By CS Arpit Garg

Limited Liability Partnerships are the emerging form of business entity since its inception. Easier Compliances, flexibility of operations, taxation benefits and other benefits lead to increase of incorporations of LLP in India since last few years.

LLP gives the benefits of Private Limited Company and overcomes the shortcomings of Partnership Firm. LLP is a great combination of Private Limited and Partnership Firm altogether in India.

Accordingly, in this article we shall discuss the provisions with respect to Conversion of Private Limited Company into Limited Liability Partnerships.

Pre-Requisite of Conversion of Private Limited into LLP

• Every member of the company must agree with the decision of conversion.
• All the members become the partners of an LLP and no one else.
• Not just the members, all the creditors of the company must also agree with the conversion.
• At least one balance sheet and annual return should have been filed by the company after its incorporation.
• The company should not be a ‘Section 25 company’/ ’Section 8 Company under Companies Act, 1956/2013.
• The company should be having share capital.
• The latest copy of Income tax return is to be filed with ROC.
• Under Companies Act, no prosecution should have been initiated procedure to be followed.
• No open charges should be pending against the company.

Effect of Conversion of Private Limited into LLP

• The private company will be deemed to be dissolved.
• The name of the private limited company will be removed from the register of the Registrar of Companies.
• Permits or licenses issued under any written law to the Private Limited Company, and which is active before the date of conversion will not be transferred automatically to the Limited Liability Partnership.
• On conversion, all properties, assets, interests, rights, privileges, liabilities and obligations of the private limited company are transferred to the LLP.
• The conversion has no bearing on the existing liabilities, obligations, agreements, contracts and continued employment.

Taxation of Conversion of Private Limited into LLP

Conversion of Private Limited into Limited Liability Partnership will not lead to Capital Gain under section 47 if following conditions are satisfied: –

• All the assets and liabilities of the Company become the assets and liabilities of the LLP.
• All the shareholders of the Company become partners of the LLP 
• The capital proportion and profit-sharing ratio of partners are in the same proportion as that of the shareholding in the Company.
• The shareholders do not receive any benefit, directly or indirectly in the LLP, except by way of capital contribution and profit-sharing ratio.
• The total sales, gross receipts, and turnover in any of the three preceding years from the date of the conversion does not exceed Rs. 60 Lacs.
• The total value of assets as appearing in the books of account of the Company in any of the previous three years does not exceed Rs. 5 crores.

If any of the conditions are violated capital gain shall be levied on Transferor Company and on the shareholders of the company.

Procedure of Conversion of Private Limited into LLP

• Conduct Board Meeting
• Apply for Name Availability in RUN-LLP
• Filing of Application for Conversion of Private Limited to LLP
• File form FiLLiP and Form 18 for Conversion
• After complying with the requirements, Certificate of Incorporation upon conversion will be issued by Ministry.
• Drafting of LLP Agreement.
• Filing of LLP Agreement with ROC by Filing Form-3.

Advantages of Conversion of Private Limited into LLP

• On the conversion of a private limited company into LLP, all assets and liabilities of the company will convert into those of the LLP. However, no instrument of transfer required. Hence there will not be any stamp duty implications on such transfers as well.
• There is no limit to the number of partners; which is not so in case of private limited companies. 
• There is no compulsion on holding a minimum number of meetings and maintaining statutory records.
• No Audit Requirement unless capital contribution exceeds Rs. 25 Lakhs or turnover exceeds Rs. 40 Lakhs.
• No Capital gain tax on transfer of property from company to LLP.

Conclusion

Owing to flexibility in its structure, compliances, tax and operation, LLP would be useful for small and medium enterprises, in general, and for the enterprises in services sector and professional firms, in particular. The conversion from the existing corporate structure can be made to a LLP while retaining the advantages of Limited Liability and less compliances.

For any queries or requirements contact:

CS Arpit Garg
Founder – Compliance Arena
Practicing Company Secretary
8447773833