Conversion of LLP to Private Limited Company

Conversion of LLP to Private Limited Company

Several businesses started in India as Limited Liability Partnership (LLP), may now wish to convert into a private limited company for more growth in business or for infusing equity capital. An LLP can be converted into a Pvt. Ltd. company as per the provisions contained in Section 366 of the Companies Act, 2013 and Company (Authorised to Register) Rules, 2014.

However, there are various requirements which need to be satisfied for converting an LLP into a Private Limited Company, for instance, an LLP must have at least 7 partners, approval from all the partners is required, advertisement in newspaper is to be done in a local and a national newspaper, a No Objection Certificate (NOC) is required from the ROC where such LLP is registered and then all the incorporation process has to be undertaken which includes:

Benefits of Converting LLP Into a Private Limited Company

The following are the benefits of converting an LLP into a private limited company:
  1. Growth: Conversion in the company facilitates the growth and expansion of the business.
  2. Raising Capital: Raising investments from investors is more convenient and easier for companies than LLPs. You can make them a partner in your business by just giving them a portion of the equity. Otherwise, you can issue them debentures to raise debt capital.
  3. Further Issue of Shares: Capital can be increased anytime in the case of companies through the issue of equity shares. Further, bonuses can be allotted to the employees in the form of ESOPs.
  4. Lower Taxes: Income tax rates for LLPs are flat at 30%, whereas it is 25% in the case of companies. 
  5. Tax Exemption: Conversion of LLP to companies is exempted from capital gains tax. It also allows the carry forward of unabsorbed depreciation and losses.
  6. Conversion to Public Limited Company: Private limited companies can be further converted into public limited companies in the future for further expansion of operations and raising capital from the public at large.
  7. Retain Goodwill: Conversion of LLP into a private limited company allows the business to retain its brand name and goodwill.
  8. Foreign Investments: Raising investments from foreign investors becomes easier in the case of private limited companies than in the case of LLPs.

Conditions for Claiming Income Tax Exemption on Conversion

If the limited liability partnership firm is converted to a company, then the capital gains tax arising therefrom will be exempted if the following conditions are satisfied:

  1. All the assets and liabilities of the LLP immediately before conversion becomes the assets and liabilities of the company.
  2. All the firm's partners immediately before the conversion become the shareholders in the new company in the same proportion at which their capital accounts stood in their books on the date of the conversion.
  3. The partners in the firm should not receive any benefit or consideration, directly or indirectly, otherwise than by way of allotment of shares in the company.
  4. The aggregate shareholding in the company of the partners of the LLP should not be less than 51% of the total voting power of the company. Further, their shareholding should continue as such for 5 years after the date of conversion.

Above was the tax implication on the conversion of LLP into the company. If the above conditions are satisfied, then the capital gains tax will not be levied on the Conversion of LLP to private limited company.

Approval of name

Name Approval has to be obtained from the ROC (Registrar of Companies) by submitting an application in e-format. To apply for this, you need to choose various items that are mentioned in the form INC-1. The name once accepted by the authority will be valid for 60 days.

Securing DSC and DIN

In case all 7 members, who are future directors of the company after conversion, do not have the Digital Signature Certificate (DSC) and Director Identification Number (DIN) for all the future directors of the company must be obtained. For obtaining the DIN, an application form must be filed on MCA portal. DIN application is processed & approved by central government via the office of regional director, the ministry of corporate affairs.

The form must be accompanied by self-attested address proof and identity proof with 1 recent passport size color photo of the applicant. All the required documents should be attested by a practicing cost accountant or a practicing chartered accountant or a practicing company secretary.

Filing form no. URC – 1

After getting the approval of name from Registrar of Companies, the applicant must prepare & file the form No URC-1 in addition to the following documents.

