Operating a LLP form of business organization can be a hurdle as other form of business organizations offers better opportunities for the growth & expansion of the business. Therefore, the amazing benefits offered by the other organizational structures will attract the shareholders. Thus, that would lead to the conversion of LLP into Private Limited Company.
Earlier it was not possible to convert a LLP into a private limited company. However, as per section 366 of the Companies Act, 2013, any partnership firm or LLP, cooperative society, or any other business entity which is incorporated under any other law and which has two or more members can get themselves registered as an unlimited company or as a company limited by shares or a company limited by guarantee.
Companies capable of being registered:-
As per Section 366. (1) For the purposes of this Part, the word “company” includes any partnership firm, limited liability partnership, cooperative society, society or any other business entity formed under any other law for the time being in force which applies for registration under this Part.
(2) With the exceptions and subject to the provisions contained in this section, any company formed, whether before or after the commencement of this Act, in pursuance of any Act of Parliament other than this Act or of any other law for the time being in force or being otherwise duly constituted according to law, and consisting of [two or more members]*, may at any time register under this Act as an unlimited company, or as a company limited by shares, or as a company limited by guarantee, in such manner as may be prescribed and the registration shall not be invalid by reason only that it has taken place with a view to the company’s being wound up.
(Note* In section 366 sub section (2), for the words:- “seven or more members” The following word shall be substituted, namely :-“two or more members” substituted via Companies Amendment Act, 2017 w.e.f 05.07.2018)
Taxability on conversion of LLP into Company:-
High Court Ruling:-
In decision of the Bombay High Court in CIT v Texspin Engineering and Manufacturing Co. (2003) 263 ITR 345 (Bom) has held that such conversion of firm into company by following the route under Part-IX of the Companies Act, 1956, does not occasion capital gains, since there is no transfer involved in such a case. The High Court after considering the provisions of Companies Act, provisions of income tax relating to capital gains and relying on the ratio of Malbar Fisheries Company v CIT (1979) 120 ITR 49 (SC), CIT Vs. George Henderson & Co Ltd (1967) 66 ITR 622 (SC), CIT Vs. Gillanders Arbuthnot & Co (1973) 87 ITR 407 (SC), held that, when a firm is registered as a company, as per the procedure prescribed under Part IX of the Companies Act, no capital gains arise to the firm. When a partnership firm is treated as limited company, under Part IX of the Companies Act, the properties of the erstwhile firm vests in the limited company as they exist. There is no dissolution of the firm. Hence section 45 (1) of the Income Tax Act is not applicable. When shares of the Company are allotted to partners in consideration of capital standing in their accounts in the firm, there is no transfer of capital assets as contemplated under section 2(47)(iii) of the Income Tax Act (i.e. compulsory acquisition, thereof under any law), as partners are getting their own right to share Capital.
In Well Pack Packaging Vs. Dy. CIT (2003) 78 TTJ (Ahd.) 448, also the same view was taken that, corporatisation of the firm under the part IX route did not attract liability to Capital Gains in the hands of the firm.
Further, In Artex Manufacturing Company while all assets and liabilities of the firm came to be transferred to the company as a going concern, it was not a case of conversion of firm into company under Part IX of the Companies Act 1956.
Pros of Private Limited Company over LLP:-
I. LLPs do not have the concept of shareholders. Hence, all the owners of a LLP would be a Partner in the LLP. This structure is not suitable for Venture Capitalists and Private Equity Investors – who do not wish to actively participate in the management of the Company. Hence, equity investors will only invest in a Private Limited Company. Therefore, if the startup or promoters have plans for expanding the business by raising equity capital, then the entity must be registered as a private limited company.
II. Foreign Direct Investment (FDI) in a private limited company is under the automatic route whereas FDI in LLP is under the approval route. Therefore, businesses that have foreign or NRI promoters opt for incorporation of a private limited company.
III. Tax credit in respect of tax paid on deemed income relating to certain companies (i.e. MAT credit U/S 115 AA)
IV. Income tax rate for a company with a turnover of upto Rs.400 crores is 25%. However, LLPs are taxed at a 30% rate irrespective of the turnover.
V. The penalty for non-compliance or late filing of documents with the Ministry of Corporate Affairs are most of the times higher for a LLP as a flat fee of Rs.100 per day is levied when the non-compliance continues with no cap on the liability. Therefore, LLPs could incur larger penalty or fines from MCA due to non-compliance.
VI. Private limited company offers its promoters a better image or standing than that of a LLP. Private limited company also enjoys better access to funding from banks and foreign direct investment.
