Process for Conversion of Private Limited Company into LLP in India

PROCESS FOR CONVERSION OF COMPANY INTO LLP

Section-56 of LLP Act- 2008, Third Schedule

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

A. Conversion Of Private Limited Company Into LLP:

As all of us are aware that Companies Act-2013 came into force w.e.f. 01st April, 2014. Under Companies Act, 2013 there are very much compliances and many complications, which are cost consuming for small enterprises. Therefore, Small enterprises are thinking to switch their Companies into Limited Liability Partnership (LLP’s) Firm.

A registered limited Company in India (Private or Public) has a lot of complex formalities and incurs additional overheads for managing affairs including mandatory board meeting, maintenance of statutory records, filling of e-forms with MCA etc. Absence of such mandates for LLP combined with advantages such as non-applicability of dividend distribution tax on profit repatriation, transfer of profit rules and deemed dividend profit issues, MAT provisions (discussed below).

In India, formation, registration, and regulation of an LLP is exclusively governed and controlled by the rules, provisions, and regulations provided in the LLP Act of 2008 and the LLP Rules of 2009. The Ministry of Corporate Affairs (MCA), Government of India, and its well-equipped web portal [www.llp.gov.in] is directly concerned for establishing an LLP.

B. How To Take Decision Of Conversion Of Company Into LLP (Benefits Of LLP As Compared To Company)

For Conversion of Private Limited Company and Unlisted Public Company into LLP we must do Cost and Benefit analysis of same.

BENEFITS OF LLP AS COMPARED TO CORPORATE FORM:

COMPARATIVE ANALYSIS

C. Comparative chart of compliances to be made by a Company and LLP

MINIMUM COMPLIANCE LEVEL & COST SAVING:

After commencement of Companies Act, 2013 cost of compliance has increased many fold in the case of Companies, while a LLP has to comply with a very few compliances.

Comparative chart of compliances to be made by a Company and LLP is given below.

D. Benefits Under Income Tax Law:

√ Saving of Dividend Distribution Tax. (There is no provision of Dividend Distribution Tax in LLP)

√ Saving of MAT Tax. (Because LLP don’t give credit of MAT)

√ Saving of Income Tax due to Interest and remuneration payable to partners as salary payable to directors.

INCOME TAX PROVISIONS IN DETAIL:

The Finance Act, 2009 amended the Income-tax Act, 1961 to clarify that LLPs will be taxed on the same lines as general/ traditional partnership firms. However the Tax implications upon the conversion of a Private Company or an unlisted Company into LLP were not clear by The Finance Act, 2009 and leaves doubts;

√ The levy of Capital Gain Tax on Transfer of assets to LLP on conversion.

√ Availability of carry forward of losses and of unabsorbed depreciation to the successor LLP.

√ Availability of MAT credit to the successor LLP.

Lack of clarity on above matters was a roadblock to conversion of Company into LLPL. But The Finance Bill, 2010 Finance ministry addressed the above issues and opened the doors of conversion of Company to LLP. These amendments took effect from assessment year 2011-2012.

E. Is there any liability on account of capital gain tax on transfer of assets and liability in a Company on conversion into LLP?

The finance Act, 2010 has inserted a new Clause (xiiib) in section-47 and a new sub-section (4) in section 47A of the Act with effect from assessment year-2011-12.

If the following conditions are satisfied then the transfer of capital asset or intangible asset to LLP or any transfer of share or shares held in Company by a share holder on conversion of Company into LLP shall not be regarded as transfer:

√  If all the above conditions (i) to (vi) 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 (i) to (vi) is not complied with, then as per provisions of Section 47 A (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.

F. Is MAT (Minimum Alternate Tax) benefit is available to successor LLP?

The Finance Act, 2010 has inserted a new sub- section (7) in section 115JAA to provide that MAT credit of the predecessor Company shall not be available to the successor LLP. Thus, it may make sense for the Company to first avail the MAT credit before converting to LLP.

