Conversion of Company into LLP

“Discover the advantages of converting a company into a Limited Liability Partnership (LLP) in India. Learn about the legal framework, prerequisites, and the step-by-step process for conversion. Explore the tax advantages, simplified compliance, and the conditions for transferring assets and liabilities.”

Introduction

In India, Limited Liability Partnership (LLP) are emerging as a popular business structure for their multiple advantages among small and medium scale businesses and service sector. It is simpler yet corporate form of business where in all good features of both Company and Partnership are present. It is an alternative corporate business form that gives the benefits of limited liability of a company and the flexibility of a partnership. Since LLP contains elements of both ‘a corporate structure’ as well as ‘a partnership firm structure’ LLP is called a hybrid between a company and a partnership.

Advantages of LLP

> LLP has all the advantages of Company like limited liability, perpetual succession, separate identity, Capacity to enter into contract, Capacity to sue and be sued etc.

> LLP can be formed by any amount of capital. There is no need for minimum capital for LLP.

> It requires a minimum of 2 partners and there is no limit on the maximum number of partners of the LLP.

> The cost of registration and other statutory compliances of LLP are very low as compared to a Company.

> The LLP has very limited compliances as compared to the Company. LLPs don’t have to maintain secretarial documents like Notices, Agenda, Minutes, Statutory Registers etc.

> Companies have to get their financial statements audited compulsorily irrespective of turnover and profit however in case of LLP there is no requirement to audit the financial statement unless the contributions of LLP exceeds Rs. 25 lakh or annual turnover exceeds Rs. 40 lakh.

> LLP offers biggest tax advantages as in case of Company, Profits and taxed twice i.e one at corporate level at Corporate Tax and another at shareholder level while distributing dividend. However, in case of LLP, profits are taxed only once at LLP level and any distribution of share of profit to partner is exempt in the hands of partner.

What is the need of Conversion from Company into LLP?

> A dividend received from Company is taxable in the hands of shareholders as per their applicable income tax slab rate. While taxation structure for LLP is simpler as Compared to Company. Once profit is declared and tax is paid by LLP, the distributed income is tax free in the hands of the partners.

> A paying back the capital i.e Buy back is very complex and costly exercise in case of company. However, in LLP, partners can withdraw his/her capital at any point of time by writing a simple letter. There is no tax implications on withdrawal of capital from LLP.

> There is no stamp duty payable on all movable and immovable properties of the company pursuant to conversion of a private limited company into LLP as such properties automatically vest in the LLP.

> No Capital gain tax shall be charged on transfer of property from the company to LLP, if the conditions stipulated in the Section 47(xiiib) of the Income Tax Act 1961, are fulfilled.

> Carry forward and set off losses and unabsorbed depreciation of the company is deemed to be loss/depreciation of successor LLP the previous year in which conversion was effected, thus such loss can be carried for further 8 years in the hands of the successor LLP.

Legal Framework for Conversion of Company into LLP

Section 56, Third Schedule and Fourth Schedule of LLP Act- 2008

A Private Limited Company or Unlisted Public Company may convert into a Limited Liability Partnership in accordance with the provisions of Section 56 and the Third and Fourth Schedule of LLP Act, 2008.

Pre-Requisites for conversion of company into LLP

> There is no security interest in its assets (open charges) subsisting or in force at the time of application.

> Every shareholder of the Company must agree with the decision of conversion and become partners of LLP.

> All the creditors of the Company must also agree with the conversion.

> Under Companies Act, no prosecution should have been initiated.

> All the pending forms and returns are required to be filled up to date with the RoC.

> At least one financial statement and annual return should have been filed by the company after its incorporation.

> The Company should be having share capital.

> The Company should not be a Section 25 Company/Section 8 Company under Companies Act, 1956/2013.

Process for Conversion of Company into LLP

> Call for Board Meeting and pass Board Resolution for the conversion of the Company into LLP.

> Take the Written consent of all the shareholders for conversion of Company into LLP.

> File application for name availability in web based form ‘RUN-LLP’ with the RoC. Attach the Board Resolution and proposed object clause with the name availability application.

