Conversion of LLP Into Private Limited Company

Introduction

Almost every Business starts small and grows gradually. There are a lot of Businesses in India that operates as an LLP (Limited Liability Partnership). They choose LLP for optimum compliance and higher flexibility. But, LLP has its limitations. As the world and India are inching towards a unified Global Market place, it has become vital for businesses to adapt to the changing business scenario. At some stage, the Business will need to change its Structure to accommodate growth and expansion.

Businesses can achieve such growth by converting an existing LLP into a Private Limited Company. As per the amendments made by the Ministry of Corporate Affairs on 31^st May 2016 in the Companies Act 2013, if an LLP satisfies specific criteria (We will discuss them later in the blog), then it can be converted into a Private Limited Company.

Benefits of Choosing a Private Limited Company

Benefits of choosing LLP

1. Limited Liability – In LLP, the Liability of every Partner is limited to the contribution that he/she makes in the firm.
2. Low Registration expenses – The registration cost for an LLP is low as compared to a Private Limited Company. So if the business’ turnover is below 40 lacs, it is advisable to register your Business as an LLP.
3. No mandatory audit – Unlike a Private Limited Company that needs to be audited every year, LLP has to get their accounts audited only in two cases:
   • When the turnover of an LLP is above 40 lac
   • If the contribution of an LLP is above 25 lac
4. Lower compliance – LLPs have to follow lower compliances. Every year, an LLP has to be submitted the following two statements only, but For any Private Limited Company, the number of such statements can go up to 10.
   • Statement of Accounts and Solvency
   • Annual Return.
5. No minimum Capital is necessary – As per the LawLaw, no mandatory minimum capital is required to incorporate an LLP. On the contrary, the necessary minimum capital for setting up a Private Limited Company is INR 1,00,000.

Reasons for converting LLP into a Private Limited Company

Converting your existing LLP into a Private Limited Company comes with many perks. Let’s take a look at them:

1. Separate Legal Identity – Unlike an LLP, a Private Limited Company enjoys the Separate Legal identity in the eyes of Law. This means it can have assets and debts in its name. Moreover,
2. Zero Capital Gain – When you convert your LLP into a Private Limited Company and transfer assets in the Private Limited Company’s name, such transfer does not attract Capital Gain.
3. ESOP (Employee Stock Ownership Plan) – The concept of ESOP is rapidly gaining popularity in India. More number of companies are offering shares to attract talented employees. But this can be done only in a Private Limited Company as LLPs have no concept of shares as mentioned above.
4. Easy Funding – Fund-raising is easy for Private Limited Companies. In LLP, every stakeholder is a partner. Venture Capitalists and Angel investors do not invest in such Businesses as they do not want to get involved in the day to day business operations. Instead, they choose a Company for an investment where they can become stakeholders without participating in Business operations.
5. More FDI – As the second-largest market in the world based on population, India is rapidly becoming the apple of the foreign investors’ eye. But as per the Law, Foreign Direct Investment) FDI needs special approval from the Government. That’s not the case for a Private Limited Company. Foreign investors can directly invest in a Private Limited Company without any special approval.

Procedure For Converting LLP into a Private Limited Company

The Process of converting an existing LLP into a Private Limited Company is technical and a bit complex.  So we recommend getting assistance from a legal expert before you initiate the Process.

Let’s take a look at this step-wise Process.

Step 1: Approval of Name

Once you decide you to convert your LLP into a Private Limited Company,  the first step will be getting an approval of the name. The Process of application of name and approval can be done through Reserving Unique Name (RUN) web-service.

Step 2: Obtaining DSC

All the proposed members of CompanyCompany must have a Digital Signature Certificate (DSC). This DSC can be obtained from any DSC certifying Authority by submitting self-attested documents and eKYC authorization.

Step 3: Obtaining DIN

Every Director of the proposed Private Limited Company must obtain a Director Identification Number (DIN). Now, let us explain to you about DIN. It is a unique number that MCA (Ministry of Corporate Affairs) allots to every Director of an existing or proposed Company.

It can be obtained by submitting e-form DIR-3 online. 

Step 4: Filling e-Form URC-1

After getting approval for the name and obtaining DSC for all members and DIN for all the directors of the proposed CompanyCompany, you will have to submit e-From URC-1 along with all the necessary documents.

Step5: Preparing AOA & MOA

You will have to prepare and submit AOA (Article of Association) and MOA (Memorandum of Association) to the Registrar of the Company.

Documents required for the Conversion of LLP into a Private Limited Company

Here is the list of documents that you will need to apply for the Conversion. Make sure you enclose and submit accurate documents to avoid any hassles.

