By converting a Private Limited Company into a Limited Liability Partnership (LLP), a business can restructure itself to take advantage of an LLP structure while continuing to conduct its current business.
In contrast to a Private Limited Company, an LLP offers its participants the advantages of limited liability.
Changing from a Private Limited Company into an LLP can be difficult and time-consuming.
It entails receiving the required clearances and approvals, compiling and submitting several pieces of paperwork, and adhering to legal and regulatory regulations.
Step for Conversion of Private Company into LLP
The conversion process is comprehensive and involves several steps. Here is a summary of each step that is required to be undertaken.
- Stakeholders must sign a No Objection Certificate (NOC) for the company. This includes members, directors, banks, and other stakeholders. The NOC attests that none of these parties is opposed to the conversion. The business must send a letter asking for the NOC and a copy of the board of directors' resolution converting the private limited company to an LLP.
- Obtain shareholder approval: The corporation needs the shareholders' consent to proceed with the conversion procedure. A special resolution must be approved by a 75% vote of the shareholders present and voting at the company's annual general meeting.
- The business must apply to the Registrar of Companies (ROC) to get the required permissions and certifications. Along with the LLP agreement, statement of assets and liabilities, and other pertinent documents, the company must submit Form 18, which contains information on the company's directors, shareholders, and registered office address. This process can be confusing and time taking. It is always advisable to seek professional help in procedures like these. We hire specialists at Especia, which will make sure that you have a hassle-free and seamless experience.
- A new Certificate of Incorporation for the LLP must be obtained by applying with the Ministry of Corporate Affairs (MCA) after the ROC has approved the conversion. Along with the fees and other necessary paperwork, the business must submit Form 2, which includes information on the LLP's partners, registered office address, and LLP agreement.
- A new Permanent Account Number (PAN) and Tax Deduction and Collection Account Number (TAN) for the LLP must be obtained after the company receives a new Certificate of Incorporation. To receive these figures, the corporation must make an application to the Income Tax Department.
- Update records: To reflect the change in entity type, the business must update its records, including bank accounts, licenses, and permits. The business must also update its website, letterheads, and other communication tools to reflect the new organization type.
- Stakeholders must be informed about the conversion of the business, including customers, vendors, and workers. All parties involved in the business must receive a written notification alerting them of the conversion and the new LLP registration number. The business must inform its business partners of the change in corporate type and, if necessary, supply them with the new LLP agreement.
Requirements for a company to be converted into LLP
To be eligible for conversion of private company into llp, the Private Limited Company must meet the following criteria:
- At the time of the application, the corporation has no security interest in any of its assets.
- The only people who will be the LLP's partners are the company's shareholders.
- The company must be a registered Private Limited Company under the Companies Act, 2013 or the Companies Act, 1956.
- The company must not have any outstanding liabilities or dues. Before initiating the conversion process, it must have cleared all its debts, including taxes and other statutory dues.
- The company must have all the necessary approvals and clearances from its stakeholders, including creditors, banks, and other parties.
- The company must have at least two directors at the time of conversion. The directors must also be designated partners of the LLP.
- The company must have a valid and active DIN (Director Identification Number) and DSC (Digital Signature Certificate).
- The company must have a registered office address.
- The company must comply with all legal and regulatory requirements, including filing annual returns and financial statements with the ROC.
It is important to note that the conversion process may not be suitable for all companies, and the decision to convert should be based on a careful analysis of the benefits and drawbacks of the LLP structure.
Documents Required for the Conversion Process
- Approval for the company's conversion into an LLP in the specified format by each shareholder.
- Document of incorporation in Form 2.
- Form 3: LLP application and incorporation declaration.
- Receipt or letter of approval from the tax authorities.
- Statement of the company's assets and liabilities.
- A list of all the creditors, signed by each.
- Acceptance by any other nation.
- Authorisation to make a declaration
- Any optional attachments.
