Conversion from Private Company to LLP

Converting a Private Limited Company (Pvt. Ltd.) into a Limited Liability Partnership (LLP) is a viable option for businesses seeking flexibility, reduced compliance burdens, and limited liability protection. The process is governed by the provisions of the Limited Liability Partnership Act, 2008, and applicable rules under the Companies Act.

Conversion refers to the process of transforming a Pvt. Ltd. company into an LLP, transferring its assets, liabilities, and contracts while gaining the benefits of an LLP.

• Governing Law:

The conversion is guided by Sections 56-58 of the LLP Act, 2008, and the Companies Act, 2013.

Reasons for Conversion:

• Limited Liability:

Like Pvt. Ltd. companies, LLPs provide limited liability protection to their partners.

• Reduced Compliance Burden:

LLPs are subject to fewer regulatory requirements compared to companies.

• Tax Efficiency:

LLPs enjoy certain tax advantages, such as exemption from dividend distribution tax.

• Operational Flexibility:

LLPs offer a simpler structure for decision-making and profit sharing.

• Perpetual Succession:

An LLP retains perpetual existence, making it ideal for long-term business operations.

Eligibility Criteria for Conversion:

• Private Company Status:

Only private companies can convert into LLPs. Public companies are not eligible.

• No Security Interest:

The company should not have any outstanding security interest in its assets at the time of conversion.

• Consent of Shareholders:

All shareholders of the company must approve the conversion and agree to become partners in the LLP.

• Compliance with LLP Act:

The conversion must meet the minimum requirements for LLPs, including having at least two designated partners.

Procedure for Conversion:

The conversion involves several steps:

Step 1: Obtain Digital Signature Certificate (DSC)

• Each designated partner must acquire a DSC for electronic filings.

Step 2: Apply for Director Identification Number (DIN)

• The designated partners must possess a DIN or apply for a Designated Partner Identification Number (DPIN) through the MCA portal.

Step 3: Name Reservation

• File Form RUN-LLP (Reserve Unique Name) to secure the proposed name of the LLP. The name should comply with MCA naming guidelines and must include “LLP” or “Limited Liability Partnership.”

Step 4: Filing Application for Conversion

• Submit Form 18 along with Form 2 (Incorporation Application) to the Registrar of Companies (RoC).
• Documents required for Form 18:
  1. Statement of shareholders’ consent for conversion.
  2. Statement of assets and liabilities, certified by a Chartered Accountant.
  3. List of all creditors and their consent.
  4. Copy of the resolution passed by the company for conversion.

Step 5: Draft and File LLP Agreement

• Prepare an LLP agreement detailing the roles, responsibilities, and profit-sharing ratios of the partners.
• File the agreement with Form 3 within 30 days of incorporation.

Step 6: Issue of Certificate of Incorporation

• Upon verification, the RoC issues a Certificate of Incorporation (COI) for the LLP, marking the completion of the conversion.

Step 7: Update Records and Inform Authorities

• Notify all relevant authorities, such as GST and income tax departments, about the conversion. Update business records and licenses to reflect the new LLP status.

Benefits of Conversion:

• Reduced Compliance:

LLPs are exempt from many compliance requirements applicable to companies, such as mandatory board meetings and filing numerous annual returns.

• Cost Savings:

LLPs incur lower compliance and regulatory costs compared to Pvt. Ltd. companies.

• Simplified Taxation:

LLPs are not subject to dividend distribution tax and enjoy a more straightforward tax regime.

• Operational Flexibility:

LLPs allow greater flexibility in managing business operations, profit sharing, and decision-making.

Legal and Financial Implications:

1. Transfer of Assets and Liabilities:All assets and liabilities of the Pvt. Ltd. company transfer to the LLP upon conversion.
2. Continuation of Contracts:Contracts and agreements entered into by the company remain valid, ensuring business continuity.
3. Tax Implications:The conversion is tax-neutral under the Income Tax Act, 1961, if:
   • All shareholders of the company become partners in the LLP.
   • The profit-sharing ratio remains unchanged.
   • All assets and liabilities transfer to the LLP.
4. No Fresh Registrations:

Licenses and permits held by the company remain valid, subject to updates and approvals.

Challenges in Conversion:

• Statutory Formalities:

The process involves multiple filings and adherence to regulatory provisions, which may require professional assistance.

• Costs of Conversion:

Initial costs for professional services, government fees, and statutory filings can be significant.

• Impact on Business Reputation:

Changing the structure of the business may require additional communication with stakeholders to maintain trust.