Cons of Private Limited Company:-
I. Private limited companies have a limit on No. of shareholders whereas in LLP there are no such restriction.
II. Audit is not required for a LLP annual sales turnover is less than Rs.40 lakhs and the LLP has a capital contribution of less than Rs.25 lakhs. Whereas, for a Private Limited Company, audit is mandatory irrespective of sales turnover or capital.
II. LLP there is no concept of dividend distribution tax. Whereas, for a Private Limited Company, dividends are taxed at 15%.
IV. In LLP, there is no concept of Board Meetings or Annual General Meetings. So annual compliance is comparatively lesser.
V. MAT U/S 115 JB of Income Tax Act, 1961 is not applicable.
VI. There is no need of compliances related to meetings and maintenance of huge statutory records.
Annual compliances of a private limited company:-
1) Statutory Audit Compliances:-
The purpose of a statutory audit is the same as the purpose of any other audit – to determine whether an organization is providing a fair and accurate representation of its financial position by examining information such as bank balances, bookkeeping records and financial transactions.
2) Annual ROC Filings:-
Private Limited Companies are required to file its Annual Accounts and Returns disclosing details of its shareholders, directors etc to the Registrar of Companies. Such compliances are required to be made once in a year.
As a part of Annual Filing, the following forms are to be filed with the ROC:
Form MGT-7 (Annual Return): Every Private Limited Company is required to file its Annual Return within 60 days of holding of Annual General Meeting. Annual Return will be for the period 1st April to 31st March.
Form AOC-4 (Financial Statements): Every Private Limited Company is required to file its Balance Sheet along with statement of Profit and Loss Account and Director Report in this form within 30 days of holding of Annual General Meeting.
3) Annual General Meeting:-
Every Private Limited Company is required to hold a meeting of its shareholders once in every year within a period of six months from the date of closing of the financial year.
The primary agenda of an AGM includes approval of financial statements, declaration of dividends, appointment or re-appointment of auditors, appointment and remuneration of directors etc.
The Annual General Meeting shall be held during business hours on a day which is not a public holiday and shall take place at the registered office of the company or at some other place within the city, town or village in which the registered office of the company is situated.
4) Board Meetings
5) Directors’ Report:-
Every director has to disclose about his directorship in other companies every year. This shall be done by giving a declaration in writing to the company every year in a specified Directors’ Report format.
6) Income Tax Compliances:-
7) Maintenance of Statutory Registers and Records:-
A Private Limited Company has to maintain various statutory registers and records as required by the Company law such as Register of shares, Register of Members, Register of Directors etc. Besides, Incorporation documents of the company, Resolutions of the meetings of the Board of Directors, Minutes of the Board Meetings and Annual General Meeting etc are also required to be preserved by the Company.
Such records are to be kept at the registered office of the company and shall be open for inspection to its members during business hours. Also, the books of account of every company relating to a period of atleast eight financial years should be preserved and kept in good order.
Procedure for conversion of LLP into a private limited company:-
1) Approval of Name:
To get the name approved from the ROC, one needs to submit RUN (Reserve Unique Name) form which is in e-format. Various items are to be filled in while submitting the RUN form. Also, the name which is approved by the ROC is available for use only for twenty days in case of a new company and sixty days in case of change of name of existing company.
2) Securing DSC And DIN:
Apply for the Digital Signature Certificate (DSC) and Director Identification Number (DIN) for all the members of the LLP who after the conversion will be the directors of the Private Limited Company, in case if they don’t have it.
A self- attested address proof, identity proof and one recent passport size colour photo of the applicant have to be provided along with the application. DIN can be obtained directly through filing incorporation form
3) Filing of Form URC – 1:
I. Once, the ROC approves the name; form URC-1 has to be filed by the applicant. The following are the list of documents which are to be submitted along with the form URC-1:
II. Details like name, address, shares held by the members are to be provided along with the list of members.
III. Names, address, the DIN, passport number with an expiry date of all the first directors of the Private Limited company has to be provided.
IV. As per section 164 of the Companies Act, 2013, an affidavit has to be provided by all the proposed first directors of the Private Limited Company stating that they are not banned from being a director. Also, all the necessary documents to be filed with the ROC for the registration of the company should consist of such information which is complete and correct and accurate to the best of their belief and knowledge.
V. A copy of LLP agreement along with a list consisting of the names and addresses of partners of LLP and a certificate of registration which is duly verified by two designated partners of LLP has to be provided.
VI. A statement to be provided which has the details of the nominal share capital of the firm and the number of shares into which it is separated, the number of shares taken and the amount paid for each share and the name of the firm with the addition of word private limited.
VII. A no objection certificate from all the creditors is to be provided.
VIII. A duly certified statement of accounts of the company by the auditor which must not be of 6 days preceding the date of application and copy of the newspaper advertisement is to be provided