  1. List of the members with various details viz. names, address, shares held by them appropriately, etc.
  2. List of the first directors of the private company with various details viz. names, address, the DIN, passport number with an expiry date, etc.
  3. An affidavit from every person proposed as first directors, that he is not banned to be a director under section-164 and all the necessary documents filed with the registrar for the registration of firm must contain information which is complete and correct & true to be best of his belief and knowledge.
  4. A list including the names & addresses of partners of LLP and a copy of LLP agreement & certificate of registration duly verified by two designated partners of LLP must be enclosed.
  5. A statement indicating the following specifications
    • the nominal share capital of firm & the number of shares into which it is separated
    • the number of shares taken & the amount paid for every share
    • the name of the firm, with the addition of word Limited or private limited is required.
  6. A written consent or No objection certificate from all creditors.
  7. Copy of newspaper advertisement, statement of accounts of the company which must not be 6 days preceding the date of the application and it must be duly certified by the auditor.

Memorandum of Association & Articles of Association

Memorandum of Association (MoA) & Articles of Association (AoA) is to be formulated and then filed with RoC after getting the name approval and sanction of form no. URC-1 – from the registrar. The conversion process provides certain tax benefits, however for availing the same several additional requirements needs to be met, for instance, maintaining the same shareholding by the partners as was in the previous LLP when the conversion takes place, for five years from conversion the former partners of such LLP who are now shareholders in the newly formed company cannot in total have shareholding less than 50 percent.

There is another option available for the LLP which is to establish a separate private limited company and after that get the whole business transferred to the private company with the help of a written agreement, in such case the restrictions mentioned above such as need for minimum 7 partners, newspaper publication, etc. are not needed to be met. However, in this situation, there is a levy of capital gain tax. Moreover, stamp duty implication is also applicable to such transfer.

E-form INC- 33 / INC-33 / INC-34

The company must mandatorily file the INC-32/ INC-33/ INC-34 forms with the linked forms such as URC-1 and also along with all the documents which are required in the normal Incorporation of the Company such as-

Cautions While Conversion of LLP into Private Limited Company for Professionals

There are many ways by which the firm can be converted into a company via itemized sale, slump sale, dissolution thereof and on dissolution, accepting the company as a partner, business taken by the company etc. as per the choices. The conversion from LLP to the company must be done is an appropriate way as per the situation and which gives the benefits.

  • Obtain an Engagement letter from a subscriber: According to the certification under the SPICE Form i.e. INC-32 Form, a professional has to declare that he is engaged for the certification purpose so therefore is mandatory to have an engagement letter.
  • Verification of original records pertaining to the registered office: According to the certification in SPICE Form i.e. INC-32 form, a professional declares that all the particulars along with attachments have been verified from the original records.
  • Ensure all attachments are clear enough to read: According to the certification in SPICE Form i.e. INC-32 Form, a professional declares that the attachments submitted by him are complete and neat.
  • Ensure the registered office of the company is functioning for the business purposes of the company: According to the certification in SPICE form i.e. INC-32 form, a professional has to declare that the registered office has been visited by him personally. He must also declare that all the original documents have been given after the incorporation. According to section 7(4), the professional must declare that all the copies of the documents/ information are verified from the originally filed documents which are maintained at the registered office of the company and must give it to the incorporation documents.
  • MCA Circular 10/2014: As per this circular ROC/ RD, if the material fact is not included or the introduction of misleading/incomplete/false information post giving chances to explain the issue to the government division of MCA may further proceedings under section 447 or respective department may take action.

Created & Posted By Sapna Choudhary
Accounts executive at TAXAJ

TAXAJ is a consortium of CA, CS, Advocates & Professionals from specific fields to provide you a One Stop Solution for all your Business, Financial, Taxation & Legal Matters under One Roof. Some of them are: Launch Your Start-Up Company/Business, Trademark & Brand Registration, Digital Marketing, E-Stamp Paper Online, Closure of Business, Legal Services, Payroll Services, etc. For any further queries related to this or anything else visit TAXAJ

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