On May 31, 2016, the Ministry of Corporate Affairs or MCA issued a notice that permitted the Conversion of LLP into companies. A list of necessary papers must be prepared for such conversion and submitted to the ROC in forms such as INC-32, INC-33, INC-34, and URC-1, among other forms. When converting, it is necessary to consider the income tax provisions of the capital gains, which will help make the process smooth and easy. The author of the post below attempts to obfuscate the requirements of the Companies Act and the implications of capital gains while converting from LLP to Company. Many companies that began as Limited Liability Partnerships (LLP) in India are now planning to change their status to private limited companies to expand their operations or inject equity capital, which would benefit their business immensely.
Conversion Law for LLP to Private Limited
The conversion of an LLP into a Pvt Ltd is not acknowledged in the Limited Liability Partnership Act of 2008. Still, according to the requirements of Section 366 of the Companies Act of 2013 and the Company (Authorized to Register) Rules, 2014, an LLP may be changed into a Private Limited Company.
The current situation calls for corporatization. And this has become active due to the globalization.
The word or usage of “globalization” refers to the growing interconnectedness of cultures, economies, and people or populations worldwide due to technology, cross-border commerce in products and services, and movements of labour, capital, and data. Over these long years, countries around the globe have developed economic alliances to support these activities. However, the phrase became more mutual after the Cold War in the early 1990s because of how these cooperative arrangements and treaties influenced the contemporary style of living. With a primary focus on the United States, this guide uses the term more specifically to refer to international trade and some investment flows among advanced economies.
This has outwarded its hands to India and all other developing countries.
Global trade obstacles are steadily eliminated as the globe moves toward a single market. Many entrepreneurs are looking forward to corporatization due to the growth of corporate work cultures and promotional start-up incentives by the government authorities.
Types of Conversion Option (LLP to Pvt Ltd)
- The incorporation of a fresh business or new enterprises.
- The transformation or the conversion of a current entity, such as an LLP or partnership firm, into a company.
The second option, which involves converting a limited liability partnership into a corporate entity, may make it feasible for the current entities to change their mode of operation.
However, several conditions must be met to convert an LLP into a Private Limited Company. For example, an LLP must have at least 7 partners, and the approval from all these partners are necessary, along with this newspaper advertising must be done in both local and national publications. A No Objection Certificate (NOC) is needed from the ROC where the LLP is registered. Finally, the entire incorporation process must be completed, which is the basis of discussion herewith:
Comparison of LLP vs Private Limited
LLP is primarily appropriate for small firms with a capital commitment of less than Rs 25 lakhs and an annual sales turnover of less than Rs 40 lakhs. LLPs that meet these requirements are exempt from having to undergo the audit every year under section 44AB; nevertheless, a private limited company is required to audit its financial statements yearly. Although the requirement for compliance becomes almost identical for both the private limited company and LLP, if the LLP has an annual turnover of Rs. 40 lakhs or a capital contribution or input of an amount higher than Rs. 25 lakhs, it would be forcing the LLP’s owners to convert into a private limited company.
The existing state of the market requires corporatization. Every market in the world we live in has as its secondary objective the removal of national boundaries to converge on a single global market. Many start-ups and business owners are keen to embrace corporatization. To start the procedure, adhere to the instructions below:
- Incorporating a whole new company, or
- Conversion of the LLP, which is existing, into a private limited company.
Advantages of Changing from an LLP to a Private Limited Company
Some of the major pros or advantages of converting an LLP to Private Limited company would include the following:
1. Maintenance of Brand Value
Business organizations can continue to use their brand name without spending additional money on brand ads thanks to the conversion of LLP into a Private Limited Company.
2. Unabsorbed Losses and Depreciation Carry Forward
No money will be spent on bookkeeping after the conversion since the losses and depreciation experienced by the LLP will be carried forward on the entity changeover.
3. To Employees: Employee Stock Ownership Plan
Companies can provide stock ownership and ESOP programs thanks to the conversion of LLP to Private Company. Such programs aid businesses in luring skilled workers by providing incentive packages for them to join the organization.
4. Simple Fund Raising
Strict firm registration procedures make the organizational structure more respectable in customers’ eyes. This makes soliciting money from other sources simple.
5. Distinct Legal Status
The separation of ownership and management allows them to focus on their potential work, thanks to business conversion. The shareholders delegate management and operational duties to the corporation without sacrificing their ability to exercise voting power.
6. Owners’ Limited Liability
The owners’ obligation is restricted to the capital they subscribed to but did not pay for.
What are the Reasons for LLP Registration?
- Educating small companies about the LLP idea.
- Provide the benefit of limited liability and allow them to arrange their company internally.
- An audit is unnecessary if an annual sale exceeds Rs. 40 lakhs and a capital contribution stays below the threshold of Rs. 25 lakhs.
- Simple to start and maintain
- Dividend Distribution Tax is not required to be paid by LLP (DDT).
- An LLP is not required to hold a board or annual meeting like a private limited company.
In contrast to a Private Limited Company, the LLP registration process is straightforward.
Reasons for Private Limited Company Registration
For investors like venture capitalists and private equity investors who do not desire to participate in the company’s administration, LLPs with all the owners being Partners are deemed undesirable. For investors, a private company is the best option. The proprietors must transform their firm into a private limited company if it is expanding.
