Conversion of LLP to Private Limited Company

Are an LLP looking to expand and attract more investors? Converting into a Private Limited Company in India may be the key to achieving your business goals. Although the Limited Liability Partnership Act 2008 does not have a provision related to the conversion of an LLP into a Private Limited Company, there is a process outlined in Section 366 of the Companies Act 2013 and Company (Authorised to Register) Rules 2014. In this article, we will discuss the reasons for converting, the pre-requisites, benefits, and documents required for converting your LLP into a Private Limited Company.

I. Introduction

A. Definition of LLP and Pvt. Ltd company

A Limited Liability Partnership (LLP) and a Private Limited Company are two types of business entities commonly used in India. An LLP is a form of partnership in which all partners have limited liability and independent existence. On the other hand, a Private Limited Company is a type of company that is privately owned and limited by shares. The shareholders have limited liability, meaning their personal assets are not at risk in case of company debts and liabilities.

LLPs are suitable for small businesses with an annual turnover of less than Rs 40 lakhs and a capital contribution of less than Rs 25 lakhs. LLPs that satisfy these conditions do not have to go through an audit every year, unlike Private Limited companies which need to conduct an annual audit. However, if the LLP has an annual turnover of more than Rs 40 lakhs or a capital contribution of more than Rs 25 lakhs, the need for compliance becomes almost similar for both entities. Therefore, LLPs may convert themselves to Private Limited Companies when they intend to expand, invite more investors, and access more funding opportunities. 

B. Benefits of converting an LLP into Pvt. Ltd company

Converting an LLP into a Private Limited Company can be a smart move for businesses looking to infuse equity capital and gain more credibility with investors. Here are some benefits to consider:
– Separation of management and ownership: This can provide more comfort to investors who prefer not to invest in an LLP where the management and ownership are combined.
– Greater supervisory compliances: As a Private Limited Company, there are more legal requirements to fulfill. This can make investors feel more secure as they know that the business is being run responsibly and ethically.
– Avoidance of capital gains tax: By converting rather than incorporating a new company, not only can existing history and branding be preserved, but capital gains tax can be avoided. This can save the business significant money.
– History and branding preservation: As mentioned earlier, converting to a Private Limited Company allows the business to keep its history and branding. This can be valuable for businesses looking to maintain their existing reputation and customer base.

Overall, converting an LLP into a Private Limited Company can make the business more attractive to investors and provide greater credibility, while also allowing for history and branding preservation and the avoidance of capital gains tax. 

C. Conditions for conversion

To convert an LLP to a private limited company, there are certain conditions that need to be fulfilled. Firstly, the LLP must have at least seven partners all of whom must give their approval for the conversion. Additionally, an advertisement must be placed in both local and national newspapers, seeking objections if any, within 21 days of publication. Furthermore, a No Objection Certificate (NOC) is required from the Registrar of Companies (ROC) where the LLP is registered. The LLP must also draft a Memorandum of Association and Articles of Association for the new company. It’s worth noting that LLPs with a capital commitment of less than Rs 25 lakhs and an annual sales turnover of less than Rs 40 lakhs are exempt from having to undergo an audit every year. However, if an LLP falls outside these limits, it’s required to perform an audit every year. Once all these conditions are met, the conversion process can begin with the filing of Form URC-1, SPICE+, and related forms. 

II. Process of Conversion of LLP to Pvt. Ltd Company

A. Step 1: Obtaining Director’s Identification Number and Digital Signature Certificate

To convert an LLP into a Pvt. Ltd. Company, the first step is to obtain the Director’s Identification Number (DIN) and Digital Signature Certificate (DSC). DIN is a unique identification number allotted by the Central Government to any person intending to become a director of a company, whereas DSC is a secure digital key that certifies the identity of an individual when conducting online transactions. To obtain the DIN, an application form needs to be filed on the MCA portal, which is processed and approved by the Central Government via the office of the regional director, the Ministry of Corporate Affairs. Moreover, all the required documents should be attested by a practicing cost accountant, a practicing chartered accountant, or a practicing company secretary. Once the DIN is obtained, the applicant can apply for the DSC from the certified authorities. The DSC is mandatory for filing any application with the Ministry of Corporate Affairs, and hence obtaining these documents is the first step towards converting an LLP into a Pvt. Ltd. Company. 

B. Step 2: Filing Form URC-1, SPICE+, and related forms

When comes to converting an LLP into a Private Limited Company in India, one of the most important steps is filing the necessary forms with the Registrar of Companies (ROC). This involves completing Form URC-1 and SPICE+, along with other related forms.

