Conversion of Company into LLP: Legal, Tax & Procedural Analysis

Business restructuring today is not merely a compliance exercise but a strategic decision driven by taxation efficiency, operational flexibility and long-term sustainability. One such restructuring mechanism gaining significant attention is the conversion of a Company into a Limited Liability Partnership (LLP).

While the process appears straightforward under the Limited Liability Partnership Act, 2008, its implications under the Companies Act, 2013 and the Income Tax Act, 1961 must be carefully examined to ensure that the conversion remains legally compliant and tax efficient. This article discusses the legal framework, tax provisions, pre-requisites and procedural aspects involved in conversion of a company into an LLP.

WHY CONVERSION, IF BOTH ARE CONSIDERED AS BODY CORPORATE AND HAVE PERPETUAL SUCCESSION??

The Companies Act 2013 requires companies to follow many compliances throughout the year. Comparatively there are less compliance burden for an Limited Liability Partnership (LLP) and hence businesses prefer an LLP over a private limited company. Also, LLPs receive the status of a body corporate and a separate legal entity from its partners and will have perpetual succession.

Apart from above reason, Promoters also prefer to convert their companies into LLP for following reasons: –

• 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.
• 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. (Defined below)
• 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.

For any restructuring of a Company or LLP, it is essential to examine the relevant provisions of the Companies Act, 2013, the Limited Liability Partnership Act, 2008, and the Income Tax Act, 1961 in a comprehensive and integrated manner. In practice, emphasis is often placed solely on compliance under the Companies Act, which may lead to sub-optimal tax benefits or, in certain cases, non-compliance with income tax provisions.

A private company may be converted into a LLP as per the provisions of section 56 and the Third Schedule of the LLP Act, 2008 read with 47(xiiib) of Income Tax Act

An unlisted public Company may be converted into a LLP as per the provisions of section 57 and the Fourth Schedule of the LLP Act, 2008 read with 47(xiiib) of Income Tax Act

For private companies, following are the pre requisites as per LLP act ,

• There is no security interest in its assets subsisting or in force at the time of application i.e. all the assets of the private company must be free from any type of encumbrances.
• All the shareholders of the company and no one else becomes the partner of the LLP

For public companies, following are the pre requisites as per LLP act ,

• There is no security interest in its assets subsisting or in force at the time of application.
• All the shareholders of the company and no one else becomes the partners of the LLP. (If any shareholder is unwilling or not able to join the conversion process. Then other shareholders of the company are is to acquire his shareholding by as per the company’s AOA before the company lodges the application for conversion)

Tax Provisions for conversion :-

As per Section 47(xiiib), no capital gains shall arise on the following transfer:

1. any transfer of a capital asset or intangible asset by a private company to a LLP or
2. any transfer of a share or shares held in the company by a shareholder as a result of conversion of the company into a LLP in accordance with the provisions of section 56 or section 57 of the Limited Liability Partnership Act, 2008

However , there  are some conditions to be satisfied for availing above benefit

• 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 5 years from the date of conversion
• the total sales, turnover or gross receipts in the business of the company in any of the 3 previous years preceding the previous year in which the conversion takes place does not exceed 60 lakh rupees
• the total value of the assets as appearing in the books of account of the company in any of the 3 previous years preceding the previous year in which the conversion takes place does not exceed 5 crore rupees 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.

When the above conditions in sec 47(xiiib) are not complied with, the amount of capital gains arising from the transfer of such capital asset or intangible assets or share or shares not charged under sec 45 by virtue of conditions laid down in the said proviso shall be deemed to be the capital 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.

NOW, WILL TALK ABOUT THE PROCESS OF CONVERSION

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

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

Mandatory Attachments in Form Fillip are :- Consent of Proposed designated partners, Proof of Address of Registered office of LLP i.e Sale Deed / Lease Deed / Rent Agreement along with NOC and latest electricity bill, Subscriber sheet of LLP.

Mandatory Attachments in Form-18 are:- Statement of shareholders for consent , Statement of assets and liability certified by the auditor, list of all secured creditor along with their consent , Copy of latest ITR, Declaration of no pending litigation.

Conclusion

Conversion of a company into an LLP can be a highly beneficial restructuring option when planned and executed with proper legal and tax evaluation. However, the exemption under Section 47(xiiib) of the Income Tax Act is conditional, and even a minor deviation may result in significant tax exposure in future years. A well-structured conversion not only reduces compliance burden but also ensures continuity of business with optimal tax efficiency.