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Understanding Conversion of Company

Understanding Conversion of Company

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Understanding Conversion of Company

According to section 18 of the Companies Act of 2013, any type of company that has already been registered can change into a different type of company by making a few amendments to the Memorandum of Association (MOA) and Articles of Association (AOA) of the company.

How Might a Business be Converted?

By changing the Memorandum of Association and Articles of Association, any type of company can change into another company in accordance with the norms of company law of the country, which is the Companies Act 2013.

Further, they can submit an application to the Registrar. The Registrar of Companies or the ROC must receive an application for such conversion. The previous registration of that specific company will be closed once the registrar is satisfied with the registration provisions.

Then there will be an issue a certificate of incorporation, after all necessary paperwork has been registered. Here, the registrar will issue a new certificate of incorporation to the business which states its converted or new form.

Additionally, it is to be noted that such conversion will have no impact on liabilities, debts, or other obligations incurred prior to conversion. The company will continue to have the same debts, liabilities, obligations, contracts, etc. after incorporating under a new legal structure as it did under its prior one.

This legal statement addresses company conversions under 2013 Companies Act.

Modern times have seen an enormous increase in the need and rate of expansion, which has caused a rapid change in the nature of company status to accommodate the necessary needs and overcome the limitations in existing ones. We will therefore learn about the various conversion options currently available or possible in that case in accordance with Indian taxation and current government regulations.

Partnership Firm to LLP

Many partnership firms especially have begun to change their partnership firm to an LLP since the LLP Act was introduced in 2008. The benefits of conversion are obvious and easy to understand, including the possibility to accept an infinite number of partners, the creation of different legal companies, limited liability, and quick and simple method of transferring ownership by filling out a form. Due to all of benefits, LLP has grown to be well-liked by small, medium-sized firms functioning in a developing economy like India.

The Indian Partnership Act, 1932 requires that the partnership firm that wants to become an LLP register as such. Unregistered Firms cannot be transformed into an LLP, in contrast to these.All LLPs that have been converted from Partnership Firms must share the same partners as the original Partnership Firm. Putting this in mind, our expert team at Kanakkupillai would advise you to retire any partners who do not want to be a part of an LLP, and to join new partners only after the LLP has been incorporated.

Proprietorship into a Private Limited Company

Due to the few compliance requirements and documentation requirements, the Sole Proprietorship business entity is the most common one used by most small and medium entities or we can simply say the Indian entrepreneurs.

You must open a business with current accounts and the Proprietor’s PAN details for income tax filings as the business and incomes develop, which is the only requirement the entrepreneur needs to comply with. To achieve this separation, you can change your sole proprietorship into a private limited company once you realise that business is thriving and there is only one more hill to climb.

An agreement to sell the firm is often drafted between the Proprietorship and the Private Limited Company once it is incorporated. And this is done in order to transform a Sole Proprietorship into a Private Limited Company.Furthermore, as stated in its Memorandum of Association, the newly created Private Limited Company should take over the Sole Proprietorship Concern for completing the process.

OPC or One Person Company to Private Limited Company

The regulations and procedures for converting an OPC into a Private Limited Company are repealed by Section 18 of the Companies Act, 2013, and Provisions of Companies (Incorporation) Rules of 2014. It won’t have an impact on the OPC’s assets, liabilities, other debts, commitments made, or any ongoing or existing contracts.

There are two ways to transform an OPC into a private limited company and this is freely and voluntarily or in a compulsory manner. Here, the OPC’s MOA and AOA need to be changed to meet the new standards of the private limited company.

You must also pass a resolution as an OPC in support of the conversion and satisfy the necessary number of members and directors, which is at least two members and two directors. You must also obtain written NOC from the concerned members and creditors for ensuring that there would not be any issues arising in the future.

LLP or Limited Liability Partnership to Private Limited Company

Many companies who began in India as Limited Liability Partnerships (LLPs) are now willing to change their status to a private limited company in order to take advantage of the benefits that a Private Limited Company has. The simplicity of injecting equity money being the most notable of them all. According to the provisions of Section 366 of Companies Act of 2013 and the Firm (Authorized to Register) Rules of 2014, an LLP may be changed into a Private Limited Company.

However, there are a number of conditions that must be met before an LLP can become a Private Limited Company. The consent of partners would be necessary. Newspaper advertising should appear in both local and national publications.From the ROC where such LLP is registered, a No Objection Certificate (NOC) is to be obtained. The incorporation process must then be completed.

Private Limited Company to Public Limited Company

Private limited companies are plentiful which might even sound small as the number of their existence is really big in Indian economy. But every one of them eventually wants to go public in order to scale more easily.

The question “Why go public?” is frequently posed by even the companies themselves. The distinctions that develop between private limited companies when compared to the public limited companies would help in understanding it.

Initial Public Offerings are an option that public limited companies provide (IPO), which is one major attraction of a public limited company. Here, the business is distributing its shares to the broader public by going public.

The restriction on transferability of shares, which is characteristic of private limited companies or corporates, is thereby eliminated by the option of an IPO.

The maximum number of members in a public limited company is unrestricted, making it possible for them to raise money and have easy access to capital.Therefore, moving from private to public should ideally be motivated by development and flexibility.

