changes in the partners of the LLP, the LLP will be a same entity with the same privileges, immunities, estates and possessions. The LLP shall continue to exist till its wound up in accordance with the provisions of the relevant law.
  • Flexible to Manage:LLP Act 2008 gives LLP the at most freedom to manage its own affairs. Partner can decide the way they want to run and manage the LLP, in form of LLP Agreement. The LLP Act does not regulated the LLP to large extent rather than allows partners the liberty to manage it as per their will and fancies..
  • Easy Transferable Ownership:It is easy to become a Partner or leave the LLP or otherwise it is easier to transfer the ownership in accordance with the terms of the LLP Agreement.
  • Separate Property:A LLP as legal entity is capable of owning its funds and other properties. The LLP is the real person in which all the property is vested and by which it is controlled, managed and disposed off. The property of LLP is not the property of its partners. Therefore partners cannot make any claim on the property in case of any dispute among themselves.
  • Taxation:Another main benefit of incorporation is the taxation of a LLP. LLP are taxed at a lower rate as compared to Company. Moreover, LLP are also not subject to Dividend Distribution Tax as compared to company, so there will not be any tax while you distribute profit to your partners.
  • Raising Money:Financing a small business like sole proprietorship or partnership can be difficult at times. A LLP being a regulated entity like company can attract finance from PE Investors, financial institutions etc.
  • Capacity to sue:As a juristic legal person, a LLP can sue in its name and be sued by others. The partners are not liable to be sued for dues against the LLP.
  • No Mandatory Audit Requirement:Under LLP, only in case of business, where the annual turnover/contribution exceeds Rs 40 Lacs/Rs 25 Lacs are required to get their account audited annually by a chartered accountant. This provides great relief to small businessmen.
  • Partners are not agent of other Partners: In LLP, Partners unlike partnership are not agents of the partners and therefore they are not liable for the individual act of other partners in LLP, which protects the interest of individual partners.
  • Compliances: As compared to a private company, the number of compliances are on lesser side in case of LLP.
  • Meetings : No Requirements of Convening Meetings
  • No restriction with regards to Loan & Borrowing and Related Party Transactions
  • No Limit on Partners : A LLP requires a minimum of two partners while there is no limit on the maximum number of partners

10.2 .DISADVANTAGES  OF LLP :

  • Any act of the partner without the consent of other partners , can bind the LLP
  • Under some cases , liability may extend to personal assets of the partners.
  • An LLP are not allowed to raise money from public
  • Because of the hybrid form of the business , it is required to comply with various rules and regulations and legal formalities
  • It is very difficult to wind up the business in case of exigency as there are a lot of legal compliances under LLP rules.

 11.COMPARATIVE ANALYSIS OF LLP VIS-A -VIS COMPANY

Particulars LLP Company
Perpetual Succession Applicable Applicable
Compliance Moderate High
DDT Not Applicable Not Applicable
Regulator Regulated by LLP Act , 2008 and Agreement Regulated by Companies Act , 2013
Taxation Moderate High
  1. TAXATION ASPECTS : –

Income Tax Treatment of a Company converted into LLP is more or less tax neutral provided conditions specified in Section 47 (xiiib) of Income Tax Act , 1961 are satisfied.

  • Section 47(xiiib)

Following shall not be regarded as a ”transfer”, therefore, no capital gain tax shall arise on the following:

  1. Any transfer of a capital asset or intangible asset by a private company or unlisted public company to a limited liability partnership
  2. Any transfer of a share or shares held in the company by a shareholder as a result of conversion of the company into a limited liability partnership in accordance with the provisions of section 56 of the Limited Liability Partnership Act, 2008
  • Conditions For Exemptions

Exemption shall be available only if the conversion satisfies all the below mentioned six conditions:-

1) All the assets and liabilities of the Company immediately before the conversion become assets and liabilities of LLP;

2 (a) All the shareholders of the company immediately before the conversion become the partners of the LLP;

(b) Their capital contribution and profit sharing ratio in the LLP are in the same proportion as their shareholding in the company on the date of conversion;

  1. 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 LLP;
  2. The aggregate of the profit sharing ratio of the shareholders of the company in LLP shall not be less than 50% at any time during the period of 5 years from the date of conversion;
  3. The total sales, turnover or gross receipts in the business of the company in any of the 3 previous year preceding the previous year in which the conversion takes place does not exceed 60 lakh Rupees;
  4. 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 3 years from the date of conversion.
  • Section 47 A(4) : Withdrawal of exemption in certain cases:-
  1. a) If all the above conditions (i) to (vi) 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.
  2. b) If any of the above conditions (1) to (6) 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.
  • SOME OTHER CONSIDERATIONS:
  1. LLP is not subject to MAT (Section 115JB) o book profit however AMT (Alternate Minimum Tax) is applicable to LLP’s (Section 115JC) on adjusted total income.
  2. It is not subject to Dividend Distribution Tax.
  3. A Partner is entitled to receive interest on his capital contributions if LLP Agreement so provides. The interest is deductible in the hands of the LLP subject to certain conditions.
  4. Subject to fulfillment of certain conditions a LLP can claim deductions for any salary , bonus , commission or remuneration paid to a partner.
  5. Carry Forward / Set of Losses :-The Finance Act , 2010 has amended Section 72 A of the Act by inserting new sub- section  (6A) which provides that the accumulated business loss and unabsorbed depreciation of the predecessor company shall be allowed to be carried forward and set – off          by the successor LLP for the purpose of the previous year in which business re- organization was effected if all the conditions (conditions 1 to 6 in clause (xiiib) of Section 47 are satisfied.
  6. Provisions of Deemed Dividend will not apply to a LLP.
  7. LLP is allowed to maintain its books of accounts on either accrual basis or cash basis

Disclaimer:

Please note that all the views contributed in this article are our personal views based on our experience, research and contains information available in public domain. It is not any professional advice. Any person acting or deciding on the basis of this views should do so only after consulting expert professionals. Care has been taken while including contents in this document ; however errors or omissions cannot be completely ruled out. To link, post, distribute, or reference any of our published views /articles for any lawful purpose requires specific permission from us. We, however disclaim any responsibility on account of any implications, decisions or actions taken on basis of some inadvertent mistake in said document. Any typographical error found in the contents of this document shall be reported to us immediately for necessary actions and corrections to be made.

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