Certificate of registration
Within 15 days of the conversion date, the LLP must inform the registrar that the company has been converted into an LLP.
The Registrar will issue a certificate of registration upon the completion of the necessary procedures.
The private limited company may appeal to the Tribunal if the Registrar rejects conversion. If properties are registered in the company's name, the LLP must inform the relevant authorities of the conversion details and provide them with the LLP's information.
Effects of the conversion
Some effects of converting a private limited company into an LLP include the following:
It will be assumed that the private corporation has been disbanded.
- The private limited company's name will be struck from the Registrar of Companies' list.
- All of the private limited company's properties, assets, interests, rights, privileges, liabilities, and responsibilities are transferred to the LLP at conversion.
- Existing responsibilities, commitments, agreements, contracts, and continuous employment are unaffected by the conversion.
- The Limited Liability Partnership will not immediately inherit any permits or licenses that were granted to the Private Limited Company and were in effect before the conversion date. The license's provisions will govern this situation.
Advantages of the conversion
Limited liability: LLPs provide limited liability protection to the partners, which means that their assets are protected from business liabilities.
- Separate legal entity: LLPs have a separate legal entity from their partners, which means that the LLP can enter into contracts, sue, and be sued in its name.
- Flexibility: LLPs provide flexibility in terms of management and ownership. Partners can manage the business as per their mutual agreement, and they can also change the terms of the agreement with the consent of all partners.
- Tax benefits: LLPs are taxed as a partnership, which means that they are not subject to dividend distribution tax, minimum alternate tax, and surcharge on income tax.
- Cost-effective: LLPs have fewer compliance requirements than companies, which means that they are generally less expensive to operate and maintain.
- No minimum capital requirement: Unlike companies, LLPs do not have a minimum capital requirement, which makes it easier for entrepreneurs to start a business.
- Easy to wind up: LLPs can be wound up easily and quickly compared to companies, which require a more complex process.
Drawbacks of the conversion.
- Limited growth potential: LLPs may not be suitable for businesses that have high growth potential, as they may face limitations in raising funds or attracting investors.
- Limited ownership structure: LLPs have a restricted ownership structure, with a maximum of 200 partners. This may limit the ability to bring in new partners or investors.
- Limited exit options: LLPs may have limited exit options for partners, as there is no stock market for LLPs. Partners may need to buy out other partners or sell their shares to a third party, which may be challenging.
- Compliance requirements: While LLPs have fewer compliance requirements than companies, they still need to comply with various statutory requirements, such as filing annual returns and tax returns.
- Perceived credibility: Some stakeholders may view an LLP as less credible than a company, which may affect the ability to attract customers, vendors, or investors.
- Change in entity status: Conversion to an LLP results in a change in the entity status, which may require updates to contracts, agreements, licenses, and permits.
The decision to convert should be based on a careful analysis of the benefits and drawbacks of the LLP structure, and the eligibility criteria and conversion process should be carefully followed.
It is important to seek professional advice and guidance to ensure a smooth and successful conversion process.
Especia gives its clients unparalleled service, which ensures a smooth, hassle-free conversion process.
FAQs Related to Conversion of Private Company into LLP
1. Is it mandatory to dissolve the Private Limited Company before converting it into an LLP?
No, it is not necessary to dissolve the Private Limited Company before conversion. The LLP can be formed while the Private Limited Company continues to exist until the ROC approves the conversion.
2. Can a Private Limited Company convert to an LLP if it has any pending legal disputes or litigations?
Resolving all legal disputes or litigations before initiating the conversion process is recommended. The conversion process may not be approved if there are any pending legal disputes or litigations.
3. What are the tax implications of converting a Private Limited Company into an LLP?
Conversion of a Private Limited Company into an LLP is not considered a transfer or sale; hence, there are no tax implications. However, the LLP will be subject to the tax rules applicable to LLPs, such as the tax on profits and capital gains.
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