An LLP is the simplest form of Incorporated Business in India that is easy to start and lighter on the compliance aspect compared to the company form of organization. There is no hard and fast rule whether a business should begin as LLP or a Private Limited Company. As per the Law, there is no restriction on the kind of business you may do in the LLP form of business. However, it is presumed that the LLP form of business is very well suited for professionals such as Architects, Doctors, Engineers, CA, CS and Lawyers.
Due to fewer compliance requirements, small businesses and startups prefer a Limited Liability Partnership (LLP) over a Private Limited. In the case of LLP, the statutory audit by CA is required only when the turnover of the LLP is more than 40 Lakhs or where the capital is over Rs. 25 Lakhs. In other words, when the LLP grows, the compliance requirement is similar to that of a Private Limited Company. Further, the LLP is investor-friendly, and for every small change in the ownership, the LLP agreement has to be changed. In contrast, the shareholding changes can be done easily in a Private Limited Company. For these reasons, many LLP converts as Private Limited Company;
Several businesses started in India as Limited Liability Partnership (LLP), may now wish to convert into a private limited company for more growth in business or for infusing equity capital. An LLP can be converted into a Pvt. Ltd. company as per the provisions contained in Section 366 of the Companies Act, 2013 and Company (Authorised to Register) Rules, 2014.
However, there are various requirements which need to be satisfied for converting an LLP into a Private Limited Company, for instance, an LLP must have at least 7 partners, approval from all the partners is required, advertisement in newspaper is to be done in a local and a national newspaper, a No Objection Certificate (NOC) is required from the ROC
When is LLP the Best Choice?
Limited Liability Partnership (LLP) is Ideal for service sectors, professionals, startups, and small businesses seeking Limited Liability, aiming to reduce annual compliance and audit costs. It is also suitable for those not looking to secure funds from Angel Investors or Venture Capital firms in the initial phase and not intending to issue shares to employees through ESOP
When is a Private Limited Company the Best Choice?
A private Limited Company is suitable for those investors who are big businesses, startups, and capital-intensive businesses and need funding from Venture Capitalists and Investors, need borrowings from banks, need foreign funding, and offer ESOPs to employees.
What are the Benefits of Converting LLP into a Private Limited Company?
- Facilitated Growth: Converting to a private limited company supports business growth and expansion.
- Convenient Capital Raising: Private limited companies find it more convenient to attract investments from investors compared to LLPs. Equity can be offered to make them business partners, or debentures can be issued to secure debt capital.
- Flexible Share Issuance: Companies can increase capital at any time by issuing equity shares. Additionally, employee bonuses in the form of ESOPs can be allocated.
- Lower Taxation: Companies enjoy a lower income tax rate of 25%, as opposed to LLPs with a flat rate of 30%.
- Tax Benefits: The conversion from LLP to a company is exempt from capital gains tax. It also permits the carryforward of unabsorbed depreciation and losses.
- Potential for Public Listing: Private limited companies have the flexibility to be transformed into public limited companies in the future, facilitating expanded operations and the potential to raise capital from the public.
- Preservation of Goodwill: Converting from an LLP to a private limited company allows the business to retain its established brand name and goodwill.
- Enhanced Foreign Investments: Private limited companies generally encounter fewer hurdles in attracting investments from foreign investors compared to LLPs.
Eligibility Requirement For Conversion of LLP to Company
- Any person who is not disqualified as per the act
- A company considered in the Companies Act 1956 or Companies Act 2013
- An LLP considered under the LLP Act 2008
- An LLP is considered as a foreign LLP
- A company considered as a foreign company
Who is not Eligible for Becoming a Partner in LLP?
- An individual with a condition that he might be in no unsound mind and has been declared by competent authorities and jurisdiction.
- A minor/ HUF/ Partnership Firm
- An AOP (Association of Persons) or BOI (Body of Individuals)
- An Artificial Judicial Person/ Corporate Sole
- A Co-operative Society registered under any law in the mentioned time period
- A body corporate which the Central Government might mention on the behalf by notification in the Official Gazette.
Who Can Become a Member of LLP?
- Any person or a body corporate can become a member of an LLP.
Who is not Capable of Becoming a Member of LLP?
