How to Convert of Private Limited Company into LLP?

In the emerging business landscape, choosing the suitable business structure is crucial for operational effectiveness, efficiency and compliance. Many private limited companies in India are now opting to convert into a Limited Liability Partnership, viz. (LLP) due to its flexible structure, minimal compliance burden, and tax advantages. This blog provides a detailed guide regarding the process, benefits, eligibility, legal requirements and various key considerations for converting a private limited company into an LLP.

Understanding LLP and Its Relevance

A Limited Liability Partnership (LLP) is a hybrid business entity that combines the operational adaptability and flexibility of a partnership with the several benefits of limited liability which is enjoyed by a company. It has been Introduced in India through the Limited Liability Partnership Act, 2008, LLPs are particularly suitable for small and medium enterprises, professional services firms, and family-run businesses.

Unlike a private limited company, an LLP has fewer compliance requirements, no requirement for audit unless turnover exceeds a certain limit, and allows for more relaxed internal governance.

Why Convert a Private Limited Company into an LLP?

There are several reasons why businesses may choose to convert a private limited company into an LLP:-

• Lower Compliance Burden: LLPs are not required to conduct board meetings, annual general meetings, or file resolutions with the ROC unless specified.
• No Dividend Distribution Tax (DDT): LLPs are not liable to pay DDT, which was applicable to companies until recently.
• Tax Efficiency: Profit sharing in LLPs is tax-free in the hands of the partners. Also, LLPs are taxed at a flat rate without surcharge or cess.
• Flexible Management: LLPs offer greater flexibility in terms of roles, responsibilities, and governance as compared to companies.
• No Minimum Capital Requirement: There is no such mandatory capital requirement for LLPs.

Legal Provisions Governing the Conversion

The conversion process of a private limited company into an LLP is governed by given provisions: -

• Section 56 and Third Schedule of the LLP Act, 2008
• Companies Act, 2013 (for pre-conversion compliance)
• Rule 39 of LLP Rules, 2009

Only private limited companies, (not public or Section 8 companies) are eligible for conversion under these provisions.

Eligibility Criteria for Conversion

Before initiating the conversion process, ensure the company satisfies the following conditions as given below: -

1. No Security Interest: There should be no existing charge or security interest in the company’s assets at the time of application…!
2. No Pending E-forms: The company must have filed all annual returns (such as AOC-4 and MGT-7) and other required documents under the Companies Act.
3. Partners and Shareholders Same: All shareholders of the company must become partners in the LLP. [No outsider can be inducted during conversion.
4. Minimum Two Partners: The LLP must have at least two designated partners, one of whom must be an Indian resident.
5. Consent of Secured Creditors: No objection certificates (NOCs) from all secured creditors must be obtained prior to filing.
6. Asset and Turnover Limit (for tax-neutral conversion): The company’s total sales, turnover or gross receipts in any of the preceding 3 years must not exceed ₹60 lakhs and its total assets must not exceed ₹5 crores.

Step-by-Step Process for Conversion

Step 1: Hold Board Meeting

• Conduct a Board Meeting to discuss and approve the process of conversion.
• Authorize a director to file necessary forms with the Registrar of Companies (ROC).
• Pass a Special Resolution in a general meeting for the conversion and file Form MGT-14 with the ROC within 30 days.

Step 2: Obtain Name Approval

• Reserve the proposed LLP name through RUN-LLP (Reserve Unique Name – LLP) service on the MCA portal...!

Step 3: File Incorporation Application

File Form FiLLiP (Form for incorporation of LLP) along with Form 9 (consent of designated partners) and Form 18 (application for conversion), with details of the partners and proposed LLP structure…!

• Attach the following documents:
• Consent letters from partners
• Proof of address of registered office
• Subscriber’s sheet
• ID and address proof of partners

Step 4: File Form 18 (Application for Conversion)

This form must be filed along with Form FiLLiP.

Attach the following documents:-

• Statement of shareholders
• Incorporation documents
• Declaration of no security interest
• Financial statements of the company
• Copy of latest income tax return acknowledgment
• Auditor’s certificate of Statement of Assets and Liabilities (not older than 15 days)
• NOC from all secured creditors (if any)
• Form MGT-14 acknowledgment (proof of shareholder resolution)

Step 5: Certificate of Registration

• Once the forms are verified successfully, the ROC will issue a Certificate of Registration for the LLP, specifying the date of conversion.

Step 6: Intimate to ROC

• Inform the ROC (under Companies Act) about the conversion within 15 days of conversion using Form 14, along with the LLP incorporation certificate.
• File Form 3 (LLP Agreement) within 30 days from incorporation.

Fees Required

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

1. Stamp Paper & Notary fee: ₹1000.

Effects of Conversion

Once the conversion is complete:-

• The LLP is deemed to carry on the business of the company.
• All assets, liabilities, contracts, and obligations of the company are transferred to the LLP.
• The company is deemed to be dissolved and removed from the records of the ROC.
• All pending legal proceedings by or against the company continue in the name of the LLP.

Post-Conversion Compliances

After conversion, the LLP must:-

• Update PAN, TAN, GST, Import-Export Code, bank accounts, and licenses with the new LLP details.
• Notify all stakeholders (vendors, customers, suppliers, etc.) of the change in entity status.
• Revise all business letterheads, invoices, contracts, and signage.

Key Advantages of LLP Post-Conversion

• Simplified Compliance: No AGM, board meeting, or complex ROC filings.
• Limited Liability Protection: The liability of partner's is limited to the extent of their contribution.
• Perpetual Succession: The LLP continues irrespective of changes in partners. 
• Tax Benefits: No tax on profit sharing, no surcharge or DDT. (Also, conversion may be tax-neutral under Section 47(xiiib) of the Income Tax Act, 1961, subject to specific conditions.)
• Separate Legal Entity: LLP is a distinct legal entity from its partners.

Limitations and Cautions

Despite its advantages, certain limitations should be known:

• LLPs cannot raise equity of capital from the public.
• Professional investors like VCs and PEs may prefer companies over LLPs.
• Regulatory recognition is still stronger for companies in many sectors.
• Conversion does not provide immunity from previous non-compliances.

Conclusion

Converting a private limited company into an LLP is a strategic and planned move for businesses looking for operational flexibility and reduced the compliance costs. It is especially beneficial for closely held businesses with limited external investment requirements. However, it is important to consult with the skilled professional before initiating the process to ensure eligibility, avoid procedural errors and achieve a smooth transition.

With the right approach and documentation, the conversion process can be completed effectively and efficiently, opening the door to a more streamlined and cost-effective business structure...! If you need any professional assistance, feel free to contact CRSPL Business Consultants. 

If you need guidance on whether your business should convert into an LLP, or require assistance with the legal process and documentation, it’s advisable to consult a company secretary, chartered accountant, or legal expert experienced in corporate law and compliance.