Entities these days often find the need to adapt and evolve to stay competitive. One such strategic move that businesses might consider is the conversion of a Limited Liability Partnership (LLP) to a Private Limited Company. This conversion involves a shift in the legal structure of the business which brings about several advantages such as:
1. Access to Capital: Private Limited Companies often find it easier to attract investment compared to LLPs. The conversion allows access to various funding options, including equity investments and preference shares, which can be crucial for business expansion and growth.
2. Ease of Transferability: Shares of a Private Limited Company are easily transferable, providing greater flexibility in ownership and the ability to bring in new investors or sell shares to existing ones.
3. Separation of Ownership and Management: The separation of ownership and management allows for a more structured and professional approach to business operations.
STEPS UNDER COMPANIES ACT, 2013
The regulations for conversion of LLP into a Company is covered from section 366 to section 374 of the Companies Act, 2013
Brief Procedure for Conversion of LLP to a Company:
1. The LLP should have at least two partners who will become directors and shareholders in the Private Limited company.
2. All the partners in the LLP should approve the Conversion of the LLP to a Private Limited company.
3. The LLP should have complied with all the statutory compliances.
4. No objection certificate from the registrar should be obtained.
5. A Board Resolution is to be passed which outlines the intent to convert the LLP into a Private Limited Company and appoint an authorized representative to oversee the conversion process.
6. The next step involves obtaining approval for the New name of the Private Limited Company from the Ministry of Corporate Affairs (MCA).
7. Filing of Various documents, including the application for conversion, the new Memorandum of Association (MOA), and Articles of Association (AOA), need to be filed with the MCA.
8. Once all the necessary documents are submitted and reviewed, the MCA issues the Certificate of Conversion, officially recognizing the transformation of the LLP into a Private Limited Company.
INCOME TAX IMPLICATION
1. Capital Gains Tax:
The transfer of assets and liabilities from the LLP to the Private Limited Company may trigger capital gains tax implications. The difference between the fair market value of the assets transferred to the existing partner of the LLP and the book value of the assets in the LLP that are transferred to the Company could be subject to capital gains tax.
An An exemption can be claimed on the conversion of LLP into Private Limited under Section 47 of the Income Tax Act,1961 provided the following conditions are fulfilled:
a) All of the LLP’s assets and liabilities are transferred to the new entity as its assets and liabilities.
b) In proportion to their capital investment in the LLP, each partner of the LLP turns into a shareholder of the business.
c) Not less than 50% of the total voting power and share capital of the company is held collectively by the partners of the LLP.
d) Partners do not receive any benefit/consideration, directly or indirectly from the Company other than the allotment of shares.
However, certain judicial precedents mention that such conversion of LLP into Private Limited is not a transfer and thus question of capital gains should not arise.
2. Carry Forward and Set-Off of Losses:
The Private Limited Company can carry forward and set off the accumulated losses and unabsorbed depreciation of the LLP, subject to compliance with the provisions of section 72A(6) of the Income Tax Act.
ASPECTS TO BE TAKEN CARE OF POST CONVERSION TO PRIVATE LIMITED COMPANY
1. Update Business Stationery like letterheads, Invoices, Contracts and other official documents to reflect the new legal structure and company details.
2. The newly converted Company has to apply for new registrations like PAN, TAN, GST, PF, ESIC, and PT for the Private Limited Company.
3. Open new bank accounts in the name of the Private Limited Company and close the existing LLP bank accounts.
4. Transfer or update ownership of Intellectual Property Rights, including trademarks, copyrights, and patents, to reflect the ownership of the Private Limited Company.
5. Establish a Compliance Calendar for the Private Limited Company, including due dates for statutory filings, board meetings, annual general meetings, and other compliance-related activities.
6. Update all the existing policies and agreements in the name of the Private Limited Company.
CONCLUSION
Converting an LLP into a Company has various benefits as it allows the business to grow and Private Limited Companies will find it easier to attract Investors as compared to an LLP. Transitioning from an LLP to a Private Limited can be a strategic move for businesses seeking greater growth and access to resources. By carefully considering the advantages, understanding the eligibility criteria, and following the established procedures, one can successfully transform the business into a stronger and more sustainable entity.
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Authors:
Veedhi Patel | Associate Consultant | Email: veedhi.patel@masd.co.in
Shreyans Dedhia | Partner | Email: shreyans.dedhia@masd.co.in
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