LLP doesn’t have the concept of MAT. LLP have the concept of AMT (Alternate Minimum Tax). Therefore, the succeeding LLP will not be allowed the credit of MAT paid by the preceding Company.

G. Cost of Conversion of Company into LLP:

Cost on conversion of Company into LLP which will be incurred by Company will be as under:

√  Unabsorbed Depreciation and Accumulated Loss not carried over {if, all the conditions {(i) to (vi) above} in clause xiiib of section 47 are not satisfied.}

√  Capital Gain on transfer of capital asset or intangible asset to LLP or any transfer of share or shares held in the Company by a shareholder on conversion of a private Company or unlisted Company into an LLP. {If, all the conditions {(i) to (vi) above} in clause xiiib of section 47 are not satisfied.}

√  Loss of Credit of MAT. {LLP don’t have concept of MAT. LLP have concept of AMT (Alternate Minimum Tax). Therefore, the succeeding LLP will not be allowed the credit of MAT paid by the preceding Company.}

√  Stamp Duty on Transfer of Immovable Assets, If any.

√  Cost on transfer of Brand Name, Patent and Trade Mark on conversion, if any.

√  Cost of forming of LLP for the purpose of conversion.

H. PROCESS OF CONVERSION OF COMPANY INTO LLP

a. BOARD MEETING:

• Call meeting of board of Director.
• Pass Resolution for Conversion of Company into LLP.
• Pass Resolution to authorize any director to Apply for Name of LLP.

b. APPLICATION FOR NAME AVAILABILITY:

File e-form RUN with ROC.

Attachments: Board Resolution passed by the Company approving the conversion into LLP shall be attached with the aforesaid form

c. Obtain name Approval Certificate from ROC.

d. DRAFTING OF LIMITED LIABILITY PARTNERSHIP 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

It is not necessary to have the LLP Agreement signed at the time of incorporation, as the details of the same needs to be filed in e-form 3 within 30 days of incorporation but in order to avoid any dispute between the partners as to the terms & conditions of the agreement after the conversion into LLP.

e. FILING OF INCORPORATION DOCUMENTS: File E-Form-FiLLiP with ROC along with following ATTACHMENTS:

> Proof of Address of Registered office of LLP.

> NOC for using place as registered office.

> Subscription sheet signed by the promoters.

> Detail of LLP(s) and/ or Company(s) in which partner/ designated partner is a director/ partner

> Consent of Designated Partners in form -9

f. FILING OF APPLICATION FOR CONVERSION:

File E-FORM- 18 with ROC along with following ATTACHMENTS:

> List of shareholders.

> Incorporation Documents & Subscribers Statements in Form 2 filed electronically.

> Statement of Assets and Liabilities of the Company duly certified as true and correct by the auditor.

> List of all the Secured creditors along with their consent to the conversion in form of NOC.

> Approval of the governing council (In case of professional private limited companies)

> NOC from Income Tax authorities and Copy of acknowledgement of latest income tax return.

> Approval from any other body/authority as may be required.

> Particulars of pending proceedings from any court/Tribunal etc.

> Copy of Latest ITR.

> Declaration by Designated Partner part B

g. After all formalities and filings been complied with by the applicants and approved by the Ministry, REGISTRAR OF LLP TO ISSUE A CERTIFICATE OF REGISTRATION in form no. 19 as to conversion of the LLP. The Certificate of Registration issued shall be the conclusive evidence of conversion of the LLP.

h. FILING OF E-FORM-3:

This form provides information in respect to the LLP Agreement entered into between the partners.

ATTACHMENT: LLP Agreement

i. CERTIFICATE OF INCORPORATION AS LLP FORM ROC.

I. Event Based Compliance by LLP:

J. Regular Compliance by LLP:

L. Table Of Steps Of Conversion of Company into LLP

(Author – CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES Company Secretary in Practice from Delhi and can be contacted at [email protected]).