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Introduction

Conversion of Private Limited Company is a matter of concern since LLPs have certain advantages over private limited companies. They are as follows :

The internal structure of an LLP can be managed easily as compared to private limited companies.

The maximum number of shareholders is not restricted in an LLP. The LLP can have any number of shareholders. However, the maximum number of shareholders is limited in a Private Limited Company.

Managing funds depends completely on the desire of the members.

LLP does not require making payment of the Dividend Distribution Tax which must be paid by the private limited companies. Also, LLPs save MAT tax and income tax because of interest and remuneration need to be paid to partners.

Furthermore, LLPs consist of reduced forms and are easier to form, manage and continue.

In a nutshell, LLPs engage the most excellent practices of private limited companies and also shield the freedom of partners. It provides them with the capacity while deciding the rules of the private limited company. Therefore it merges the finest characteristics of a variety of businesses.

Other Advantage

According to the finance bill 2010, the capital gain tax will not be levied while conversion to an LLP will take place if certain conditions are followed.

Needs to Convert Private Limited Company into LLP

Each member of the company requires agreeing with the choice of conversion.

All members of the Private Limited Company will become the partners of the LLP.

The most up-to-date copy of Income tax return must be filed with Registrar of Companies.

Not only the members, but also all the creditors of the private company must agree with the conversion.

According to Companies Act, no prosecution should start any process to be followed

Procedure of Conversion of Private Limited Company into LLP 

1. Acquire Director Identification Number (DIN)

The minimum number of nominated partners for the incorporation of an LLP is 2.  1 of them requires being an Indian resident. At present, DIN is issued only at the time of incorporation or while adding an individual as a director or selected partner in a private limited company or an LLP. Therefore, such members require to be added as directors in the private company to get DIN. DIN will be needed for those who would become nominated partners.

Further, it is essential to apply for a DSC before applying for the DIN. A corporate unit can also be a partner in a Limited Liability Partnership through a nominee.

2. Meeting of Board of Directors of Private Company

A meeting of the Board of Directors is to be arranged.

Pass necessary resolution to convert the private company into LLP.

Pass essential resolution for authorizing any director for filing all the essential forms with MCA.

Pass necessary resolution for authorizing any director for filing all the essential forms with Ministry of Corporate Affairs.

3. Application for Availability of Name

The private company needs to apply for reservation of name of LLP and obtain name approval certificate from Registrar of Companies.

4. Filing of Incorporation Form with Essential Documents

Filing E Form FiLLiP with Registrar of Companies with following Attachments :

The subscription sheets

Address proof of the registered office of LLP.

Proof of identity and residence of nominated partners and partners

Approval to act as a nominated partners and partners

Detail of LLP(s) and/ or private company(s) wherein partner/ nominated partner is a director/ nominated partner.

5. Filing of Application to Convert into LLP

Form 18 is the form to convert a private limited company into an LLP. But it requires to be filed with Form for incorporating itself.

This form includes information about the conversion of the company into LLP such as :

Whether all the shareholders of the company have offered their approval to convert a private company into the LLP

If all the partners of the LLP include all the shareholders of the private company and nobody else

An up-to-date Income-tax return is filed according to Income tax act, 1961.

Documents include the most up-to-date balance sheet and annual returns as per the Companies Act, 2013 filed with Ministry of Corporate Affairs.

Authenticating if any ruling, conviction, a judgment of any Court, order, Tribunal or other authority supporting or against the private limited company exists as on date?

Whether any security interest in the assets of the private limited company exists or still in force

Is there any earlier application to convert the private limited company into limited liability partnership was refused by the Registrar.

If there is any secured creditors

Filing of E-FORM- 18 with Registrar of Companies with following attachments

Statement of accounts of the company authorized as true and accurate by the independent auditor

Statement of the approval of shareholders is compulsory

Photocopy of acknowledgement of most up-to-date income tax return is compulsory

List of all the secured creditors with their approval

6. Certificate of Incorporation as LLP from Registrar of Companies

After following all the formalities by the private company and accepted by the Ministry, Registrar of Companies to issue a Certificate of Incorporation for the conversion of LLP.