> Once the name is approved, execute all necessary documents like consent, subscriber sheet etc. and file form FiLLip along with form 18 with the RoC.

Attachments of form FiLLip

• Subscriber Sheet including consent;
• Consent of Designated Partner;
• Proof of Address of Registered office of LLP i.e Sale Deed / Lease Deed / Rent Agreement;
• NOC of owner of registered office, if taken on rent / lease;
• Latest Utility bill (Electricity, Mobile, Telephone or Gas bill) of registered office;
• Detail of LLP(s) and/ or Company(s) in which partner/ designated partner is a director/ partner.

Attachments of form 18

• Statement of shareholders. It is the document given by each shareholders giving their consent and statement.
• Statement of Assets and Liabilities of the company duly certified as true and correct by the auditor.
• List of all the secured creditors, if any along with their consent to the conversion.
• Copy of acknowledgement of latest income tax return.

In addition to above documents, CRC may ask for additional documents like Certificate from Auditors that Company is not carrying NBFC activities, A self-declaration from shareholders that Company does not have any secured creditors on the date of application of conversion.

> Once conversion is approved by the RoC execute LLP Agreement and file the same with the RoC in e-form LLP 3 within 30 days of approval of conversion by RoC.

Capital Gain on transfer of Assets and Liabilities

> The transfer of capital asset or intangible asset to LLP or any transfer of share or shares held in Company by a shareholder on conversion of Company into LLP shall not be regarded as transfer and no capital gain will arise if the following conditions are satisfied then:

> all the assets and liabilities of the Company immediately before the conversion become the assets and liabilities of the LLP;

> all the shareholders of the Company immediately before the conversion become the partners of the LLP and their capital contribution and profit sharing ratio in the LLP are in the same proportion as their shareholding in the Company on the date of conversion;

> the shareholders of the Company do not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of share in profit and capital contribution in the LLP;

> the aggregate of the profit sharing ratio of the shareholders of the Company in the LLP shall not be less than 50% at any time during the period of five years from the date of conversion;

> the total sales, turnover or gross receipts in the business of the company in any of the three previous years preceding the previous year in which the conversion takes place does not exceed Rs.60 Lacs;

> the total value of the assets as appearing in the books of account of the company in any of the three previous years preceding the previous year in which the conversion takes place does not exceed Rs.5 Crore; and

> no amount is paid, either directly or indirectly, to any partner out of balance of accumulated profit standing in the accounts of the company on the date of conversion for a period of 3 years from the date of conversion.

If all the above conditions are complied with, the conversion shall not attract capital gains tax either for the Company or the Successor LLP or for the shareholders of the Company, who became partner in the successor LLP and get share of profits and capital in the LLP in lieu of their shares in the Company.

If any of the above conditions are not complied with, then as per provisions of Section 47A(4) such transfer of Capital Assets & Intangible assets deemed to be liable to Capital gains of the successor LLP or the Shareholders of the predecessor Company in the previous year in which such non-compliance took place.

 What if Predecessor Company does not have any capital assets and intangible assets?

 Transfer as per Income Tax includes disposing of or parting with an asset or any interest therein or creating any interest in any asset in any manner whatsoever. Even if there is no capital assets and intangible assets in a Predecessor Company, there is conversion of the equity shares into partnership interest in an LLP and hence this transaction is clearly covered within the definition of transfer. So, Even if there is no transfer of immovable property, LLP has to follow the above mentioned conditions otherwise respective shareholders have to pay capital gain tax on the difference between the values of their interest in LLP less cost of acquisition of shares in erstwhile LLP.

(Advance ruling in the matter of Domino Printing Services PLC)

 Conclusion

 Owing to flexibility in its structure, compliances, tax and operation, LLP would be useful for small and medium enterprises and service sector enterprises. Those companies which depends on self-funding or companies with less capital requirements, may go for conversion to LLPs to tap the benefits which LLPs offer. The conversion from the existing corporate structure can be made to a LLP while retaining the advantages of Limited Liability, Separate entity and perpetual succession.

(Republished with amendments)