Converting LLP to Private Limited Company: Key Steps & Rules

Introduction

In today’s rapidly evolving business landscape, adaptability is essential for growth. One strategic move that many businesses consider is converting from a Limited Liability Partnership (LLP) to a Private Limited Company. This conversion can provide businesses with access to better funding opportunities, improved tax efficiency, and greater potential for structured governance. This guide will walk through the legal framework, key benefits, the step-by-step process, and tax implications of converting an LLP to a Private Limited Company, ensuring a smooth transition for any business.

Key Benefits of Converting an LLP to a Private Limited Company

The decision to convert an LLP into a Private Limited Company offers numerous benefits that can significantly improve business growth and operations:

1. Access to Capital

Unlike LLPs, Private Limited Companies can issue shares, making it easier to raise funds from investors, including venture capitalists, private equity firms, and angel investors.

2. Tax Efficiency

A Private Limited Company is eligible for a reduced tax rate of 22% under Section 115BAA of the Income Tax Act, compared to the 30% tax rate applicable to LLPs, along with surcharge and cess.

3. Higher Borrowing Capacity

Financial institutions generally prefer lending to companies due to the higher level of regulatory oversight and transparency they offer. This improves a company’s access to loans and credit.

4. Foreign Investment

A Private Limited Company can receive Foreign Direct Investment (FDI) through the automatic route, whereas LLPs require government approval for FDI.

5. Flexibility in Growth Strategies

Companies can pursue mergers, acquisitions, and public listings without facing the restrictions that LLPs encounter in these areas.

Legal Framework for Conversion

The conversion of an LLP into a Private Limited Company is regulated under Section 366 of the Companies Act, 2013 and the Companies (Authorised to Register) Rules, 2014. The key points to keep in mind during the conversion process are:

• Minimum Number of Members: A minimum of two partners must agree to the conversion, and they will subsequently become shareholders and directors in the new company.
• Compliance with LLP Laws: The LLP must file all required statutory returns and clear any outstanding liabilities before applying for conversion.
• Bank Account Closure & Share Allotment: The LLP’s bank account must be closed post-conversion. Shares will be allotted based on the partners’ contributions to the LLP.

Tax Implications of Converting an LLP to a Private Limited Company

Converting an LLP into a Private Limited Company carries significant tax consequences. Here are the key tax considerations:

1. Capital Gains Tax Exemption

Under Section 47(xiii) of the Income Tax Act, asset transfers during the conversion are not subject to capital gains tax, provided:

• • All assets and liabilities of the LLP are transferred to the company.
  • The partners hold at least 50% of the voting power in the new company for a minimum of five years.
  • No consideration other than shareholding is paid to the partners.

2. Profit Distribution Taxation

In an LLP, profits are not taxed in the hands of the partners. However, in a Private Limited Company, dividends distributed to shareholders are subject to applicable taxes.

3. Loss Carry Forward

• • The new company can carry forward any losses incurred by the LLP, provided the conditions under Section 72A(6) are met.

Step-by-Step Process for Converting an LLP to a Private Limited Company

The process for converting an LLP to a Private Limited Company involves several key steps. Here’s a breakdown of the process:

Pre-Conversion Requirements

• Unanimous Consent: All partners must unanimously agree to the conversion.
• Clear Pending Liabilities: The LLP must file all statutory returns and clear any outstanding liabilities before initiating the conversion process.
• Regulatory Approvals: If the LLP operates in a regulated sector, such as banking or insurance, prior approval from relevant regulatory authorities may be required.
• NOC from Secured Creditors: If the LLP has secured creditors, an NOC (No Objection Certificate) must be obtained.

Conversion Process

1. Pass a Resolution: A resolution must be passed by the partners to approve the conversion of the LLP into a Private Limited Company.

2. Name Reservation: Apply for name reservation through the MCA portal. The name reservation is valid for 20 days, but the newspaper advertisement must run for 21 clear days.

3. Publish Newspaper Advertisement: A notice (Form URC-2) must be published in both an English and regional newspaper for 21 clear days, inviting objections.

