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Overview of Conversion of LLP to Private Company

There are businesses in India that 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.

The Limited Liability Partnership Act, 2008 has no provision related to the conversion of an LLP into a Private Limited Company, but Section 366 of the Companies Act, 2013 and Company (Authorised to Register) Rules, 2014 states that an LLP can be converted into a Private Limited Company.

LLP is good for small businesses with an 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 an audit every year; on the other hand, a private limited company must 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 becomes almost similar for both the private limited Company and LLP, making the owners of LLP think about converting into a Private Limited Company.

Reason for Conversion of an LLP into a Private Limited Company

The followings are the reasons for converting an LLP into a Private Limited Company:

  • LLP converts into a private company for growth and to extend its existing business.
  • LLP can attract only a few types of investors, so to attract more investors, such as foreign investors or equity investors, they go for conversion.
  • The LLP is converting for issuing equity share capital in the private limited Company.
  • One of the reasons for conversion is to avoid capital tax gain.
  • To carry forward all the unabsorbed losses and depreciation of the last year.
  • For continuing with the same brand name and goodwill of their LLP, the LLP decides to convert into a Company.

Pre-requisite conditions for the conversion of LLLP into a private company

The conditions to be fulfilled before moving forward towards the conversion of an LLP into a Private Limited Company are as follow:

  • The Limited Liability Partnership must have at least two partners who are required for incorporation of a Private Limited company.
  • All the partners should have approved the conversion of LLP.
  • The LLP should have complied with all the required returns.
  • Publication related to such conversion of LLP into a Private Company, in at least two newspapers, one in English Language and another in any regional language newspaper of the place of registered office.
  • No Objection Certificate from the Registrar.

Benefits of Conversion of LLP into Private Limited Company

  • Conversion of LLP into a Private Limited Company facilitates business entities to continue the brand name without making any further efforts on brand advertisements.
  • In a Private Limited company there, 100% Foreign Direct Investment (FDI) is allowed; thus, any foreign investor (entity or person) can directly invest in the Company.
  • 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 the entity.
  • Conversion of LLP to Private Company facilitates Companies to offer stock ownership and ESOP plans. Such plans help companies attract efficient employees, as it provides incentive plans for them to work in the Company.
  • A Private Limited Company or Public Company can only raise funds from venture capitalists or angel investors, and 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.
  • Conversion prohibits the liability of the owners only to the capital subscribed and unpaid by them.
  • There is no capital gain tax in a private limited company.
  • Existing LLP has just replaced y the Private Limited Company by adding the "Pvt. Ltd." at the end of its name.

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Documents Required for Conversion of LLP into a Private Limited Company

The List of documents required for conversion is as follows:

  • Address Proof of the applicant.
  • Identity Proof of the applicant.
  • Passport size photographs of the applicant.
  • Copy of latest returns file by the Limited Liability Partnership.
  • The NOC was obtained from members of LLP and the Registrar.

The List of documents required at the time of filing the Form URC-1:

  • List of members with their details such as name, address, the share held by them, etc.
  • List of the persons who are first directors of the Company along with their details such as name, address, DIN, Passport number, etc.
  • An affidavit from all first directors that he is not disqualified from being a director of the Company under section 164 of the Companies Act, 2013 and that the documents submitted to the Registrar for registration of the Company have true and complete information.
  • List of partners of the Limited Liability Partnership along with their details such as name, address, etc.
  • A copy of the Limited Liability Partnership agreement and certificate of registration which are duly verified by at least two members/partners of the LLP.

A statement indicating the followings:

  • The number of all the shares of the Company with the detail of the ratio in which they are divided.
  • The number of all the shares taken and the amount that is involved in every share.
  • The name of the same LLP with the addition of Pvt. Ltd. in the end.
  • The written consent or No Objection Certificate (NOC) from all the creditors of the LLP.
  • The account statement of the private Limited Company duly certified by the auditor should be six days preceding the date of application.
  • A copy of the newspaper in which the publication related to such conversion has been made.

Process of Conversion of LLP into a Private Limited Company

Here are details of each step of the procedure required for the conversion of LLP into a Private Limited Company:

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 the Ministry of Corporate Affairs portal. The Central Government approves the said application of DIN through the office of the 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 the approval of the name has been obtained from the ROC, the applicant is required to prepare and file Form No URC-1 along with the all required documents.

Memorandum Of Association and Article of Association

Once the name of the Company is approved, and the Registrar scrutinises the Form no. UGC-I, the Registrar of Companies, issues the form URC-1; the Company needs to form its MOA and AOA.

After the following steps are completed, the LLP will be converted into a Private Limited Company, and the ROC will issue the Certificate of Incorporation of such a new Private Limited Company.

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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 and 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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