Public Limited Company to Private Limited Company

The Companies (Incorporation) Fourth Amendment Rules, 2018, were created by the MCA or Ministry of Corporate Affairs by notification dated December 18, 2018, which updated the Companies (Incorporation) Rules, 2014. The aforementioned rules which were notified, have been amended to include Rule 41, which outlines the requirements for submitting a request to convert a public limited company into a private limited company. Previously, the conversion application was submitted to the NCLT Benches, which had jurisdiction over the firms, and the process was exceedingly time-consuming.

However, the Central Government now has the authority to approve conversions, freeing up the tribunals from handling conversion cases and making it easy for the companies themselves.Following that, the Central Government granted the Regional Director authority to approve the conversion of a public limited company into a private limited company through notification S.O. 6225 (E) dated December 18, 2018.

LLP or Limited Liability Partnership to Partnership Firm

The liability of the LLP or Limited Liability Partnership, which is a separate legal entity, is capped at the agreed-upon portion of the partners’ investment in the LLP. In an LLP, the major attraction is that a partner is not liable or accountable for thecarelessness or wrongdoing of another partner.

Further, in an LLP, an agreement between the partners, or, as the case may be, an agreement between the partners and the LLP, governs all of the reciprocal rights and obligations of the partners within the LLP.However, in the absence of such a contract, the LLP would be controlled by the guidelines set forth in Schedule I of the Limited Liability Partnership Act of 2008, which outlines the partners’ respective rights and obligations.

Additionally, any other business structure, including a partnership created in accordance with the Indian Partnership Act of 1932, a private limited company, and an unlisted public limited company, may convert to an LLP in accordance with the LLP Act’s rules and the proper legal procedures. The LLP firm’s conversion to a partnership firm is now discussed.

Private Limited Company to OPC or One Person Company

According to the Companies Act of 2013, which creates a mechanism to convert one class of company into another, the conversion of a Private Limited Company into an OPC which stands for One Person Company is permitted.

Beginning on April 1, 2014, Section 18 of the Act expressly permits the conversion of a private limited company that is already registered.

The responsibilities and contractual obligations of the business before to conversion would not be affected by the conversion of PLC to OPC; these claims, liabilities, and obligations would continue to be legally enforceable, and the subsequently formed new OPC would be accountable for them.

Private Limited Company to LLP or Limited Liability Partnership

Due to their many benefits, Limited Liability Partnerships are very popular since they combine company and partnership business structures. The advantages of a company and partnership flexibility are combined in LLPs.

The limited liability partnership is a type of business entity where the partners’ liability is constrained. The LLPs are capable of making agreements and owning property in their own names due to their separate legal standing.

The idea of converting Private Limited Companies into an LLP is discussed in this article. The application for the conversion of the private limited company into an LLP must be submitted with a statement and consent from each shareholder which is important.

What is meant by converting the legal structure of a Business Entity?

The legal process of changing your present legal structure of your business entity into another without having to create a new entity or dissolve your current entity is known as a change of business entity, also known as business entity conversion or statutory conversion.

You can simply relate this to porting of your SIM card from Airtel connection to say Vi Connection without the need for changing the number you were already using.

Changing your company from an LLC to a corporate, for instance. In this instance, the corporation would be the converted entity, or the entity that results from a conversion, and the LLC would be the converting entity, or the existing entity prior to a conversion.

Companies may alter their legal framework for a variety of reasons.An LLP might decide to become a corporation in order to start awarding stock options to staff members, reduce tax liabilities, or possibly draw in some venture capitalists. On the other hand, a corporation might decide to change its legal structure to an LLC in order to benefit from the latter’s flexibility in decision-making, pass-through taxation (where taxes are passed through the company to the owners), or just to get rid of all the ongoing administrative paperwork.

In comparison to other options, such as a merger, a non-statutory conversion, or a dissolution/formation process, which necessitates dissolving the old entity and forming a new entity, a business entity conversion is promoted as one of the least expensive and complicated ways to change a business entity.Your best choice is typically the corporate entity conversion, assuming it’s possible in your state.

There will be additional measures to perform if the converted entity will have a different domestic state (or “home” state”) than the converting entity. This is known as domestication. Simply changing or converting the home state is often referred to as domestication.

How do I alter my corporate’s legal structure?

A plan of conversion document, business formation documents for the converted entity, and a certificate of the conversion are typically required when changing your business entity. This is done through the Secretary of State, and while each state has its own regulations, generally speaking there are at least three parts. The websites of the Secretary of State typically have access to these three papers. Although a conversion of a company entity is a relatively new idea and not yet accepted by all states, the majority of them permit it.

State law specifies the terms and conditions for the conversion in a Plan of Conversion. This document contains information about the organization, such as the duties and rights of each member.Along with the other mandatory conversion files, a Plan of Conversion must be submitted. A plan of conversion often includes the following details, at the very least:

  • Name of the converting entity
  • Name of the transformed entity
  • “Continuing existence” is stated.
  • a declaration endorsing the conversion

The converted entity must have the Articles of Association or a comparable business formation document, depending on the entity type you selected. These are typically sent to the Secretary of State together with the conversion certificate and necessary payments.

The document that formally implements your business entity conversion is the Certificate of Conversion, commonly referred to as the Articles or Statement of Conversion. Basic information regarding your converting and converted entities is provided in this conversion document. The Certificate of Conversion normally contains at least the following details in addition to basic information:

  • Information on the tax status and the effectiveness of the plan of conversion’s approval statement
  • Although ownership interests and liabilities normally carry over to the converted business, state laws on conversion vary from state to state. Depending on your converting and converted entities, there might or might not be tax repercussions.

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