Form URC-1 is used for the registration of conversion of a company from one class to another. Meanwhile, SPICE+ is a comprehensive form that combines various services related to the incorporation of a company, including name reservation, allotment of Director Identification Number (DIN) and Permanent Account Number (PAN), and more. 

In addition to these forms, there are other documents that must be submitted as part of the conversion process. These include a copy of the LLP agreement, a certified copy of the resolution approving the conversion, and the latest audited financial statements of the LLP.

It’s important to note that the process of converting an LLP into a Private Limited Company is complex and requires careful consideration. That’s why it’s best to seek professional guidance to ensure that all the necessary steps are taken care of in a timely and efficient manner.

C. Step 3: Drafting Memorandum of Association and Articles of Association

Step 3 in the process of conversion of an LLP to a Private Limited Company is drafting the Memorandum of Association (MOA) and Articles of Association (AOA). The MOA defines the purpose for which the company was incorporated, while the AOA outlines the rules and regulations governing the company’s operations. The MOA must be signed by all partners of the LLP, and the AOA must be signed by a minimum of two shareholders of the company. These documents must be filed with the Registrar of Companies (ROC) along with other required documents. The ROC may ask for additional clarifications if needed and then approve the conversion. Thus, drafting the MOA and AOA is a crucial step towards successful conversion. It is imperative to ensure that these documents are correctly drafted as any oversight may lead to unnecessary complications in later stages. Seeking professional assistance for drafting these documents is recommended. 

III. Tax Implication on Conversion of LLP to Pvt. Ltd Company

A. Exemptions from capital gains tax

One of the top benefits of converting an LLP to a private limited company in India is the exemption from capital gains tax. Section 47 of the Income Tax Act of 1961 lists certain transactions that are excluded from capital gains tax, including the transfer of assets from an LLP to a business. However, there are specific requirements that must be met in order to qualify for this exemption. These requirements include transferring all of the LLP’s assets and liabilities to the new entity, making each partner a shareholder in proportion to their capital investment in the LLP, and ensuring that at least 50% of the total voting power and share capital of the company is held collectively by the partners of the LLP.

While there have been disputes regarding the taxability of LLP conversion, the courts have generally held that this conversion is not subject to capital gains tax. This exemption is one of the reasons why many professionals choose to convert their LLP to a private limited company. 

B. Conditions for claiming income tax exemption

When an LLP to a private limited company, there are certain conditions that need to be met in order to claim income tax exemption. These conditions include:

– All assets and liabilities of the LLP prior to conversion become assets and liabilities of the new company.
– All partners of the LLP immediately prior to conversion become shareholders in the new company in the same proportion as their capital accounts in the LLP.
– Partners should not receive any benefit or consideration other than through allotment of shares in the company.
– The aggregate shareholding in the company of the LLP partners should not be less than 51% of the total voting power in the company, and this should continue for at least five years after conversion.

Meeting these conditions will exempt the capital gains tax arising from the conversion. It is important to note, however, that these conditions must be met in order to avoid incurring any unnecessary tax liability. By undergoing the conversion process and meeting the specified conditions, businesses can continue to grow and expand in a cost-effective manner while benefiting from a more appropriate business structure. 

IV. Other Requirements for Conversion

A. Approval from all partners

Approval from all partners is a crucial requirement for the conversion of an LLP into a Private Limited Company in India. Under the Limited Liability Partnership Act 2008, all partners of the LLP must approve the decision to convert their business into a Private Limited Company. This is a significant step as it ensures that all partners are on the same page and have an understanding of the benefits and consequences of the conversion.

To ensure that the approval is obtained, the partners must be communicated about the conversion and informed of the benefits that a Private Limited Company can offer. The partners should also be aware of the compliance requirements and the cost of the conversion. 

Obtaining approval from all partners shows that there is a unanimous decision to convert the LLP into a Private Limited Company, and it avoids any conflicts or legal disputes later. It is essential to get the approval in writing with signatures of all the designated partners of the LLP.

Overall, getting the approval from all partners is an essential step towards converting an LLP into a Private Limited Company and can ensure a smooth transition of the business structure. 

B. Advertisement in local and national newspapers

Advertisement local and national newspapers is a mandatory requirement for converting an LLP into a private limited company. This step is necessary to inform the public and creditors of the conversion and to ensure that no objections are raised. Here’s what you need to know about the advertisement requirement:

• Local and national newspapers: The advertisement has to be done in a local and a national newspaper.

