Introduction

Conversion of a Private Limited Company into LLP is allowed under the provision of Section 56 (Third Schedule) of the LLP Act, 2008.

Benefit

There are a large number of benefits to govern a business having LLP as legal form as compared to Private Limited Company. LLPs involve the best practices of private companies and also protect the freedom of partners, giving them the ability to decide the norms of the LLP. Some of the benefits are as follows:

  • The maximum limit of shareholders is not limited in an LLP. The LLP can have any desired number of shareholders. However, the maximum number of shareholders is fixed to 200 in a private company.
  • Management of funds depends entirely on the partners’ wish.
  • The internal structure of a LLP is flexible as compared to that of a company.
  • LLP does not have to pay the Dividend Distribution Tax which is to be paid by the companies. Also, LLPs save MAT tax and income tax due to interest and remuneration payable to partners.
  • Apart from this, LLPs include lesser forms and are easier to form run and manage.
  • The Finance Bill 2010 stated that the capital gain tax will not be levied on conversion to an LLP if certain conditions are adhered to.

Note:

  • As per provisions of section 40(b), 1961 of the IT Act, remuneration paid to the partners is allowed as deduction as follows:

On Rs. 3,00,000 of Book Profit (BP) or loss: Rs. 1,50,000 or rate of 90% of BP whichever is higher

On Balance: 60% of BP

  • Interest paid to partners shall be capped to maximum of 12% simple interest deduction.
  • Exemption from Capital Gains is allowed only if:

I. all the assets and liabilities of the company immediately before the conversion become the assets and liabilities of the limited liability partnership;

II. all the shareholders of the company immediately before the conversion become the partners of the limited liability partnership and their capital contribution and profit sharing ratio in the limited liability partnership are in the same proportion as their shareholding in the company on the date of conversion;

III. 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 limited liability partnership;

IV. the aggregate of the profit sharing ratio of the shareholders of the company in the limited liability partnership shall not be less than fifty per cent at any time during the period of five years from the date of conversion; (i.e you can take new partners in the LLP, but all the previous shareholders who became partners in LLP share should remain at least 51% for 5 years from conversion.)

V. 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 60 lakh rupees; and

VI. 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 three years from the date of conversion.

VII. 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 5 crore rupees. 

Requirements for conversion of company into LLP

  • Every member of the company must agree with the decision of conversion.
  • All the members become the partners of an LLP.
  • The latest copy of Income tax return is to be filed with ROC.
  • All the secured creditors of the company must also agree with the conversion.
  • Under Companies Act, no prosecution should have been initiated procedure to be followed

Steps for Conversion:

1. Obtain Designated Partner Identification Number (Form DIR-3)

The designated partners, who do not have a DIN, must file for obtaining DPIN. The minimum number of partners for the incorporation of an LLP is 2 and also one of them must be Indian. But it is very important to file for a DSC before applying for the DIN.

2. Meeting of board of directors of the Company

√ Pass a resolution by majority of the members for the conversion of the company to an LLP

√ Pass Resolution to authorize any director for application of the Name of LLP.

3. File Form 1 (RUN-LLP)

Form 1 is to be filled for registering the name of the company. The name of the company can be changed into the name of the LLP.

The following information is to be entered in Form 1:

√ Name of the partners

√ Address of the office of the LLP

√ Proposed business activity of the LLP

√ Capital contributed by the partners

√ Importance of the chosen name

The resolution of the company authenticating the conversion of the company into an LLP is to be attached along with the form. Also, the form must be digitally signed by the applicant using DSC.

4. Draft the LLP agreement 

The mutual rights of the partners and those of the LLP and partners are decided by a mutual agreement between the partners or between the LLP and the partners. This agreement is called LLP Agreement.

Contents of Agreement are:

√ Name of LLP

√ Name of Partners & Designated Partners

√ Form of contribution

√ Profit Sharing ratio

√ Rights & Duties of Partners

√ Proposed Business

√ Rules for governing the LLP

5. File Incorporation Documents in EForm-2 (FiLLiP)

This form basically contains the location of the office, the contribution of every partner and other details of the directors.

√ This form has basic information about the LLP as given in Form 1.

√ Location of the LLP’s office.

√ Capital contribution of the designated partners.

√ Number and name of LLPs the director are already a part of.

Attachments with EForm 2 are:

√ A copy of Board Resolution of the company which is becoming designated partner through a nominee.

√ Proof of the registered office.

√ Subscriber sheet in the prescribed format.

6. File EForm-18 for Application for Conversion

EForm-18 is the main form for the conversion of company into an LLP. It is required to be filed with eform-2. This form has information about the conversion of a company such as:

√ Whether any permission is needed for conversion?

√ Whether all shareholders have become partners of the LLP?

√ Whether all shareholders have agreed/consented to conversion?

√ Whether any security interest in the assets is subsisting or in force?

√ Whether any earlier application for conversion to LLP was refused by the registrar?

√ Whether any prosecution or proceeding is initiated against the company?

√ Whether the company has filed up to date Income Tax Returns?

√ Whether the company has filed latest financial statements with ROC?

√ Whether there are secured creditors in the company? 

Attachments with LLP EForm-18

√ Copy of acknowledgment of latest income tax return

√ List of all the secured creditors along with their consent (Mandatory if where there are secured creditors of the company and consent of all the secured creditors for conversion of company into limited liability partnership has been obtained)

√ Approval from any other body/ authority (Mandatory if applicable approvals from the concerned body/ authority or authorities is required and have been obtained)

√ Statement of Assets and Liabilities of the company duly certified as true and correct by the auditor (Mandatory, the statement should contain the latest place as on date of application for conversion)

√ Statement of consent of shareholders of the Company.

Prerequisites for filing LLP EForm-18

√ No e-Forms should be pending for payment or processing in respect of the company.

√ No open (unsatisfied) charges should be pending against the company.

√ The company should be having share capital.

√ The company should not be a ‘Section 8 Companyunder Companies Act, 2013.

√ At least one balance sheet and annual return should have been filed by the company after its incorporation.

7. File EForm-3

This form requires you to enter details of the LLP Agreement, mutually entered by the partners of the LLP. To be filed within 30 days of the incorporation of LLP.

8. Obtain certificate of incorporation

9. EForm-14

The eForm-14 is not required to be filed after filing eForm-18. Upon approval of eForm-18 itself, the status of the company will be changed to ‘Converted to LLP’.

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