Conversion of a Limited Liability Partnership (LLP) to a Private Limited Company

Conversion of a Limited Liability Partnership (LLP) to a Private Limited Company

 

Limited Liability Partnership

Introduction

The Limited Liability Partnership Act of 2008 governs limited liability partnerships. But Limited Liability Partnership  was introduced in India in April 2009.

LLP is a combination of both forms i.e. Partnership firm and Company. It includes both feature of partnership firm and company. Like a company it has Separate legal entity that separates its partners from LLP and also has less compliance like a partnership firm.

Features of LLP

Separate legal entity: - It has its own separate existence from the partners and status of LLP is unaffected due to admission and removal of the partners.

Limited Liability:- As the term implies, partners have limited liability in the firm, which means that their personal assets are not utilized to pay off the company's obligations. In contrast to a sole proprietorship or a typical partnership firm, where the proprietor's or partners' personal assets would be at risk if the business fails, each partner's liability is limited to the amount of his or her contribution/share. As a result, this method assists the partners in being free of personal liabilities

• No requirement for minimum capital contribution: - There is no minimum capital prescribed for the formation of LLP.
• No Restriction on number of owner: - An LLP must have a minimum of two partners in order to be formed. There will be no maximum limit on the number of partners.
• No obligation for an annual audit: - An LLP is not required to get his accounts audited unless the following conditions satisfied:-
  • Annual Turnover of the LLP exceeds Rs 40 lakh or
  • Contribution of the LLP exceeds Rs 25 lakhs.

Advantages of LLP

• Effortless forming: - Forming an LLP is a simple process. Unlike company, it is not complicated and time consuming.
• Lower cost required to form: - Cost of LLP Registration is low as compared to cost of incorporating a private limited and public limited company.
• Ownership is transferable: - When it comes to entering and leaving the LLP, there are no restrictions. It is easy to join the business as a partner and then quit, or to transfer ownership to others.
• Lower Compliance burden: - Compliance of the LLP is low as compared to the private and public companies. Companies are required to do at least 8 to 10 compliance per annum, On the other hand mandatory compliance for LLP is only filing of
  • Annual returns
  • Statement of accounts or financial statements
  • Income tax returns.
• Taxation: - LLP are not subjected to Dividend distribution tax, so there will be no tax implication while distributing profits to company.

Disadvantages of LLP

• No Concept of equity investment: - Unlike a company, an LLP does not have the concept of equity or stock ownership. As a result, angel investors, High net worth individuals, venture capitalists, and private equity firms are unable to become shareholders in an LLP. As a consequence, most LLPs would have to rely on promoter and debt finance. So, LLP is not the ideal choice for the enterprise who wanted to raise capital through the above method.
• Only in business of making profit: - An LLP cannot be registered as a charitable trust or for non-profit purpose. It is essential that the company be created in order to carry on a legal business in order to make profit.
• Documents available for public inspection: - Unlike sole proprietorship or partnership firm, where documents and financials are not available for public inspection. The documents filed by an LLP through MCA Portal are easily accessible by the public. Any person can pay a small fee INR 50 and can get a copy LLP Incorporation document, financial statement or annual return etc.
• Greater penalties in case of Non-Compliance: - Although the Compliance of the LLP is minimal but if you do not comply with these compliances you could end up paying more fines than the private limited company.

Private Limited Company

Introduction

A private limited company is a company which is privately held for small businesses. The liability of the members of a Private Limited Company is limited to the amount of shares respectively held by them. Shares of Private Limited Company cannot be publically traded. All the aspects of Private Limited Company are discussed in the article.

Characteristics of Private Limited Company

• Members– To start a company, a minimum number of 2 members are required and a maximum number of 200 members as per the provisions of the Companies Act, 2013.
• Limited Liability– The liability of each member or shareholder is limited. It means that if a company faces loss under any circumstances then its shareholders are liable to sell their own assets for payment. The personal, individual assets of the shareholders are not at risk.
• Perpetual succession– The company keeps on existing in the eyes of law even in the case of death, insolvency, the bankruptcy of any of its members. This leads to the perpetual succession of the company. The life of the company keeps on existing forever.
• Index of members– A private company has a privilege over the public company as it don’t have to keep an index of its members whereas the public company is required to maintain an index of its members.
• A number of directors– When it comes to directors a private company needs to have only two directors. With the existence of 2 directors, a private company can come into operations.
• Paid-up capital– It must have a minimum paid-up capital of Rs 1 lakh or such higher amount which may be prescribed from time to time.
• Prospectus– Prospectus is a detailed statement of the company affairs that is issued by a company for its public. However, in the case of a private limited company, there is no such need to issue a prospectus because this public is not invited to subscribe for the shares of the company.
• Minimum subscription– It is the amount received by the company which is 90% of the shares issued within a certain period of time. If the company is not able to receive 90% of the amount then they cannot commence further business. In the case of a private limited company, shares can be allotted to the public without receiving the minimum subscription.
• Name– It is mandatory for all private companies to use the word private limited after its name.

