Indian laws provide various options for setting up a business entity. In order to restrict liability exposure, individual may choose setting up of Limited Liability Partnership. But after some years when business gets perfectly established and becomes profit-making entity, he may wish to convert LLP into Private limited company for inculcating equity or for the purpose of more growth.
Here through this article, we will provide the provision of Companies Act, 2013[1], dealing with the requirements and provisions required for the conversion process of Limited Liability Partnership into Private Limited Company.
What is Limited Liability Partnership Company?
Section 3 of Limited Liability Partnership Act, 2008[2] defines Limited Liability Partnership as;
Limited Liability Partnership to be body corporate.—
- An LLP is a corporate body incorporated under LLP Act, 2008, is a legal entity which separates legal entity from that of its partners;
- It shall have perpetual succession;
- Further, change in partner of Limited Liability Partnership shall not affect the rights or liabilities or the existence of the LLP.
Whereas, Private Limited Company has been defined under Section 2 Clause 68 of Companies Act, 2013
Private Company” means a company having a minimum paid-up share capital of one lakh rupees or such higher paid-up share capital as may be prescribed, and which by its articles,—
- Restricts the right to transfer its shares;
- Except in a case of One Person Company, Limits the number of its members to two hundred: Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this clause, be treated as a single member;
What to choose between LLP and PVT LTD Company?
- For the small businesses which are looking to have business for a reasonable time and makes the annual turnover less than Rs. 40 Lakhs, and capital contribution of fewer than 25 lakhs.
- LLP’s fulfilling the above conditions are not required to conduct an audit every year, whereas Private Limited Companies irrespective of their turnover requires an audit of financial statements. To meet the necessary compliances, private companies have to bare additional cost and compliances.
- However, in the case where LLP crosses an annual turnover of Rs.40 lakhs or crosses the capital contribution of more than Rs.25 lakhs, the compliance requirements for LLP and Private Limited Company become almost same. Hence, therefore incorporating Private Company is a better choice.
What are the advantages of conversion of LLP to 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.
Read our article:Comparison between OPC and LLP: Advantage of One Person Company
What is the procedure of conversion of LLP to Private Limited Company?
Below mentioned procedure explains the conversion of an LLP into Private Limited Company:
Obtain Name Approval
At very first stage, the company needs to obtain name approval from the Registrar of Companies (ROC) by submitting Reserve Unique Name (RUN) form, which is available in e-format.
Securing DSC and DIN
Secondly, after obtaining name approval, applicant is required to apply for the Digital Signature Certificate (DSC) and Director Identification Number (DIN), against the member of LLP. The member will further be the director of the Private Limited Company after conversion.
Further, if there is non-applicability of DIN, the applicant needs to furnish the details in regards to address proof, identity proof and photographs along with the application. Therefore, applicant can obtain DIN directly through filing incorporation form.
Filing of Form URC-1
Further, applicant is required to file Form URC-1, along with the following list of documents;
- 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.
Memorandum of Association & Articles of Association
Applicant is required to draft Memorandum of Association (MOA) and Article of Association (AOA). Further, submit to the registrar of companies. Once the company name gets approved, ROC will sanction the form URC- 1.
Conclusion
The main reason to convert LLP to Pvt. Ltd Company is more growth in business. LLP structures are not considered to be suitable for the venture capitalists or for private equity, as investor feels comfortable to invest 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.
Read our article: Partnership Firm Registration: Definition, Regulations, and Registration Procedure
