Some companies in India started as Limited Liability Partnerships, mostly referred to as LLPs. Still, these are eager to change to a private limited company for increased commercial growth and profitability.
The Limited Liability Partnership Act of 2008 does not have a provision addressing the conversion of an LLP into a Private Limited Company. Still, Section 366 of the Companies Act of 2013 and the Company (Authorized to Register) Rules of 2014 do.
Small enterprises having a capital commitment of less than Rs 25 lakhs and an annual sales turnover of less than Rs 40 lakhs might choose LLP. LLPs that meet requirements are exempt from yearly audits; private limited companies must audit their financial statements annually.
Although the requirement for compliance becomes practically the same for both the private limited company and LLP if LLP has an annual revenue of Rs. 40 lakhs or also a contribution of the capital of an amount which is higher than Rs. 25 lakhs, the owners of LLP may consider changing into a private limited company.
Reasons for conversion of LLP into a Private Limited Company
The reasons for changing an LLP or Limited Liability Partnership into a Private Limited Company differ in various cases. Let’s discuss these reasons in a generalized term:
- LLP changes its legal status to a private corporation to expand its operations.
- LLP can only draw a limited variety of investors; thus, they convert to draw more, such as international or equity investors.
- The LLP is converted to issue equity share capital in the private limited Company.
- One of the conversion’s justifications is to avoid a capital gains tax gain.
- To carry forward the entire years’ worth of unrecovered losses and depreciation.
- The LLP transforms into a Company to maintain its credibility, goodwill and brand name.
Conditions for conversion of Limited Liability Partnership into Private Limited Company
Before taking any further steps to convert an LLP into a Private Company, the following requirements must be met:
- The minimum number of partners needed for the Limited Liability Partnership to be incorporated as a Private Limited business is two.
- The conversion of the LLP should have had the consent of all partners.
- The LLP was supposed to submit all required returns.
- Publication of information about the conversion of the LLP into a private company in at least two newspapers, one in English and one in any local or vernacular language newspaper published in the region where the registered office is located.
- The Registrar’s certificate of no objections.
Advantages of Converting a LLP into a Private Limited Company
- The conversion of an LLP into a Private Limited Company enables commercial firms to maintain their brand identity without investing additional resources in brand promotion.
- 100% Foreign Direct Investment (FDI) is permitted in a Private Limited Company there; as a result, any foreign investor, a corporate entity or a person may directly invest in the Company.
- Since the losses and depreciation incurred in the LLP will be carried forward on the entity’s conversion, there won’t be any costs associated with bookkeeping after the conversion.
- Companies can provide stock ownership and ESOP programs for which we should thank the possibility of conversion of a Limited Liability Partnership or an LLP to a Private Company. These programs aid businesses in luring skilled workers by offering them incentive packages to join the company.
- Only venture capitalists or angel investors are the ones mostly providing cash for a Private Limited Company or Public Company. If the registration procedure is rigorous, among other things, it enhances the credibility of the corporate structure. This makes soliciting money from other sources simple.
- The owners’ liability is restricted to the capital they subscribed to but did not pay for.
- In a private limited corporation, capital gains are not subject to tax.
- The entity, which now has been registered as a Private Limited Company, would have its existing LLP substituted to “Pvt. Ltd.” at the end part of its officially registered name.
What are the documents required to convert LLP into a private company?
The following is a list of the documents needed for conversion:
- A proof of address of the applicant
- Proof of identity of the applicant
- Passport-size photographs of the applicant
- Copy of latest returns file by the LLP or Limited Liability Partnership
- The NOC is the No Objection Certificate obtained from members of LLP and the Registrar.
Further, the following papers must be submitted with Form URC-1:
- List of members, each with their name, number of shares held, address, and other details as mandated or required.
- A list of the company’s original directors and data or information about them such as name, DIN or Director Identification Number, address, passport number, etc.
- A declaration from each first director stating that they are not ineligible or disqualified to serve as company directors under Section 164 of the 2013 Companies Act and that the information on the documents submitted to the Registrar for the Company’s registration is accurate and full.
- List of the Limited Liability Partnership’s partners, including contact information such as the basic name and address.
- Two LLP partners must officially attest a duplicate of the Limited Liability Partnership agreement and the registration certificate.
- A declaration emphasizing the following:
- The total number of shares in the company and specifics on how they are distributed.
- The total number of shares purchased as well as the total value of each share.
- The same LLP name with the suffix Pvt. Ltd. at the end of its officially registered name.
- All of the LLP’s creditors must have given their written approval or issued a No Objection Certificate or a NOC.
- The private limited company’s account statement, fully approved by the auditor, shall be six days old at the time of application.
- A copy of the newspaper where the article relating to the conversion was published.
Procedure for conversion of LLP to Private Limited Company
Details of each step of the process needed to change an LLP into a Private Limited Company are provided below:
1) Approval of Name
Obtain “Name Approval” by submitting an e-format application to the ROC (Registrar of Companies).
2) Keeping DSC or Digital Signature Certificate and DIN or Director Identification Number Safe
All seven of the company’s directors must get Director Identification Numbers (DINs) and Digital Signature Certificates (DSCs) (DIN). A request form for a DIN can be submitted on the Ministry of Corporate Affairs website. The central government approves the DIN application above through the Ministry of Corporate Affairs office of the regional director. Be careful to self-attest the form before sending it, together with identification and address documentation and one passport-size photo of the applicant.
3) Submitting Form URC-1
The applicant must create and submit Form No. URC-1 and other necessary papers after receiving ROC permission for the name.
4) Memorandum of Association (MOA) and Articles of Association (AOA)
The Company must create its MOA and AOA when the Registrar of Companies releases the form URC-1 after the Registrar of Companies has authorized the Company’s name and carefully reviewed Form No. UGC-I.
The LLP will be changed into a Private Limited Company when the subsequent stages are finished, and the ROC will issue the Certificate of Incorporation of this new Private Limited Company.
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Which is better? Private Limited Company or LLP?
When a company’s yearly revenue is less than 40 lakh rupees, and its capital contribution is less than 25 lakh rupees, an LLP is the best alternative. If an LLP (Limited Liability Partnership) meets these requirements, there is no need for annual audits. On the other hand, regardless of the company’s annual revenue, an audit of the financial accounts must be presented in the case of private limited firms.
As a result, the LLP has an advantage over private limited companies for small and developing firms. However, Pvt Ltd company registration is recommended and preferable if the turnover exceeds 40 lakhs per year. LLPs do not draw venture capitalists and investors, making the LLP structure a big no for major businesses involved in long-term growth.
Conclusion
The decision to register as an LLP or a private limited company is entirely up to the individuals or partners in the firm, as well as the business’s expansion and revenue. For LLP Registration Online in India, click here www.kanakkupillai.com
