2 Why Private Companies should convert to LLP? Limited Liability concept combines the organizational flexibility of a partnership firm coupled with the advantage of limited liability for its partners.The key features of the LLP such as a separate legal entity with unlimited number of partners, no partner being liable on account of the independent or unauthorized actions of other partner (s), liability of partners being limited to the respective stake of each partner in the LLP, are a distinct advantage over other form of organization.Such distinct features would be the key drivers for forming LLP, rather than Company for planning different structures.Another major reason for conversion of a company into an LLP is on the tax front. Currently, the Income-tax Act, 1961, provides for payment of minimum alternate tax (MAT) as also for payment of dividend distribution tax (DDT) by companies. An LLP, which is not a company, is not be liable to pay MAT, DDT and even surcharge on income tax.
3 Conversion to LLPNo need of converting into Public Company to have members more than 50 ,as there is no limit on maximum number of partnersMinimal Government InterventionMinimal cost of conversionLess Compliance levelNo requirement of holding any meetingNo requirement of maintenance of Large statutory recordsLimited Liability as in case of Companies.No restriction on related party transactionsNo Minimum alternate tax & dividend distribution tax.No mandatory audit in some cases.Less financial disclosure norms.
4 Status upon conversion. It is essential to note that on conversion, all the partners of the partnership firm shall become the partners of the LLP. It is provided that no other person would become partner on conversion into an LLP for the simple reason that on conversion, it should be a mirror image.On conversion, all the tangible (movable and immovable) property and the intangible property, all assets, interest, rights, privileges, liabilities, obligations of the firm/Company shall stand transferred to, and vest in, the LLP. Also, the firm so converted into an LLP shall cease to exist upon conversion
5 Capital Gain on Conversion Under the provisions of LLP Act, 2008 on conversion of company into LLP, all tangible (movable or immovable) and intangible property vested in the company, all assets, interests, rights, privileges, liabilities, obligations relating to the company, and the whole of the undertaking of the company, shall be transferred to and shall vest in the limited liability partnership without further assurance, act or deed; Section 45 of the Income Tax Act provides that any profit or gains arising on transfer of capital asset shall be chargeable to capital gain. Though Section 47(xiii) of the Income Tax Act exempts the conversion of Firm/LLP (as per Union Budget ) into Company from the provisions of Capital Gains subject to certain conditions that the all the Partners before the succession become the shareholders of the Company in the same proportion of the capital account on the date of succession but no exemption is granted to conversion of company into LLP. Therefore till any such amendment in Income Tax Act, the transfer of all assets (movable assets) and liabilities of the Company will be made at their Book Value at the time of conversion to avoid any Capital Gain Tax. In respect of immovable property, as per section 50C of the Income Tax Act, in case of transfer of land , building or both, the value of asset calculated for the purpose of making the payment of stamp duty ,shall be taken to be value of asset and therefore any difference in the book value and valuation as per stamp duty, shall be liable for capital gain
6 Conversion ProcedureStep I Deciding the Partners and Designated Partners A Private Company desires to convert its status to LLP Form shall foremost decide the designated Partners of the proposed LLP,1. Minimum of Two Individuals as Designated Partners, of total no. of Partners.2. At least One Designated Partner to be Resident Indian.Step II Obtaining DPIN No. & Digital Signature Designated Partner Identification Number (DPIN): Every Designated Partner have to obtain a DPIN from the Registrar of LLP. Digital Signature Certificate: Any one Designated Partner shall obtain a Digital Signature.Step III Checking the Name AvailabilityThe next step is to make an application in e Form 1 of Rule 18(5) of the Limited Liability Partnership Act 2008, for reservation of the desired name of the LLP on payment of the prescribed fees. A Board resolution passed by the Company approving the conversion into LLP shall be attached with the aforesaid form.Step IV Drafting of LLP Agreement The next pertinent step is drafting of Limited Liability Partnership Agreement governing the mutual rights and duties among the partners and among the LLP and its partners.It is not necessary to have the LLP Agreement signed at the time of incorporation, as the details of the same needs to field in e form 3 within 30 days of incorporation but in order to avoid any dispute between the partners as to the terms & conditions of the agreement after the conversion into LLP, it is always beneficial to have the LLP Agreement drafted and executed before the incorporation of the LLPStep V Filing of Incorporation Documents Next is the filing of prescribed e-forms with the Registrar of LLP for incorporation of the LLP on payment of prescribed fees based on the total monetary value of contribution of partners in the proposed LLP.E Form 2: Incorporation Document This is an informative document setting down the details of LLP, its Partners including designated partners, amount of contribution along with Subscription Sheet to be filed withE Form 3: Details of LLP Agreement This form provides for the necessary information in respect to the LLP Agreement entered into between the partners.E Form 4: Consent of Partners and Designated Partners to be filed with the Registrar of LLP within 30 days of Incorporation.
7 Conversion ProcedureStep VI Filing of Conversion Application in eForm 18 to be submitted by the Shareholder of the Company covering name, registration number and date of Incorporation of the Company, consent of all shareholders of the Company along with following details:Whether any security interest in the assets of the company is subsisting or in forceWhether up to date Income-tax return is filed under the Income-tax Act, 1961.Whether any prosecution initiated against or show cause notice received by the company for alleged offences under the Companies Act, 1956.Whether any proceeding by or against the company is pending in any Court or Tribunal or any other Authority.Whether any conviction, ruling, order, judgment of any Court, Tribunal or other authority in favour of or against the company is subsisting.Whether any clearance, approval or permission for conversion of the company into limited liability partnership is required from anybody/ authority. etcStep VII Certificate of Registration After the all formalities and filings been complied with by the applicants , the Registrar of LLP to issue a Certificate of Registration as to conversion of the LLP. The Certificate of Registration issued shall be the conclusive evidence of conversion of the LLP.Step VIII Information to Registrar of Companies Converted Limited liability partnership to file within fifteen days of the date of registration, information to the concerned Registrar of Companies with which it was registered under the provisions of the Companies Act, 1956 about the conversion and of the particulars of the limited liability partnership in eForm 14.