Ministry of Corporate Affairs has passed a notification on 31st May, 2016 in such notification its allowed conversion of LLP into Company. For such conversion there is need to prepare a list of documents and required to file the same with ROC in forms like URC-1, INC-32, INC-33 and INC-34 etc.

No Capital Gain:

The Gujarat High Court (HC) had held in the taxpayer’s case that conversion of a firm into a company was not a transfer (even before section 47(xiii) was introduced) and would not be subject to capital gains tax.

Advantages of LLP Conversion into Company

• No capital gain tax
• Carry forward of unabsorbed losses and depreciation
• Continuation of Brand Value

Easy Fund Raising: - If the company registration process is strict, it helps the company structure to be more credible among others. This leads to easy fundraising from external sources.

Conversion of a Limited Liability Partnership (LLP) to a Private Limited Company

Due to various of factors, the number of LLPs registered in India is increasing. LLP registrations in India increased by 55 percent in the financial year 2014-15, and this trend is expected to continue as more people become aware of the benefits of LLPs. The majority of entrepreneurs that choose LLP registration are small enterprises that do not anticipate the need to raise equity money. However, some of these tiny firms may need to change to a private limited company at some point for a variety of reasons. As a result, we'll look at how to convert an LLP into a private limited company in this post.

List of Documents required filing with ROC for conversion of LLP into Company:

Obtain approval for the name

Step 1: Submit an e-format Reserve Unquie Name (RUN) form to the Registrar of Companies (ROC) to obtain name approval.

Making DSC and DIN secured

Step 2: Once the name has been approved, apply for a Digital Signature Certificate (DSC) and a Director Identification Number (DIN) for the LLP members who will be the directors of the Private Limited Company after the conversion.

Note: If the DIN is not applicable, the applicant must include address evidence, proof of identity, and pictures with the application. As a result, obtain a DIN by filing an incorporation form.

Form URC-1 must be completed and submitted.

Step 3: The applicant must also file Form URC-1 and provide the following set of documents in addition to the form URC-1.

E-form URC-1 :  Company required filing e-form URC- 1 along with all the below mentioned documents:

i. A list showing the names, addresses, and occupations of all persons named therein as members with details of shares held by them

ii. a list showing the particulars of persons proposed as the first directors of the company

iii. an affidavit from each of the persons proposed as the first directors, that he is not disqualified to be a director under sub-section (1) of section 164 and that all the documents filed with the Registrar for registration of the company contain information that is correct and complete and true to the best of his knowledge and belief

iv. a list containing the names and addresses of the partners of the Limited Liability Partnership

v. Copy of LLP Agreement

vi. a statement of assets and liabilities of the Limited Liability Partnership duly certified by a chartered accountant in practice which is made as on a date not earlier than thirty days of the filing of form no.URC-1

vii. a copy of latest income tax return of the Limited Liability Partnership

viii. an undertaking that the proposed directors shall comply with the requirements of Indian Stamp Act, 1899 (2 of “1899)

ix. written consent or No Objection Certificate from all the secured creditors of the applicant

x. written consent from the majority of Partners

xi. a statement specifying the following particulars:—

♦ the nominal share capital of the company and the number of shares into which it is divided;

♦ the number of shares taken and the amount paid on each share;

♦ the name of the company, with the addition of the word “Limited” or “Private Limited” as the case may require, as the last word or words thereof;

Step 4: Prepare the Memorandum and Articles of Association (MOA) and submit them to the Registrar of Companies. The form URC-1 is sanctioned by the Register of Companies after the company name has been approved.

Visit India expert.in to learn more about private limited companies and to register a private limited company in India.

Last updated 3 years ago