Creatively savvy people never tend to sit in a place for hours and work all day. Instead, they move on to an entrepreneur role, using their desires and creativity efficiently in a private limited company. Yet, the needs of every individual vary from time to time, so some of them wish to convert a private limited company to an LLP. On taking this decision, several entrepreneurs end up in documentary chaos, thinking about what to be counted for and how the tax to be paid can be reduced.
The LLP (Limited Liability Partnership) is a newly designed corporate structure that combines the partnership flexibility and diverse advantages of a company’s limited liability at a nominal cost. To be precise, it is an alternative solution to drive business with the benefits of a company’s limited liability.
Conversion Effects of Private Limited to an LLP
To convert a private limited company into an LLP, the business or the company should be subject to the following conditions.
- A private Limited Company must not have a security interest in its assets when it is being applied for conversion into an LLP.
- Only the authorized shareholders of the business will be considered the partners of the LLP post-conversion.
- The Private Limited Company will be dissolved.
- The company’s Registrar removes the name of the Private Limited Company from its records as well as registers.
- Once the company is converted, all the liabilities, assets, interests, and obligations of the Private Limited Company are transferred to the Limited Liability Partnership.
Note – The liabilities, agreements, contracts, and employment sustainability remain the same.
- Depending on the license terms and tax numbers, the GST number must be reissued. By any means, this license can’t be shifted automatically.
Benefits of LLP
- Greater opportunity for autonomy
- An LLP must conform to compliance requirements less strictly than other entities.
- There is no maximum number of partners.
- The law does not specify a minimum number of partner meetings.
- An LLP is subject to simple rules for the upkeep of statutory records.
- An LLP is not subject to MAT.
- An LLP’s profits are exempt from the DDT
- An LLP is not required to conduct the audit.
Documents Required for Conversion of Company into LLP
In order to convert a Private Limited into an LLP, the following documents must be submitted with the application:
- Approval for the company’s conversion into an LLP in the format specified 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.
- List of all the creditors, signed by each.
- Approval by any other nation.
- Power of attorney to declare.
Process Of Converting a Private Company into an LLP
1. Receive Director Identification Number (DIN)
- The minimum number of designated partners for a firm to become an LLP is 2.
- At least one of the partners must be an Indian resident.
- DIN is allocated only when a person is added as a director or designated partner in a company or an LLP.
- The first member to be added as a director in the company must obtain a DIN. DIN will be needed, especially for those who become designated partners.
- It is mandatory to apply for a DSC before applying for the DIN. A Body Corporate can be listed as a partner in a Limited Liability Partnership via a nominee.
2. Meeting of the Board of Directors of the Company
- Hold a meeting with the company’s board of directors.
- Pass the resolution for the Conversion of a Private Company into an LLP.
- Pass the resolution to authorize all the directors to file each necessary form with the MCA.
- Pass the resolution to authorize any director to file all the mandatory forms with the MCA.
3. Application for Name Availability
The firm must now apply for the name reservation of LLP and get the name approval certificate from the ROC.
4. Filing of Incorporation Form with Required Documents
File E Form with all the below-mentioned attachments:
- Address proof of the registered office of the LLP.
- The sheets of subscriptions.
- Consent to function as designated partners and partners.
- Resident proof and identity of designated partners and partners.
- Details of the LLP / Company in which the partner/designated partner is a director / designated partner
5. Filing of Application for Conversion into LLP
FORM 18 is mandatory for converting a private company into an LLP, and it must be filed along with a form for incorporation.
This form has information about the conversion of the company into an LLP, such as:
- Whether or not all the company’s shareholders have given their consent for the conversion of the private company into an LLP.
- Whether all the authorized partners of the LLP make up all the shareholders of the company, and no one else.
- An up-to-date Income-tax return is to be filed as per the Income-tax Act, 1961.
- The documents include the latest annual returns and balance sheet under the Companies Act 2013 (filed with MCA).
- If any conviction, validating, ruling, order, or judgment of any Court, Tribunal, government authority, and/or any in favor of or against the company subsisting as on the date as mentioned?
- Knowing any security interests in the assets of the firm that are subsisting or still in effect.
- Whether an earlier application was filed for the conversion of the mentioned company into an LLP and rejected by the Registrar for some reason.
- Whether there is a presence of any secured creditors.
File E-FORM- 18 along with the following attachments:
- A mandatory statement of the shareholders’ consent
- A mandatory account statement of the company is mentioned as accurate and verified by the independent auditor
- All the secured creditors’ lists, along with their consent
- Acknowledgment copy of the latest income tax return, which is mandatory.
6. Certificate of Incorporation as LLP from ROC
After the company completes all the formalities and has been approved by the respected ministries, the ROC must issue a COI stating the conversion of the LLP.
7. Drafting of the Limited Liability Partnership Agreement
Contents of the Agreement include:
- Name of the LLP
- Name of Partners and Designated Partners
- Contribution form
- The ratio of profit shares
- The partners’ rights and duties
- The business proposals
- Rules for Governing an LLP
8. Filing of E-Form-3
This form includes information about the LLP Agreement filled between each partner and must be filed within 30 days from the company’s conversion date into an LLP.
Mandatory attachment: LLP Agreement
9. Filing of E-Form -14 (Intimation to ROC)
After receiving the list of LLP incorporation certificates, it must be filed within 15 days of the conversion date.
Attachments With E-Form 14
- A copy of the Certificate of Incorporation (COI) of the LLP.
- A copy of the incorporation document was submitted in E-Form to the respective ROC.
Taxation On Converting A Private Limited Company Into an LLP
Entrepreneurs in India must know the nukes and corners of the Limited Liability Partnership (LLP), including the taxation effects after converting a private limited company into an LLP. The conversion of the company into an LLP never attracts capital gain tax because this conversion is not considered a transfer, as defined under the IT Act.
Hence, it will not attract capital gain tax with respect to the following conditions.
- Each asset and liability of the private company becomes the asset and liability of the LLP.
- Every shareholder of the company becomes an LLP partner.
- The profit-sharing, capital proportion, and the partners’ ratio are in the same proportion as the company’s shareholding.
- The firm’s shareholders do not receive any benefit, either directly or indirectly, in the LLP, except through capital contribution and profit-sharing ratio.
- The gross receipts, turnover, and total sales in any of the three previous years from the conversion date must not exceed Rs. 60 Lacs.
- The total value of the assets appearing in the company’s account book in any of the previous 3 years must not exceed Rs. 5 crores.
Conclusion
An LLP is a more efficient form of organization than a private company. This is accurate only in terms of compliance and taxation. LLP is best for professionals and small business owners. Upgrade your private company to an LLP and protect your assets while enjoying the benefits of a flexible and efficient business structure.
