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Conversion of LLP to Private Company

Provision mentioned in the Section 366 of the Companies Act, 2013 and Company (Authorised to Register) Rules, 2014, says that an LLP can be converted into a Private limited Company.

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  • Document Preparation
  • Application Drafting
  • Application filling
  • Government Fees
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Overview of Conversion of LLP to Private Company

There are businesses in India who begin their journey as a Limited Liability Partnership (LLP), but now are keen on converting into a private limited company for more growth and prosperity in business. Provision mentioned in the Section 366 of the Companies Act, 2013 and Company (Authorised to Register) Rules, 2014, says that an LLP can be converted into a Private limited Company.

Before you step into the business of Private Limited Company, there are several requirements which you may need to fulfil for converting an LLP into a Private Limited Company, for instance, it is necessary for a LLP to have seven partners and approval from all partners is must needed. An advertisement is published in both local and national newspaper, No Objection Certificate (NOC) is obtained from the ROC where LLP is registered and then all the incorporation process begins.

Choice of LLP vs Private Limited Company

LLP is majorly suitable for small businesses that have annual sales turnover of fewer than Rs 40 lakhs and a capital contribution of fewer than Rs 25 lakhs. LLPs that satisfy these conditions do not have to go through the audit every year, on the other hand, it is necessary for a private limited company to conduct an audit of its financial statement each year. Though, in case, LLP has an annual turnover of Rs 40 lakhs or a capital contribution of more than 25 lakhs, the need for compliance become almost similar for both the private limited company and LLP, forcing the owners of LLP to convert into a Private Limited Company.

Corporatization has become the need of the current market situation. We live in a world where the ulterior goal of every market is to drift towards one global market removing the barriers between the countries. There are many start-ups and entrepreneurs who are eager to step into corporatization. Follow the below-mentioned steps to initiate the process:

LLP vs Private Limited Company

Benefits of Conversion of LLP into Private Limited Company

  • Preservation of Brand Value

    Conversion of LLP into Private Limited Company facilitates business entities to continue the brand name without making any further efforts on brand advertisements.

  • Carry forward of unabsorbed losses and depreciation

    After the conversion, no expenditure will be incurred on bookkeeping, as the losses and depreciation incurred in LLP will be carried forward on the conversion of entity

  • Employee Stock Ownership Plan to employees

    Conversion of LLP to Private Company facilitates Companies to offer stock ownership and ESOP plans. Such plans help companies to attract efficient employees, as it offers incentive plans for them to work in the company.

  • Easy Fund Raising

    If the company registration process is strict, it helps the company structure to be more credible among others. This leads to easy fundraising from external sources.

  • Separate Legal Existence

    Conversion of company facilitates the separate ownership and management to pay attention to their potential work. The Shareholders assign responsibility to run and operate the company without losing control in form of voting.

  • Limited Liability of Owners

    Conversion prohibits the liability of the owners only to the capital subscribed and unpaid by them.

Reasons for LLP Registration

  • Making small businesses aware with the concept of LLP.
  • Easy to commence and control
  • Gives the advantage of limited liability and also provides flexibility to organize their firm internally.
  • Audit is not needed if an annual sale is more than Rs 40 lakhs and capital contribution does not cross the limit of Rs 25 lakhs.
  • LLP is not bound to pay Dividend Distribution Tax (DDT).
  • It is not necessary for a LLP to conduct Board meeting or annual meeting.
  • Registration process of LLP is simple as compared to Private Limited Company.

Reasons for Private Limited Company Registration

  • LLP does not entertain the concept of shareholders. All the owners in a LLP are considered as Partners in the LLP and are considered as unsuitable for investors such as Venture Capitalists and Private Equity investors who do not possess any desire to indulge in the management of the Company. Private Company is the best choice for investors. If the business is growing then the owners must convert it into a private limited company.
  • FDI is becoming popular in Indian market. A private limited company does not require any approval from the government authorities for FDI while government approval is much needed for FDI in LLP.

