LLP Conversion

With the increasing awareness and simplicity in incorporating LLP, the LLP growth rate is increasing steadily. In the financial year 2014 -15, LLP registrationincrease by 55%. Most of the small business entrepreneurs are opting for LLP as it is easy to start with a minimum capital, customized LLP agreement, tax benefit and minimum compliance. As the LLP grows, the requirement of equity capital arises. Hence, many entrepreneurs feel the emergent need the LLP conversion into a company for the sake of growth and expansion of business by raising capital through equity funds.

With the growth in business, need for expansion, equity capital requirement, etc., LLPs want to be converted into Private Limited Company. Although, the conversion is not currently possible as both LLP Act, 2008 and Companies Act, 2013 are still on the subject matter. Many businesses started as LLP may now want to convert to a private limited company due to growth in business or for infusion of equity capital. However, the LLP conversion into Private Limited Company is currently not possible in India, as both are silent about the matter.

As per the Ministry of Corporate Affairs:

“LLP conversion into the private limited company would not be allowed under LLP Act, 2008. However, enabling provisions would be required to be made under the Companies Act for such conversion. Necessary action in this regard would be taken when Companies Act would be revised.”

As per Companies Act, 2013:
“COMPANIES CAPABLE OF BEING REGISTERED (SECTION 366):
For the purpose of this Part the “company” includes any partnership firm, limited liability partnership, cooperative society, society or any other business entity formed under any other law for the time being in force which applied for registration under this Part.”

The LLP Act, 2008 does not have any provision for converting LLP into a private limited company. However, the Ministry of Corporate Affairs website defines that an enabling provision would be made when Companies Act is revised. In the newly introduced Companies Act, 2013, LLP is mentioned among business entities that can be registered and become a Company. However, no clarification regarding the procedure for conversion of LLP into Private Limited Company is stated which leaves the hoping LLP into waiting for queue. Therefore, currently, a LLP cannot be converted into a Pvt limited company. But in near future, as more LLP grows, the chance of introduction and of the procedure is bright.

How to convert an LLP into a Private Limited Company in India?
Updated on Dec 06, 2017 - 04:08:54 PM

Several businesses started in India as Limited Liability Partnership (LLP), may now wish to convert into a private limited company for more growth in business or for infusing equity capital. An LLP can be converted into a Pvt. Ltd. company as per the provisions contained in Section 366 of the Companies Act, 2013 and Company (Authorised to Register) Rules, 2014.

However, there are various requirements which need to be satisfied for converting an LLP into a Private Limited Company, for instance, an LLP must have at least 7 partners, approval from all the partners is required, advertisement in newspaper is to be done in a local and a national newspaper, a No Objection Certificate (NOC) is required from the ROC where such LLP is registered and then all the incorporation process has to be undertaken which includes:

Approval of name
Name Approval has to be obtained from the ROC (Registrar of Companies) by submitting an application in e-format. To apply for this, you need to choose various items that are mentioned in the form INC-1. The name once accepted by the authority will be valid for 60 days.

Securing DSC and DIN
In case all 7 members, who are future directors of the company after conversion, do not have the Digital Signature Certificate (DSC) and Director Identification Number (DIN) for all the future directors of the company must be obtained. For obtaining the DIN, an application form must be filed on MCA portal. DIN application is processed & approved by central government via the office of regional director, the ministry of corporate affairs. The form must be accompanied by self-attested address proof and identity proof with 1 recent passport size color photo of the applicant. All the required documents should be attested by a practicing cost accountant or a practicing chartered accountant or a practicing company secretary.

Filing form no. URC – 1
After getting the approval of name from Registrar of Companies, the applicant must prepare & file the form No URC-1 in addition to the following documents.

List of the members with various details viz. names, address, shares held by them appropriately, etc.
List of the first directors of the private company with various details viz. names, address, the DIN, passport number with an expiry date, etc.
An affidavit from every person proposed as first directors, that he is not banned to be a director under section-164 and all the necessary documents filed with the registrar for the registration of firm must contain information which is complete and correct & true to be best of his belief and knowledge.
A list including the names & addresses of partners of LLP and a copy of LLP agreement & certificate of registration duly verified by two designated partners of LLP must be enclosed.
A statement indicating the following specifications q) the nominal share capital of firm & the number of shares into which it is separated b) the number of shares taken & the amount paid for every share c) the name of the firm, with the addition of word Limited or private limited is required.
A written consent or No objection certificate from all creditors.
Copy of newspaper advertisement, statement of accounts of the company which must not be 6 days preceding the date of the application and it must be duly certified by the auditor.
Memorandum of Association & Articles of Association:
Memorandum of Association (MoA) & Articles of Association (AoA) is to be formulated and then filed with RoC after getting the name approval and sanction of form no. URC-1 – from the registrar.

The conversion process provides certain tax benefits, however for availing the same several additional requirements needs to be met, for instance, maintaining the same shareholding by the partners as was in the previous LLP when the conversion takes place, for five years from conversion the former partners of such LLP who are now shareholders in the newly formed company cannot in total have shareholding less than 50 percent.

There is another option available for the LLP which is to establish a separate private limited company and after that get the whole business transferred to the private company with the help of a written agreement, in such case the restrictions mentioned above such as need for minimum 7 partners, newspaper publication, etc. are not needed to be met. However, in this situation, there is a levy of capital gain tax. Moreover, stamp duty implication is also applicable to such transfer.

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