Conversion from Unlisted Public Company to LLP

The conversion of an unlisted public company into a Limited Liability Partnership (LLP) is a strategic move for businesses seeking operational flexibility, reduced compliance obligations, and the benefits of limited liability. Governed by the provisions of the Limited Liability Partnership Act, 2008, and rules under the Companies Act, 2013, this conversion offers a seamless transition while maintaining the entity’s assets, liabilities, and contracts.

Conversion refers to transforming an unlisted public company into an LLP, allowing it to retain its business operations while gaining LLP benefits such as limited liability and simplified compliance.

• Governing Law:

The process is governed by Sections 55-58 of the LLP Act, 2008, and relevant rules under the Companies Act, 2013.

Key Features of Conversion:

• Continuity of Business:

LLP inherits all contracts, liabilities, and obligations of the unlisted public company.

• Limited Liability Protection:

Like a company, an LLP protects its partners from unlimited personal liability.

• Simplified Compliance:

LLPs face fewer regulatory and statutory compliance obligations compared to companies.

• Perpetual Succession:

LLP enjoys perpetual existence, independent of changes in partners.

Eligibility Criteria for Conversion:

• Type of Company:

Only unlisted public companies are eligible for conversion. Listed companies are not permitted to convert into LLPs.

• No Pending Secured Loans or Charges:

The company must not have outstanding charges or secured loans at the time of conversion.

• Shareholders’ Consent:

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

• Compliance with LLP Act:

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

Reasons for Conversion:

• Reduced Compliance Burden:

LLPs do not require board meetings, resolutions, and extensive filings like companies.

• Tax Efficiency:

LLPs are exempt from the dividend distribution tax applicable to companies.

• Operational Flexibility:

LLPs allow simpler decision-making and easier transfer of rights.

• Attractiveness to SMEs:

LLPs are ideal for small and medium-sized enterprises looking to reduce operational costs while maintaining a corporate structure.

Procedure for Conversion:

The conversion process involves several steps and compliance requirements:

Step 1: Digital Signature Certificate (DSC)

• All designated partners must obtain a DSC for electronic filings.

Step 2: Director Identification Number (DIN)/DPIN

• Existing directors who will become designated partners must possess a DIN or apply for a Designated Partner Identification Number (DPIN).

Step 3: Name Approval

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

Step 4: Filing Conversion Application

• Submit Form 18 along with Form 2 to the Registrar of Companies (RoC).
• The application must include:
  1. Consent from all shareholders of the company.
  2. A certified statement of assets and liabilities.
  3. A copy of the resolution passed by the company’s board approving the conversion.
  4. A list of all creditors and their consent.

Step 5: Draft and File LLP Agreement

• Draft an LLP agreement that specifies the rights, duties, and profit-sharing ratios of partners.
• File the agreement with Form 3 within 30 days of incorporation.

Step 6: Issue of Certificate of Incorporation (COI)

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

Step 7: Update Registrations and Inform Authorities

• Notify relevant authorities (GST, Income Tax Department, etc.) and update business records to reflect the LLP’s status.

Legal and Financial Implications:

1. Transfer of Assets and Liabilities:

   All assets, liabilities, and obligations of the company automatically transfer to the LLP.

2. Preservation of Contracts:

   Contracts entered into by the company remain valid and enforceable.

3. Tax Neutrality:

   The conversion does not attract capital gains tax if the conditions under Section 47(xiiib) of the Income Tax Act, 1961, are met, such as:

   • All shareholders of the company becoming partners in the LLP.
   • The profit-sharing ratio remaining the same.
   • The company transferring all its assets and liabilities to the LLP.
4. Striking Off Company Name:

   The name of the unlisted public company is struck off from the RoC records upon conversion.

Benefits of Conversion:

• Operational Efficiency:

LLPs enjoy a streamlined operational framework with fewer legal formalities.

• Cost Savings:

Lower compliance costs compared to companies.

• Legal Recognition:

LLPs retain the credibility of companies while being governed by simpler laws.

• Liability Protection:

Partners’ liability is limited to their capital contribution.

Challenges in Conversion:

• Regulatory Compliance:

The process involves adherence to multiple statutory provisions and may require professional assistance.

• Conversion Costs:

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

• Communication with Stakeholders:

Stakeholders, including creditors and employees, must be informed about the conversion, which can be time-consuming.