What makes LLP’s so special? Why are more and more private limited companies converting to limited liability partnerships? More importantly, if you too want to make such a switch, what steps do you need to take?
An LLP retains its power and independence even when the partners change. This is because, LLPs are treated as independent legal entities, wherein supporting partners enjoy limited liability, as the name implies.
LLPs are a preferred business model because they are an alternative to the corporate business vehicle, which provides the benefits of limited liability, while also allowing its members the flexibility to organise their internal management on the basis of a mutually agreed-upon agreement, as in a partnership firm.
Here’s a deeper look at everything you need to know about converting your private limited company into an LLP.
Governance and Benefits
Limited liability partnerships are governed by the Limited Liability Partnership Act of 2008. This Act was primarily formulated to promote small and medium-sized enterprises. In continuation with that goal, several benefits have been bestowed onto a limited liability partnership firm-
- Greater scope for self-governance
- Lesser adherence to compliance formalities is required for an LLP when compared to other entities
- No upper limit on the number of partners
- No minimum number of partner meetings is required by law
- Lenient regulations on the maintenance of statutory records are prescribed for an LLP
- MAT is not applicable to an LLP
- Profits of an LLP are not subject to Distribution Distribution Tax (DDT)
- The audit is not mandatory for an LLP
Eligibility for Conversion
The LLP Act allows a private limited company or an unlisted public company to be converted into an LLP under the following conditions:
- There is no security interest on its assets at the time of application
- No e-forms are pending
- There are no open charges against the company
- All shareholders have consented to the conversion
- All creditors of the company have consented to the conversion
- The company must have filed at least one balance sheet and annual return
- All shareholders have agreed to become partners of the LLP
- The company must have share capital.
- The company should not be a Section 25 company or a Section 8 company
Companies That Cannot Be Converted into an LLP
- All those companies engaging business in the banking, finance and insurance sector
- All those companies having a secured loan/security interest on assets
- Additionally, all those companies having FDI where performance-linked conditions are applicable
- All those companies which have external commercial borrowings
- All those companies that have secured FDI under the approval route.
Documents Required for Conversion
- Consent of each of the company’s shareholders to convert the company into an LLP in the format specified.
- Incorporation document
- Application and declaration of incorporation of an LLP
- No-objection certificate from tax authorities
- Statement of assets and liabilities of the company
- A list of all creditors, along with their consent to the conversion
- Approval from any other country, if applicable
- Authorization to make a declaration.
Procedure for the Conversion of a Company Into an LLP
Step 1 – All Designated Partners Who Do Not Already Have One Must Obtain a DIN
The first step in converting to an LLP is the determination of the intended designated partners. These designated partners must obtain their own DINs without any delay. Moreover, they must also apply for a DSC before they apply for a DIN because a digital signature is required to process a DIN application.
Step 2 – Convene a Meeting of the Board of Directors
The company must call a meeting of its board of directors, and pass a resolution sanctioning the conversion of the company into an LLP. Moreover, such a resolution must be passed with the required majority. Thereafter, the resolution of the board of directors must be communicated to the MCA with the necessary forms and applications.
Step 3 – Make an application to reserve the name of the LLP
Next, you must reserve a name for the LLP and get a certificate of approval from the Registrar of Companies.
Step 4 – File the Incorporation Form (FiLLiP Form)
Once the new name has been reserved and allotted, you must file for the LLP’s Incorporation, along with the following documents;
- Address proof of the LLP’s office
- Subscription sheets
- Consent of designated partners
- Identity proof of all partners
- Resident proofs of all designated partners and partners
- Detail of other entities in which the LLP’s partners are partners
Step 5 – Make an application for the conversion into an LLP
Form 18 must be duly filled and filed to convert an existing company into an LLP. One must file this form along with the incorporation form.
Form 18 must contain the following information
- Consent of the company’s shareholders to convert it into LLP
- Updated income tax return
- Latest balance sheet and annual returns as filed with the MCA
- Any ruling or court order for or against the company
- Whether there exists a security interest on the company’s assets
- Additionally, whether the existing shareholders are the partners of the intended LLP
- Whether the ROC has rejected an earlier conversion application
- Similarly, a list of secured creditors with their consent for conversion
- A statement of accounts of the company verified by an independent auditor
- Company’s shareholder statement
Step 5 – Obtain the certificate of incorporation
Once all filling formalities are successfully concluded, the ROC verifies the information provided and issues a certificate of incorporation, if all the prerequisites are met. The company thereafter gets converted into an LLP.
Step 6 – Draft the LLP agreement
After incorporation, the designated partners must draw up an LLP agreement that must contain the following information:
- The LLP’s Name
- Name of all partners and designated partners
- Rules of governance
- Proposed business
- Rights and duties of partners
- Form of contribution
- Profit-sharing ratio
Step 7 – File E-Form-3 and E-Form-14
Two forms namely, Form-3 and Form-14 must be filed in the next step.
E-Form-3 contains data regarding the LLP Agreement. This form must be filed within 30 days of converting your company into an LLP, by attaching the LLP agreement to the form.
E-Form-14 is used for intimating the Registrar of Companies of conversion of the company into a limited liability partnership. This form must be filed within 15 days of the conversion. Finally, along with Form-14, the following documents must be attached:
- Copy of Incorporation Certificate
- Copy of E-Form FiLLiP
Tax On the Transfer of a Limited Liability Firm Into an LLP
In this section, we will address the tax implications of converting a private limited to an LLP. The move from a private limited company to an LLP is not considered a ‘transfer’ under the IT Act, hence capital gain tax is rarely levied.
However, the conversion will not attract capital gain tax only if the following terms and conditions are fulfilled:
- The company’s assets and liabilities become the LLP’s assets and liabilities
- All the company’s shareholders become partners in the LLP
- Further, the profit-sharing, capital ratio, and the partners’ ratio are in the same proportion as the company’s shareholding
- The company’s shareholders receive little benefit in the LLP, either explicitly or indirectly, except through capital contribution and profit-sharing arrangement
- Moreover, the gross revenues, turnover and overall sales do not surpass Rs.60 lakhs in each of the three previous years prior to the conversion date
- The overall value of assets as reported in the account book of the business for each of the preceding 3 years does not exceed Rs. 5 crores.