Documents Required for Conversion of LLP into a Private Limited Company

  • Address Proof of the applicant
  • Identity Proof of the applicant
  • Passport size photograph of the applicant

Documents required at the time of filing of Form URC-1

  • Details such as name, address and shares held by the members along with the member’s list.
  • Furnish the details such as Name, Address, DIN, passport number along with an expiry date of all the directors of the Private Limited Company.
  • Also, file all mandatory documents with the Registrar of Companies for the registration of the company
  • Copy of Limited Liability Partnership agreement with a list attached mentioning the name and address of the partners of LLP and a certified copy of registration which is duly verified by at least two designated partners of LPP is required.
  • The statement with the details of the nominal share capital of the firm and the number of shares separated the number of shares taken and the amount remitted for each share and the name of the firm with the word private limited to be provided.
  • No-objection certificate from all the creditors has to be provided.
  • Duly certified accounts statement of the company by the auditor, which should not be less than six days from the date of application and the copy of the newspaper advertisement is required.

Process of Conversion of LLP into a Private Limited Company

Process of Conversion of LLP into a Private Limited Company

Let’s dig in further and discuss each process in detail.

  • Name Approval

    Obtain ‘Name Approval’ from the ROC (Registrar of Companies) by giving an application in e-format.

  • Securing DSC and DIN

    It is necessary for all the seven directors of the company to obtain Digital Signature Certificate (DSC) and Director Identification Number (DIN). DIN can be obtained by filing an application form on MCA portal. Central government approves the application of DIN through the office of regional director, the ministry of corporate affairs. Before submitting the form make sure to self-attest it along with address proof and identity proof with one passport size photo of the applicant.

  • Filing of Form URC-1

    Once you have obtained the approval of name from Registrar of Companies, the applicant is required to prepare and file the form No URC-1.

  • Memorandum of Association and Article of Association

    Formulate Memorandum of Association (MOA) and Articles of Association (AOA) and submit it to the Registrar of Companies. Once you have obtained approval of the company name, the Registrar of Companies issues the form URC-1.

    The primary reason of conversion of LLP into Private Limited Company is the growth in business. LLP framework does not fit for venture capitalists or for private equity, also investors are more comfortable in investing in private limited company. For the purpose of FDI also, private limited companies are considered to be as the preferable choice over LLP. Hence, the conversion of LLP to private limited company can be a wise decision and shall be performed by taking all prescribed regulations into consideration.

Frequently Asked Questions

Provision mentioned in the Section 366 of the Companies Act, 2013 and Company (Authorised to Register) Rules, 2014, says that an LLP can be converted into a Private limited Company.

It offers limited liability, offers tax advantages, can accommodate an unlimited number of partners, and is credible in that it is registered with the Ministry of Corporate Affairs (MCA). At the same time, it has less compliance than a private limited company and is also significantly cheaper to start and maintain.

File an affidavit, duly notarised, from all the partners to provide that in the event of registration, necessary documents or papers shall be submitted to authority with which the firm was earlier registered, for its dissolution as partnership firm consequent to its conversion into private limited company.

Unlike private limited company, you cannot raise equity funding in llp from any person other than its partner. However debt funding such as term loan, overdraft from bank is possible.

In a private limited company the number of members in any case cannot exceed 50. Another disadvantage of private limited company is that it cannot issue prospectus to general public.

There is no minimum capital requirement in LLP. An LLP can be formed with the least possible capital.

  • Gives the advantage of limited liability and also provides flexibility to organize their firm internally.
  • Audit is not needed if an annual sale is more than Rs 40 lakhs and capital contribution does not cross the limit of Rs 25 lakhs.
  • LLP is not bound to pay Dividend Distribution Tax (DDT).

LLP does not entertain the concept of shareholders. All the owners in a LLP are considered as Partners in the LLP and are considered as unsuitable for investors such as Venture Capitalists and Private Equity investors who do not possess any desire to indulge in the management of the Company. Private Company is the best choice for investors. If the business is growing then the owners must convert it into a private limited company.

All partners are liable for statutory compliances under Partnership Act Only designated partners are liable for statutory compliances as are required under LLP Act (not necessarily in respect of other Acts). He can also give loans to LLP. Every partner of firm is agent of firm and also of other partners.

In case of more than 7 partners in the LLP at the time of conversion into Company then Company have to file Scan copy of physically prepared MOA & AOA.

In above mentioned situation company have to file 1. URC-1 and 2. INC-32. No need of INC-33 and INC 34 in the above mentioned situations.

Three DIN can be applied through SPICe form.

  • Preservation of Brand Value
  • Carry forward of unabsorbed losses and depreciation
  • Employee Stock Ownership Plan to employees
  • Easy Fund Raising
  • Separate Legal Existence
  • Limited Liability of Owners

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