Introduction:
In India, the Limited Liability Partnership (LLP) model has gained popularity due to its hybrid structure that combines the benefits of both a company and a partnership. With the enactment of the Limited Liability Partnership Act of 2008, it has become possible for certain companies to convert into LLPs. Many private companies, especially small and closely held ones, prefer converting to LLPs to enjoy greater flexibility, fewer compliance requirements, and tax advantages.
Legal Framework:
- The conversion of a private company or an unlisted public company into LLP is governed by:
- Limited Liability Partnership Act, 2008, particularly Chapter X (Sections 55 to 58)
- Third Schedule – for conversion of a Private Limited Company
- Fourth Schedule – for conversion of an Unlisted Public Company
- Companies Act, 2013
- Limited Liability Partnership Rules, 2009, especially Rule 39 to Rule 40
Eligibility Criteria for Conversion:
A Private Company or an Unlisted Public Company can convert into an LLP, provided:
- There is no security interest in its assets subsisting or in force at the time of application; and
- Every Shareholder of company shall become partner of LLP
- Minimum 2 Designated Partners (At least 1 of the designated partners shall be an Indian Resident)
- There are no pending e-forms for payment or processing.
- No open (unsatisfied) charges/loans should be pending against the company or any proceedings at any Court/Tribunal.
- The Company is not a Section 8 Company.
- The company must have share capital.
- The company must have filed at least one balance sheet and annual return after its incorporation.
Basic Steps for Conversion into LLP:
1. Name Approval for LLP:
2. Convene a Board Meeting.
3. Convene a General Meeting
4. Filing of Form FiLLiP
Attach necessary documents: consent of partners, details of partners/designated partners, address proof, utility bill, etc.
5. Filing Form 18 (Application for Conversion) This is the most critical step, where the company officially applies for conversion to LLP.
Attachments:
- Statement of assets and liabilities
- List of all secured creditors with their consent
- Approval/resolution of shareholders
- Income tax returns acknowledgment
- NOC from regulatory authorities (if applicable)
6. Issuance of Certificate of Registration The ROC, after verification, will issue a Certificate of Registration of the LLP.
Post-Conversion Requirements:
- Update PAN, TAN, and Bank Accounts in the new LLP’s name.
- Inform concerned authorities like GST, PF, ESI, etc.
- Display conversion status on all correspondence for 12 months.
- Execute the LLP Agreement and file Form 3 within 30 days of incorporation
Effects of Conversion Upon conversion:
- The LLP inherits all assets, liabilities, rights, and obligations of the erstwhile company.
- The company shall be deemed dissolved and removed from the records of ROC.
- No new registration for assets is required unless specified under another law.
Benefits of Conversion from Company to LLP:
- Reduced Compliance Burden:
LLPs are not required to hold board meetings, AGMs, or maintain statutory registers.
- No Dividend Distribution Tax (DDT):
LLPs are not subject to DDT, unlike companies distributing dividends.
- Statutory Audit:
Audit is not mandatory unless turnover exceeds ₹40 lakhs or contribution exceeds ₹25 lakhs.
- Flexibility in Operations:
No restrictions on managerial remuneration, related party transactions, or borrowing powers.
- Lower Cost of Compliance:
ROC fees and other regulatory costs are significantly lower compared to companies.
- Separate Legal Entity and Limited Liability:
Partners are protected from personal liability, similar to a company structure.
Drawbacks to Consider:
- LLPs cannot raise equity capital like companies.
- Some sectors (like NBFCs) are restricted from forming LLPs.
- LLPs have lesser credibility with investors and institutions compared to companies.
Conclusion:
Both Limited Liability Partnerships (LLPs) and Private Limited Companies offer distinct advantages and serve different business needs. LLPs provide flexibility, a reduced compliance burden, and a management structure that emphasizes partnership. On the other hand, Private Limited Companies offer limited liability protection, easier access to capital, and enhanced credibility.
Entrepreneurs should carefully evaluate their business objectives, long-term goals, and regulatory considerations before choosing the most appropriate structure for their venture.
In summary, the decision between an LLP and a Private Limited Company depends on factors such as liability protection, taxation, compliance requirements, ownership flexibility, and long-term growth aspirations. Consulting with experienced legal and financial advisors can assist entrepreneurs in making a well-informed decision that aligns with their business goals.
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Author- CS Manohar Mishra, a Practicing Company Secretary and Registered Valuer (Securities or Financial Assets) based in West Bengal, can be reached at csmanoharmishra@gmail.com.