1. A written consent from the majority of the Partners, supporting the move of Conversion.
2. A list of all the persons that are mentioned as the members and details of the number os shares held by each of them.
3. A list of members, proposed as the directors of the proposed Private Limited Company and their details.
4. A list of all the LLP partners that are to be converted into a Private Limited Company.
5. A Copy of the LLP agreement.
6. A copy of the latest Income Tax Return filed in the name of existing LLP.
7. An affidavit from every proposed member, mentioning he/she is qualified to be the Director of the proposed CompanyCompany.
8. A duly certified statement from a CA of the existing LLP assets and liabilities prepared not more than 30 days ago.
9. All the secured- creditors must give NOC to the firm before they can apply for Conversion.
10. A written undertaking that ensures that all the proposed directors will comply with the Indian Stamp Act 1899.

Court’s rulings on Capital Gain on Conversion from LLP to Private Limited Company

There has been much legal dispute over Capital Gain conversion from LLP to Private Limited Company. Let’s take a look at some of these rulings.

1. As per the Bombay High Court’s ruling in CIT vs Taxspin Engineering and Manufacturing Co. Case, as there is no transfer during the Conversion of LLP into a Private Limited Company, no Capital Gain arises.
2. As per the court’s ruling in the case of CIT vs Gillanders Arbuthnot & Co, it observed that when a firm is registered as a Company in lieu with system and criteria mentioned in Part IX of the Companies Act, no Capital Gain arises.
3. In the case of  Well Pack Packaging vs Dyeputy CIT, Cour observed the same thing, if the Company is formed as per the provision of Part IX of the Companies Act, no Capital Gain arises.

Thus, courts’ various rulings and observations clearly clarify that when an LLP firm is converted into a Private Limited Company, no Capital Gain Arises.

Conclusive thoughts

No business can survive in this fiercely competitive market if it doesn’t adapt and evolve. So if you plan to expand your Business for better growth, converting it from an LLP into a Private Limited company is a vice choice.

As mentioned above, a Private Limited Company enjoys a lot of perks. These benefits can positively impact your Business and help you achieve your business goals.  But before you start the Process, make sure you get in touch with an expert who can offer you better guidance and help during the entire Process. This will help you eliminate any legal and technical issues during the Conversion.

Things to keep in mind while converting an LLP into a Private Limited Company

You should keep in mind certain things before converting your CompanyCompany into a Private Limited Company. Let’s take a look at them:

1. Make sure you obtain an engagement letter from the subscriber.
2. Remember to attach the copies of documents that are clearly visible.
3. As per the e-form Spice INC-32, you declare all the details pertaining to the registered office are verified.

FAQs

1. Is LLP a better option for my Business?

That depends on the type of Business and yearly turnover. If your annual turnover is below 40 lac, and you deal with local businesses, we would recommend you LLP registration.

2. Is it possible for an LLP raise funding through share?

No, as per the Law, an LLP cannot raise funding through share. There is no provision of releasing shares for an LLP. But if you convert your LLP into a Private Limited Company, it becomes very easy to raise funds through equity shares.

Private Limited Companies are the favorite choice of Venture Capitalists and Angel investors as they can own a significant portion of the Company without participating in the day-to-day business operations.

3. How my Business will benefit after Conversion from LLP to Private Limited Company?

There are many benefits. Your brand value increases, you can raise funding through equity, the Liability of owners is limited, you can carry-forward depreciation and un-absorbed losses, and Business management becomes flawless for a Private Limited Company.

4. What are the limitations of a Private Limited Company?

Following are some of the limitations of a Private Limited Company:

1. Their shares cannot be traded in the Public.
2. The compliance and expenses are higher than an LLP
3. An audit is mandatory for every Private Limited  Company.
4. The decision-making process is slow as compared to an LLP
5. What is the minimum number of the member required for an LLP for Conversion?

As per the Law, the minimum number of members should be 7.

5. What if the number of Partners is more than  7 in the LLP before Conversion?

If the number of Partners is more than 7, you will have to submit the scanned copy of Memorandum of Association and Articles of Association. Then you will have to file URC-1 and INC-32.

6. What are the limitations of an LLP?

Following are the specific limitations of an LLP:

1. It does not enjoy a different legal status.
2. An LLP cannot raise fund via Venture Capitalists and Foreign Investors.
3. The room of growth is limited for an LLP.
4. The income of an LLP is considered as the Personal income of the Partners. Sp the tax has to be calculated and paid accordingly.
5. The minimum number of members for an LLP is 2. If any one of them chooses to leave the Partnership will have to be dissolved.

Unlike a Private Limited firm, the Financial Statements of an LLP must be submitted to Companies House for Public records. This makes the income of the Partners public, which might not be all right with everyone.