4. File Conversion Forms: Submit Form URC-1 along with the necessary documents (listed below).

5. Incorporation Forms: File SPICe+ Part B, which includes the Memorandum of Association (MOA) and Articles of Association (AOA), along with other documents.

6. Certificate of Incorporation: Upon approval, the Registrar of Companies (ROC) will issue a Certificate of Incorporation.

7. Declaration for Commencement of Business: After incorporation, file Form INC-20A to declare the commencement of business operations.

Attachments for URC-1

The following documents must be attached when submitting Form URC-1 for conversion:

• List of Partners: Include the names, addresses, occupations, and shareholding details of all partners.
• List of First Directors: Provide details of the first directors, including their names, DINs, residential addresses, passport details (if applicable), and any other business interests.
• LLP Agreement (Including Amendments): Attach the LLP agreement and any amendments made to it.
• Latest Income Tax Return (ITR): Provide the latest ITR filed by the LLP.
• Affidavit from All Partners: An affidavit confirming the dissolution of the LLP and the transfer of assets and liabilities to the new company.
• Statement of Accounts: A statement of accounts certified by an auditor, prepared no more than 15 days before the conversion application.
• Details of Objections: Include any objections raised during the newspaper advertisement period.
• Certificate of Incorporation of the LLP: Provide a copy of the LLP’s certificate of incorporation.
• Compliance Certificate: A certificate from a practicing professional confirming compliance with the Indian Stamp Act.
• Affidavit Verifying Lists by Partners: An affidavit verifying the details of partners and the transfer of assets.
• Last Annual Returns: Attach the latest annual return along with its challans.
• Details of Property: A list of movable and immovable properties, including actionable claims, should be provided.

Post-Conversion Compliance

Once the conversion is complete, the following post-conversion tasks should be completed:

• Surrender the LLP’s PAN: The LLP’s PAN must be surrendered, and a new PAN should be obtained for the company.
• Update Registrations: Update any necessary registrations, such as GST, PF, ESIC, and Professional Tax, to reflect the new company status.
• Close the LLP’s Bank Account: Close the LLP’s bank account and transfer the funds to the company’s account.

FAQs About Converting an LLP to a Private Limited Company

1. Is filing Form INC-20A mandatory after conversion?

• • Yes, filing Form INC-20A (Declaration for Commencement of Business) is mandatory for companies with share capital before they can begin operations.

2. Can the LLP continue business after applying for conversion?

• • No, the LLP must cease all business operations except those related to the conversion process.

3. Can the LLP partners hold shares in the new company?

• • Yes, but at least 50% of the shareholding must be retained by the original partners for five years to avail of tax benefits.

4. What happens if objections are received during the advertisement period?

• • Any objections raised must be addressed before proceeding with the conversion.

5. Can an LLP apply for voluntary strike-off before conversion?

• • No, an LLP must be active and compliant to apply for conversion.

6. How long does the conversion process take?

• • The process typically takes 45-60 days, depending on document verification and approvals.

7. Is NOC from secured creditors required?

• • Yes, if the LLP has any loans or liabilities, an NOC from secured creditors is required before submitting the conversion application.

8. What happens if the name reservation expires before the advertisement period ends?

• • An extension for name reservation can be sought to avoid any issues.

9. Is prior regulatory approval required for conversion?

• • This depends on the business sector. If the business operates in a regulated industry, prior approval from the relevant authority may be necessary.

10. Is NOC required from the Registrar of LLPs?

• • While not mandatory, it may be requested in some cases, although it is generally not an issue in the conversion process.

Conclusion

Converting an LLP into a Private Limited Company is a strategic decision that can unlock numerous advantages, including better access to capital, tax benefits, and a more structured governance framework. By understanding the legal, tax, and procedural requirements, businesses can successfully navigate the conversion process and position themselves for growth and success.

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If you have any questions or need assistance with the conversion process, feel free to reach out to me at Contact: 9728828002, Email: cssagarsachdeva@gmail.com