• Content of the advertisement: The advertisement should include the name of the LLP, the proposed name of the company, the reasons for the conversion, the date of incorporation of the LLP, the date of the conversion, and the name and address of the RoC where the LLP is registered.

• Approval from the RoC: The RoC where the LLP is registered has to provide a no-objection certificate (NOC) before the conversion process can start.

• Timeline: The advertisement has to be done at least 21 days before the date of incorporation of the company.

• Importance: The advertisement is important as it ensures that all stakeholders are aware of the conversion and have the opportunity to voice their objections. It also helps to establish the credibility of the new company among potential investors and partners. 

C. No Objection Certificate from the ROC

Before an LLP to a Pvt. Ltd. company, it is important to obtain a No Objection Certificate (NOC) from the Registrar of Companies (ROC) where the LLP is registered. This is a critical requirement in ensuring a smooth conversion process. Along with the NOC, the LLP must have the approval of all its partners and must advertise in local and national newspapers. The conversion process also involves filing Form URC-1, SPICE+ and related forms, as well as drafting Memorandum of Association and Articles of Association. Additionally, a Certificate from a CA/CS is required to verify compliance with all provisions of the Stamp Act. The advantages of changing from an LLP to a Pvt. Ltd. company are the continuation of brand value, the carry forward of unabsorbed losses and depreciation, among others. With these conditions in place, the conversion can be a seamless process that allows the business to grow and expand its operations. 

D. Memorandum of Association and Articles of Association

Once the name is approved and the Form-1 is sanctioned, the next step is to formulate the Memorandum of Association (MoA) and Articles of Association (AoA). The MoA contains the fundamental conditions upon which the company is allowed to operate. It contains information like the company’s name, registered office, objectives, authorized share capital, and liability of members. The AoA contains the rules and regulations for the internal management of the company. It defines the responsibilities and powers of directors, meetings, and voting procedures, share allocations and transfers, and the procedures for winding up the company. Both these documents need to be drafted in compliance with the Companies Act and should be filed with the Registrar of Companies. The MoA and AoA act as the constitution of the company, and any change in these documents requires the consent of shareholders. It is recommended to double-check the language used and hire a legal expert who can help you draft these documents accurately. Following the detailed procedures and creating a proper MoA and AoA ensures a smooth and hassle-free conversion process. 

V. Conclusion

A. Benefits of Conversion

Conversion of LLP to Pvt Ltd Company brings several benefits to the table. First and foremost, the process facilitates the infusion of capital, which is crucial for business growth. Plus, separation of management and ownership and increased supervisory compliances make investors feel more secure and comfortable investing in a company rather than an LLP. Moreover, conversion helps in retaining the existing entity’s history and branding, which may be lost in case of starting a new company.

Another significant advantage is the ability to attract foreign investors as 100% foreign direct investment is allowed in the Pvt Ltd Company. Conversion also allows businesses to carry forward all the unabsorbed losses and depreciation of the last year, thus reducing the expenditure on bookkeeping. Plus, ESOP plans and stock ownership help attract efficient employees to help grow the business.

With Pvt Ltd Company, there is no capital gain tax, and raising funds from venture capitalists or angel investors becomes easier. Furthermore, liability is limited to the capital subscribed and unpaid by owners. So, converting an LLP into a Pvt Ltd Company could be a wise decision. 

B. Cost of Conversion

One of the crucial aspects of converting an LLP to a Private Limited Company in India is the cost involved in the entire process. The conversion process is a step-by-step technical process, which requires you to fulfill all the major legal and documentary requirements. Here are some of the costs that are usually included in the conversion process:

– Incorporation costs: The cost of incorporation includes the payment of several statutory fees, such as the registration fee, stamp duty, and legal charges.

– Professional fees: Professional fees include the fees that you need to pay to hire a professional like a chartered accountant, lawyer, or company secretary to conduct and manage the entire conversion process.

– Advertisement costs: To convert an LLP to a Private Limited Company, you need to advertise the conversion in local and national newspapers. This will also add to your overall cost.

– Taxation costs: There may be some taxation costs involved, such as capital gain tax or any other tax liabilities that need to be settled while converting an LLP to a PVT LTD Company.

The cost of conversion varies depending on the complexity of the process and other relevant factors. However, the benefits that a Pvt Ltd Company offers make this conversion process worth the cost.