7. Preparation of Limited Liability Partnership Agreement

Following are the components of Agreement :

Name of LLP

Name of Partners and Designated Partners 

Profit Sharing ratio

Form of contribution

Proposed Business

Rights and duties of partners

Rules for administering an LLP

8. File E-Form-3

This form offers information about the LLP Agreement took place between the partners. It must be filed within 30 days since the date of conversion of the private company into an LLP.

Necessary attachment - LLP Agreement

9. File E-Form -14 (Informing Registrar of Companies)

Once incorporation certificate of LLP is obtained, E-Form -14 must be filed within 15 days since the date of conversion.

Attachments of E-Form 14

Photocopy of certificate of Incorporation of LLP.

Photocopy of incorporation document given in E-Form FiLLiP to Registrar of Companies.

Taxation on Conversion of Private Limited Company into LLP

The conversion of Private Limited Company into an LLP will not affect capital gain tax since this conversion is not a "transfer" as stated under the IT Act.

It will not affect capital gain tax depending on the following conditions :

All the assets and liabilities of the Private Limited Company turn into the assets and liabilities of the LLP.

All the shareholders of the Private Limited Company turn into partners of the LLP

The capital and profit-sharing ratio of partners are in the same ratio similar to the shareholding in the Private Limited Company.

The shareholders do not obtain any benefit, directly or indirectly in the LLP, excluding by means of profit-sharing ratio and capital contribution.

The gross receipts, total sales and turnover in any of the three preceding years from the date of the conversion not exceeding Rs. 60 Lacs

The total value of assets as showing in the books of account of the Private Limited Company in any of the previous three years not exceeding Rs. 5 crores

Consequence of Conversion

The following are some of the implications as a result of the conversion of a private company into a LLP :

Once conversion took place, the Private Limited Company is dissolved.

The name of the private limited company will be eliminated from the register of the Registrar of Companies.

The conversion will not include any effect on existing liabilities, responsibilities, contracts, agreements and sustained employment.

Company must inform all the authorities who are associated with the conversion and make essential changes in all the registrations and licenses.

Advantages of Conversion

While converting a private limited company into LLP, all assets and liabilities of the private company will be converted into those of the LLP. However, there is no need to implement any transfer. Therefore there will not be any stamp duty concerned on such transfers also. There is not any limit on the number of partners that is not so in the case of private limited companies.

There is no need to keep a minimum number of meetings and keep statutory records.

Conclusion

LLP is a more suitable type of organization as compared to a private limited company regarding compliance and taxation features. Thus, it may be suitable mainly for small entrepreneurs and professionals. The conversion from an existing Private Limited Company can be converted into a LLP while sustaining the advantages of limited liability and less compliance.

Frequently Asked Questions

Ques: Whether other business entities like firm or company can be converted into LLP?

The LLP Act includes allowing provisions that are following private company (incorporated under Companies Act) can be converted into LLPs. Provisions of clause 58 and Schedule II to Schedule IV to the Companies Act include procedure to accomplish this.

Ques: What is the treatment for stamp duty matters, both for original incorporation and conversion from other business units? Would there be any stamp duty exemption for conversion?

As Stamp Duty is the matter retained for the states, the LLP Act does not include any provision to treat stamp duty concerns. The stamp duty payable will be based upon the applicable Stamp Act recommended by the State Government/Union Territory.

Ques: What are the consequence or needs offered in the Act regarding licences, permits, approvals and others acquired by a private company before its conversion into LLP?

According to the Act, conversion of a private limited company into LLP, any approval, permit or licence served to the private company under any other Act shall, depending on the provisions of such other Act under which such approval, licence or permit was served, be transferred in the name of converted unit like LLP.



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