How to Convert LLP into Private Limited Company?

In India, businesses can take various legal forms which depends on their goals, scale of operations, and liability structure. One of such structure is the Limited Liability Partnership (LLP), which combines features of both partnerships and companies. However, as the business grows, many LLPs opt to convert into a Private Limited Company (Pvt. Ltd.) to access benefits like easier fundraising, greater credibility, and scalability.

This blog discusses the concept, need, legal framework, eligibility, process, and benefits of converting an LLP into a Private Limited Company in India.

What is a Limited Liability Partnership (LLP)?

An LLP is a corporate business form that offers the various benefits of limited liability of a company and the element of flexibility of a partnership. It is primarily governed by the Limited Liability Partnership Act, 2008. Partners in an LLP are not personally liable for the business's debts, except in cases of fraud or wrongful acts.

Why Convert LLP into Private Limited Company?

Businesses may wish to convert from LLP to Pvt Ltd for various reasons:

1. Attracting Investors: Private limited companies are usually preferred by angel investors, venture capitalists and financial institutions.
2. Credibility and Branding: Pvt Ltd companies enjoy more credibility and transparency among clients, vendors, and stakeholders.
3. Growth and Expansion: Converting to a company helps in expanding operations domestically and internationally.
4. ESOPs and Equity Sharing: Pvt Ltd allows offering Employee Stock Options (ESOPs) to attract and retain talent.
5. Compliance with Regulatory Norms: Some businesses or tenders require bidders to be a company rather than an LLP.

Legal Framework for Conversion

There is no such direct provision under the Companies Act, 2013 or the LLP Act, 2008 that allows conversion of LLP into a private limited company. However, such conversion can be undertaken under:

• Section 366 of the Companies Act, 2013: This section allows conversion of an entity (including LLPs) into a company.
• Companies (Authorised to Register) Rules, 2014: These rules lay down the procedure for such conversion.

Eligibility Criteria for Conversion

Before initiating the conversion process, the LLP must meet the following conditions:

• The LLP must have at least 2 partners who will become shareholders/directors of the company post conversion.
• The LLP should have a minimum capital as prescribed for private limited companies (at least ₹1 lakh).
• All partners of the LLP must agree to the conversion and become shareholders of the new company.
• There should be no security interest in the LLP's assets at the time of application.
• The LLP must be registered under the LLP Act, 2008 and have filed all necessary returns and statements.

Documents Required for Conversion

1. Consent of all partners.
2. Audited statement of accounts certified by a Chartered Accountant, not older than 6 days at the time of filing.
3. No objection certificate (NOC) from tax authorities (if applicable).
4. Affidavit and declaration by the proposed directors and shareholders.
5. Name approval letter (Reserve Unique Name – RUN).
6. LLP agreement and Certificate of Incorporation.
7. Digital Signature Certificates (DSC) and Director Identification Numbers (DIN) for proposed directors.
8. List of all partners and creditors along with their consent.
9. Advertisement in a newspaper (as per the rules) stating the intent to convert.

Step-by-Step Process of Conversion

Step 1: Name Approval

File an application for name reservation through RUN, viz. (Reserve Unique Name) form available on the MCA portal. Choose a name in accordance with the Companies (Incorporation) Rules, 2014...!

Step 2: Prepare and File Incorporation Documents

Once the name is approved, file Form URC-1 along with the required documents:

• List of members and directors
• Declaration of compliance
• Copy of LLP agreement
• Affidavit from all partners confirming compliance

Also, file SPICe+ Forms (Part A & B) for incorporation of the company, including:

• MOA (Memorandum of Association)
• AOA (Articles of Association)
• Declaration by directors (DIR-2)
• Consent of directors (INC-9)

Step 3: Publication in Newspaper

A public notice must be published in English and vernacular newspapers in the district where the LLP is located, inviting any objections within 21 clear days.

Step 4: Approval by Registrar

Once all documents are submitted and objections (if any) are addressed, the Registrar of Companies (ROC) will issue a Certificate of Incorporation.

Post-Conversion Requirements

• Inform all the concerned departments, such as tax authorities, banks, and vendors, about the conversion.
• Modify existing registrations like GST, PF, ESI, and Shops & Establishment to reflect the new company name and status.
• Ensure all books of accounts, financial records, and agreements are transferred to the new company...!
• Intimate the Registrar of LLP about the conversion within 15 days of the new company's incorporation.

Fees Required

Government fee: It is based on the authorised capital in the LLP. Fee may range between ₹5000- ₹50000.

1. Stamp Paper & Notary fee: ₹1000.
2. Professional fee: ₹25000 +18% GST.

Key Benefits of Conversion

• Separate Legal Entity: A company has a unique identity, separate from its shareholders.
• Limited Liability: The liability of Shareholders is limited to the extent of their shareholding.
• Perpetual Succession: The company exists irrespective of changes in ownership or management.
• Ease in Raising Funds: Pvt Ltd companies can raise equity capital and take loans more easily.
• Tax Benefits: Companies enjoy certain tax advantages over LLPs in specific sectors.
• Greater Market Reach: Enhanced trust leads to better client and vendor relationships.

Challenges and Considerations

• No Direct Provision: Since there’s no straightforward process, legal and procedural compliance must be followed rigorously.
• Professional Assistance Needed: Chartered Accountants or Company Secretaries are usually required to manage filings and compliance.
• Costs Involved: Stamp duty, professional fees, and ROC charges can be substantial.
• Tax Implications: Check for any potential tax liabilities arising from the conversion, especially on asset transfers.

Conclusion

Converting an LLP into a Private Limited Company is a planned move that can offer various advantages, especially for the purpose of business growth who are looking for scalability and external funding. However, the process involves detailed legal compliance and documentation. It is always recommended to take the professional advice before initiating the process of conversion.

This conversion not only enhances the image of the business in the market but also opens doors to wider opportunities, enabling the enterprise to compete at a larger scale.

FAQs

1. Can an LLP be directly converted into a Private Limited Company under Indian law?

No, there is no direct provision under the LLP Act, 2008 or the Companies Act, 2013 for the conversion of an LLP into a Private Limited Company. However, such conversion is possible under Section 366 of the Companies Act, 2013, read with the Companies (Authorised to Register) Rules, 2014, which allow an LLP to register as a company subject to specific conditions and procedures.

2. Do all partners of the LLP need to become shareholders in the Private Limited Company?

Yes, all the existing partners of the LLP must become shareholders of the proposed Private Limited Company at the time of conversion. The structure may change post-conversion, but during the process, it is mandatory for continuity and compliance.

3. Is it necessary to publish a newspaper advertisement during the conversion process?

Yes, as per the Companies (Authorised to Register) Rules, 2014, the LLP must publish a notice of conversion in two newspapers (one English and one vernacular) in the district where the registered office is located. This allows any objections to be raised within 21 clear days of publication.