In India, FDI is growing more and more popular. The government does not need to approve foreign direct investment (FDI) in a private limited company, but FDI in LLP requires significant government permission.
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Board Discussion and Resolution
Hold a meeting of the partners to get the majority of the members’ approval before registering the LLP by Section 366 of the 2013 Companies Act. To give one or more partners the authority to carry out all actions and sign all papers, deeds, documents, etc., required for the LLP to be registered as a company.
LLP: You must request the name’s availability in RUN. One of the main benefits is that the company can operate under the same name as the LLP (provided that the name is available per the Name Availability Guidelines of the Companies Act), with the exception that the words “limited” or “private limited” must be placed after the LLP’s name.
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Acceptance of Name
The ROC (Registrar of Companies) must be approached for name approval, and an electronic application must be submitted. You must select from a list of goods on the form INC-1 to apply for this. The name will be valid for 60 days after the authority has approved it.
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Keeping DSC and DIN Safe
The Digital Signature Certificate (DSC) and Director Identification Number (DIN) for each of the company’s future directors must be obtained if not all seven members who will serve as directors after conversion have them. An application form must be submitted on the MCA portal to get the DIN. The Ministry of Corporate Affairs, through the Office of Regional Director, processes and approves DIN applications on behalf of the central government. The application must be submitted with self-attested documentation of the applicant’s name and residence and one current colour passport-size photo. A practising cost accountant, practising chartered accountant, or practising company secretary must attest to all required documents.
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Submitting form URC-1
The applicant must prepare & file form No. URC-1 together with the following papers after obtaining Registrar of Companies permission for the name:
- List of the members, including their names, addresses, the number of shares they each own, etc.
- List of the initial private firm directors, complete with names, addresses, DINs, passport numbers and expiration dates, etc;
- Every person who is proposed as a first director must submit an affidavit stating that they are not prohibited from serving as directors by Section 164, and all other documents submitted to the registrar for the registration of the firm must contain information that is accurate, complete, and true to the best of their knowledge;
- A list of the partners’ names and addresses, as well as a copy of the partnership agreement and registration certificate that has been properly confirmed by the two chosen partners, must be sent;
- A declaration outlining the following requirements the following information is required: a) the nominal share capital of the company and the number of shares into which it is divided;
- the number of shares taken and the price per share; and c) the name of the company, with the term Limited or private limited added;
- A signed statement of agreement or a letter of no objection from each creditor;
- Copy of a newspaper ad, a company statement of accounts that the auditor officially approved, and that was published no more than six days before the application date.
Articles of Association & Memorandum of Association
After receiving the name permission and sanction of form no. URC-1 – from the registrar, the Memorandum of Association (MoA) and Articles of Association (AoA) are to be written and submitted to RoC.
The conversion process provides certain tax benefits, but several additional conditions must be satisfied to take advantage of them. For instance, the partners must maintain the same shareholding percentages as in the prior LLP at the time of conversion. For five years following conversion, the former LLP partners, now shareholders in the newly formed company, cannot collectively have a shareholding percentage of less than 50%.
Another option for the LLP is to create a private limited company and then transfer the entire business to the private company using a written agreement. In this case, the requirements mentioned above, such as the requirement for a minimum of 7 partners, newspaper publication, etc., are not necessary to be satisfied. However, a capital gains tax is imposed in this case. Moreover, this transfer is subject to the implications of stamp duty.
Pre-conditions for Conversion of LLP into Private Company
These requirements must be met before an LLP can be converted into a Private Limited Company:
- A Limited Liability Partnership needs the same minimum of two partners to incorporate a Private Limited Company.
- All partners should have approved the conversion of LLP.
- The LLP should have filed all necessary returns.
- Notice of the conversion of a limited liability partnership (LLP) into a private company must be published in at least two newspapers, one in the English language and another in any regional language newspaper of the place of registered office.
- The Registrar has issued a Certificate of No Objection.
Process of Conversion of LLP into Pvt Ltd Company
Let’s delve deeper and try to summarize the key essentials:
1. Name Acceptance
Obtain “Name Approval” by submitting an e-format application to the ROC (Registrar of Companies).
2. Keeping DSC and DIN Safe
The corporation requires that its seven directors receive a Digital Signature Certificate (DSC) and Director Identification Number (DIN). By applying to the MCA portal, one can receive a DIN. The central government grants approval for DIN applications through the Ministry of Corporate Affairs’ Office of 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 complete and submit Form No. URC-1 once the Registrar of Companies has approved your choice of name.
4. Articles of Association and the Memorandum of Association
Create the articles of association (AOA) and the memorandum of association (MOA) and submit them to the registrar of companies. The Registrar of Companies issues the form URC-1 once the business name has been approved.
The expansion of business is the main driver behind converting an LLP into a Private limited company. Venture capitalists and private equity firms do not fit inside the LLP framework, and investors feel better at ease investing in private limited companies. Private limited firms are also seen as a better option than LLP for FDI purposes. Therefore, changing an LLP to a private limited company may be prudent if all applicable requirements are considered.
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 transforming a pvt ltd company Online in India click here www.kanakkupillai.com