The person who cannot become a member of LLP is
- If he is found to be unsound by the Court of competent jurisdiction and if it is proved;
- If he comes under ‘undischarged insolvent; or
- If his application shows to be arbitrated as insolvent but the application is still on hold.
Who is Appointed as a Designated Partner in LLP?
- An LLP stands for the Limited Liability Partnership and is ruled according to the rules of the LLP (Limited Liability Partnership) Act, 2008. As the years are passing, the LLP is becoming famous as compared to the ‘Private’ or a ‘Limited Company’ form of business and this is only possible because the nature of the LLP is easier and the compliances are lesser.
- Each and every LLP must have at least 2 partners and both of them must be designated partners who must participate in daily basis activities and works in the support of the partners. After the appointment, the partner or a designated partner can be removed, changed, or appointed.
Who cannot be Appointed as a Designated Partner in LLP?
- Person who has been adjudged insolvent in the last five years.
- Person who has not clear payments to his creditors in preceding five years.
- Person convicted by court for an offence involving moral turpitude and for which
- sentence is imprisonment for minimum six months
- Person convicted by court for an offence under section 30
What are the Conditions for Conversion of LLP into Private Limited Company?
- An LLP should have a minimum of 2 partners who can become the Director and the Shareholder each.
- All the partners of an LLP should approve of the conversion of the LLP into a Private Company.
- The LLP should have complied with all the statutory compliance requirements.
- The conversion of LLP to a Private Limited Company has to be published in at least 2 newspapers. One in a vernacular language and one in English language.
- You also need to obtain a No Objection Certificate from the registrar.
List of Documents Required for Conversion of LLP into Company
| A. List of Documents Required for Conversion of LLP into Company |
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| B. List of attachments in E-form Spice+ |
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What is the Process of Conversion of LLP into Private Limited Company?
Step 1. Obtain Name Approval
Obtain the approval for the name of your company from the Registrar of Companies (ROC) by submitting the Reserve Unique Name (RUN) form. This must be in electronic or digital format.
Step 2. Sending DSC and DIN
Once you have obtained the name approval, apply for a Digital Signature Certificate (DSC) and the Director Identification Number (DIN) for the members of the LLP who will become the directors of the Private Limited Company after the conversion.
Step 3. Filing of Form URC-1
Next, you need to file Form URC-1 and furnish the following documents along with it –
- Details such as address, name, and shares held by the members along with the member’s list.
- Provide details like name, address, DIN number, and Passport number including the expiry date of all the directors of the private limited company.
- An affidavit is needed from the first directors of the private limited company. This affidavit should state that the LLP member is not banned from being a director.
- File all the mandatory documents with the Registrar of Companies for company registration.
- Provide a copy of the Limited Liability Partnership Agreement along with a list containing the address and name of the partners of the LLP and a certified copy of registration verified by at least 2 partners of the LLP.
- Provide a statement with the details of the nominal share capital of the firm, the number of shares taken and the amount remitted for each share, the name of the firm with the word private limited, and the number of shares separated.
- Provide no-objection certificate from all creditors.
- You also need to provide a certified accounts statement of the company.
Step 4. Drafting Memorandum of Association and Articles of Association
Draft the Articles of Association (AOA) and Memorandum of Association (MOA) and submit them to the Registrar of Companies (ROC). Upon getting the approval of the company name, URC-1 is sanctioned by the Register of Companies.
FAQs
How to convert LLP into a Company?
To convert an LLP into a company, you need to firstly obtain approval from all partners of the LLP for conversion. Next, apply for Director Identification Number (DIN) and Digital Signature Certificate (DSC) for designated partners. Then, file an application with the Registrar of Companies (RoC) for name approval, conversion, and incorporation. Prepare and file the necessary documents, including the Memorandum of Association (MoA) and Articles of Association (AoA) of the Company. Finally, upon completing the process, you will obtain a certificate of incorporation for the converted Private Limited Company from the RoC.
What are the tax implications of LLP conversion to Private Limited Company?
The income earned by LLPs is taxed at @30% and that of a Private limited Company is subject to tax at @25%. The conversion of LLPs to Private Companies is exempted from capital gains tax. Private companies are also allowed to carry forward unabsorbed depreciation and losses.
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