Conversion of Private Company into LLP

Introduction

As per the business strategy company wishes to convert them into an LLP and the governing section for Conversion of Company into LLP is section 56, Third Schedule and Fourth Schedule of the LLP Act, 2008. Major Highlights for conversion are covered hereby,

Company:

As per section 2(20) of the Companies Act, 2013 Company means a Company incorporated under this Act or under any previous company law.

Private Company:

Section 2(68) of the Companies Act, 2013 “private company” means a company having a minimum paid-up share capital as may be prescribed, and which by its articles,—

(i) restricts the right to transfer its shares;

(ii) Except in case of One Person Company, limits the number of its members to two hundred:

Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this clause, be treated as a single member:

Provided further that—

(A) Persons who are in the employment of the company; and

(B) Persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased, shall not be included in the number of members; and

(iii) prohibits any invitation to the public to subscribe for any securities of the company;

LLP

The Limited Liability Partnership (LLP) is a unique and versatile business entity that combines the advantages of limited liability, typically associated with companies, with the flexibility and characteristics of a partnership. By encompassing elements of both a corporate structure and a partnership firm, an LLP is often referred to as a hybrid entity, bridging the gap between a company and a partnership. This business form offers its members protection from personal liability while allowing them to operate and manage the business in a more collaborative and adaptable manner, akin to a partnership.

Meaning of Conversion

In the context of a private company converting into a limited liability partnership, 'conversion' refers to the comprehensive transfer of the private company's property, assets, interests, rights, privileges, liabilities, obligations, and overall business undertaking to a limited liability partnership, as per the guidelines specified in Schedule 3 of the LLP Act, 2008.

Advantages of conversion of private company into LLP

1. Limited Compliance: A Limited Liability Partnership (LLP) entails significantly less compliance in comparison to a traditional company. Unlike companies, LLPs are not required to maintain secretarial documents such as Notices, Agendas, Minutes, and Statutory Registers, thereby reducing administrative burdens.
2. Audit Threshold for LLPs: Unlike companies that are required to undergo financial statement audits regardless of their turnover and profit, Limited Liability Partnerships (LLPs) are exempt from mandatory audits. An audit is only necessary for an LLP if its contributions exceed Rs. 25 lakh or its annual turnover exceeds Rs. 40 lakh.
3. Taxation benefits: When receiving dividends from a company, shareholders are subject to taxation based on their applicable income tax slab rate. In contrast, the taxation structure for a Limited Liability Partnership (LLP) is more straightforward compared to that of a company. Once the LLP declares its profits and pays the necessary taxes, any income distributed to the partners is exempt from taxation, meaning it remains tax-free in their hands.
4. Utilizing the Benefit of Stamp Duty Payment: When a private limited company undergoes conversion into a Limited Liability Partnership (LLP), the company enjoys an advantage as there is no requirement to pay stamp duty on any movable and immovable properties. This benefit arises because all the properties seamlessly transfer to the newly formed LLP without incurring any stamp duty charges.

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   Condition for conversion of company into LLP

1. At the time of application, there are no existing security interests (open charges) on its assets.
2. The Companies Act prohibits the initiation of any prosecution.
3. The Company must obtain agreement from all its creditors for the conversion.
4. The Company must ensure that all pending forms and returns are up-to-date with the RoC.
5. The company must have filed at least one financial statement and annual return after its incorporation.
6. The decision to convert and become partners of the LLP requires agreement from every shareholder of the Company.

Process for Conversion of Company into LLP

Step 1: The first essential step is to convene a board meeting to discuss the proposal for converting the company into a Limited Liability Partnership (LLP). During the meeting, a board resolution must be passed, authorizing the conversion and granting approval to any director to apply for the desired name of the LLP.

Step 2: After obtaining the board's approval, the company must obtain written consent from all its shareholders regarding the conversion into an LLP. This step ensures that all stakeholders are informed and supportive of the decision.

Step 3: Next, the company is required to apply for the reservation of the chosen LLP name with the Registrar of Companies (ROC). Once the application is processed and approved, the company will receive a name approval certificate from the ROC.

Step 4: With the name approval in hand, the company must proceed to execute all necessary documents, including consent forms and subscriber sheets. Additionally, they need to file the prescribed forms, namely FiLLiP and Form 18, with the ROC. These forms contain important information and details related to the conversion process.

It is important to meticulously follow each of these steps to ensure a smooth and legally compliant conversion of the company into an LLP. Consulting with legal and financial experts during the process is advisable to avoid any potential pitfalls or oversights.

Documents required for conversion

Documents for FiLLip Form

1. Subscriber Sheet including consent;
2. Consent of Designated Partner;
3. Proof of Address of Registered office of LLP i.e Sale Deed / Lease Deed / Rent Agreement;
4. NOC of owner of registered office, if taken on rent / lease;
5. Latest Utility bill (Electricity, Mobile, Telephone or Gas bill) of registered office;
6. Detail of LLP(s) and/ or Company(s) in which partner/ designated partner is a director/ partner.

Documents for form 18

1. Statement of member’s approval: this is one of the documents given by each shareholders giving their consent and approval.
2. Profit and loss statement and financials of the company duly certified as true and correct by the auditor.
3. List of all the secured creditors, if any along with their consent to the conversion.
4. Income tax return acknowledgement copy.
5. Additional Declaration: CRC may ask for an additional declaration copy stating that company is not carrying NBFC activities and declaration from shareholders that company does nit have any secured creditors on the date of conversion.

After receiving approval for the conversion from the Registrar of Companies (RoC), proceed to execute the LLP Agreement. Subsequently, ensure the timely filing of the LLP Agreement with the RoC using e-form LLP 3, all within 30 days from the date of conversion approval granted by the RoC.

Effect of Conversion

1. The private company shall be considered dissolved.
2. The name of the private limited company will be struck off from the Registrar of Companies' register.
3. The conversion will not affect any existing liabilities, obligations, agreements, contracts, or ongoing employment arrangements.
4. Permits or licenses issued to the Private Limited Company under any written law, which remain active prior to the conversion date, will not automatically transfer to the Limited Liability Partnership. The terms and conditions of each license will determine their disposition.

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   Conclusion

   Based on the preceding discussions, it is evident that a Limited Liability Partnership (LLP) offers greater convenience in terms of compliance and taxation compared to a traditional company. As a result, it becomes a more favourable choice, particularly for small entrepreneurs. Moreover, existing companies can smoothly transition into an LLP structure, ensuring they retain the benefits of Limited Liability while reducing the burden of compliance.