All aspects of conversion of Company into LLP

Limited Liability Partnerships (LLP) are emerging ever since the introduction of the Companies Act, 2013 as it is a form of business entity, which allows individual partners to be free from the concept of joint liability of partners in a partnership firm. LLPs are preferred form of business as it is an alternative corporate business vehicle that provides the benefits of limited liability of a company but allows its members the flexibility of organizing their internal management on the basis of a mutually arrived agreement, as is the case in a partnership firm. But sometimes, it may happen that some of the Directors have incorporated a Company that needs to be converted into a LLP now. Accordingly, in this article, we shall discuss about the procedure and provisions with every aspect w.r.t. conversion of a Company into LLP:

1. GENERAL BENEFITS OF LLP

1. Less compliance cost
2. Audit necessary only if turnover and contribution exceeds Rs. 40 lacs and Rs. 25 lacs respectively.
3. The partners can distribute the profits among themselves without attracting any further taxation i.e. Dividend Distribution Tax.
4. Various stringent provisions that prohibits the Company to take loans from individual or give loans to the respective Director are not there in case of LLP.
5. There are no restrictions on related party transactions in case of LLP.

2. BENEFITS OF LLP UNDER INCOME TAX ACT

1. Non-applicability of MAT.
2. Profits can be distributed without any cost of Distribution Distribution Tax (DDT).
3. Audit not mandatory.

3. PRE-REQUISITES FOR CONVERSION OF COMPANY INTO LLP

1. There is no security interest in its assets subsisting or in force at the time of application
2. The partners of the LLP to which it comprise all the shareholders of the Company and no one else.
3. No eForms should be pending for payment or processing in respect of the Company.
4. No open (unsatisfied) charges should be pending against the Company.
5. At least one balance sheet and annual return should have been filed by the Company after its incorporation.

4. TAXATION ON CONVERSION OF COMPANY INTO LLP

Conversion of Company into LLP is allowed under the provisions of the Companies Act, 2013 and the Limited Liability Partnership Act, 2008 but it really important to understand the tax implications of the same as well. Now, one may opine that the conversion of Company into a LLP may attract capital gain tax as there shall be transfer of assets but a similar issue has been discussed in various judicial forums (Gujarat High Court in DCIT v. R L Kalathia (2016) and CIT v. Well Pack Packaging (2014) that conversion is not a “transfer” as defined under the IT Act and hence no capital gain tax shall be levied thereof. Further, in accordance with the Section 47(xiiib) of the Income Tax Act, 1961, conversion of Company into LLP will not attract capital gain tax subject to following conditions:

1. All the assets and liabilities of the Company become the assets and liabilities of the LLP;
2. all the shareholders of the Company become partners of the LLP and that the capital proportion and profit sharing ratio are in the same proportion as that of the shareholding in the Company;
3. the shareholders does not receive any benefit, directly or indirectly in the LLP, except by way of capital contribution and profit sharing ratio.
4. the aggregate of the profit sharing ratio of the shareholders of the Company in the LLP shall not be less than fifty per cent, at any time during the period of five years from the date of conversion (i.e. you can add new partners to the LLP but the aggregate of profit sharing ratio of previous partners shall not fall below 50%)
5. the total sales, gross receipts and turnover in any of the three preceding year from the date of the conversion does not exceed Rs. 60 Lacks;
6. no amount, is paid either directly or indirectly, from the accumulated profits to any of the partners for a period of three years from the date of conversion;
7. the total value of assets as appearing in the books of account of the Company in any of the previous three years does not exceed Rs. 5 crores.

5. PROCEDURE OF CONVERSION AS PER COMPANIES ACT

i. Convene a Board Meeting to pass resolution for conversion of Company into LLP.

ii. Reserve the name using RUN-LLP as available mca.gov.in (not mandatory as the same can be reserved along with application to incorporate LLP as well)

iii. File form for incorporation of Limited Liability Partnership (FiLLiP).

Attachments:

• Registered office documents (for eg.: utility bill, NOC and proof of ownership)
• Identity proofs and residence proofs of partners and designated partners.
• Consent to act as designated partner as per the format provided in Rule 7 and Rule 10(8) in LLP Rules, 2009.
• Subscriber Sheet
• Details of Companies/LLPs in which the partners/designated partners are Directors/Partners or Designated Partners.

iv. File Form-18.

Attachments:

• Statement of consent of shareholders
• Statement of Assets and Liabilities of the company duly certified as true and correct by the auditor
• List of all the secured creditors along with their consent
• Approval from any other body/ authority.
• Copy of acknowledgement of latest income tax return.

v. File Form 14 within fifteen days of approval of Form 18. As per Third Schedule of the Limited Liability Act, 2008, an application (physically) has to be filed with Registrar of Companies informing about such conversion within 15 days of such conversion. However, as per the help kit of the eForm 18, the eForm-14 is not required to be filed after filing eForm 18. Upon approval of eFORM-18 itself, the status of the company will be changed to ‘Converted to LLP’. Therefore, this appears to be contradictory.

vi. File Form 3 within thirty days of incorporation of LLP attaching the LLP agreement mentioning therein the terms and conditions of Limited Liability Partnership among the partners.

6.FREQUENTLY ASKED QUESTIONS (FAQs)

1. In case the Company is converted into LLP, will the provisions of MAT apply to the successor LLP?

Reply: No, as per the amendment in Section 115JAA of the Income Tax Act, 1961 in Finance Act, 2010.

2. What shall be taken as the cost of asset in case of conversion?

Reply: The actual cost of the block of assets in the case of the LLP shall be the written down value of the block of assets as in the case of the said company on the date of conversion of the company into the LLP.

3. Who shall pay tax in case of non-compliance of any of the conditions laid down in Section 47(xiiib) of the Income Tax Act, 1961, after conversion?

Reply: The amount of profits or gains arising from the transfer of such capital asset or intangible assets or share or shares not charged under section 45 by virtue of conditions laid down in the said proviso shall be deemed to be the profits and gains chargeable to tax of the successor LLP or the shareholder of the predecessor company, as the case may be, for the previous year in which the requirements of the said proviso are not complied with.

4. What shall happen to the accumulated loss or the accumulated depreciation, if any standing in the financials of the Company?

Reply: The accumulated loss and the un-absorbed depreciation of the predecessor Company, shall be deemed to be the loss or allowance for depreciation of the successor LLP for the purpose of the previous year in which business re-organisation was effected.

Further, in case of non-compliance of any of the provisions as stated in the Section Section 47(xiiib) of the Income Tax Act, 1961, then such set off of loss or allowance of depreciation in the hands of the successor LLP, shall be deemed to be the income of the LLP chargeable to tax.

{The author is a Company Secretary in Practice and can be reached at (M) 9999952595 and (E) cskajalgoyal@gmail.com}