In this blogpost, Harsha Asnani, student, NIRMA University, Ahmedabad, writes about the process of conversion of a company into a limited liability partnership. The article also covers costs and benefits that a business enterprise will have to cover in order to undertake such conversion.

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In the year of 2008, a very new form of business organisation was introduced in India called the Limited Liability Partnership by way of Limited Liability Partnership Act, 2008. It is a unique combination of two different forms of business organisation i.e. partnership and company. It has proved to be a very suitable form of business organisation for enterprises whose scale of operation ranges from micro to small to medium form. The reasons behind suitability of this form of business organisation is that it brings lot of benefits for the partners, provides flexibility to the partnership, bearing certain elements of company form of business organisation, it acquires a legal status and one of the most important benefit that it makes the liability of a partner limited to the extent of contribution made by him or her.

As far as the company form of business organisations are concerned, there are a lot of compliances that need to be followed. Such compliances are sometimes so complex in nature that they bear a tremendous cost. These compliances are not just limited to establishing the company but also extend to overhead expenses for managing affairs including board meetings, maintaining statutory records, filling e – forms etc. In such a case, it becomes very difficult for the small or medium scale companies to manage their state of affairs. The absence of the requirement of fulfilment of all such compliances in the LLP form of business organisation persuades the small and medium scale companies to convert themselves into LLP.

Benefits of Converting a Company into LLP

One of the major benefits of converting the company into LLP is that in a company there are a lot of forms that need to be filled while the company is being incorporated for example Regular  – MGT – 14, 23AC, 23ACA, 20B, GNL – 2 etc. Whereas, in the case of establishing an LLP, only two forms need to be filled i.e. Regular-E-Form 8 and E-Form 11.

In the company form of business organisation, members can transfer their shares only through court order once it is decided that the company is to be wound up whereas, in an LLP, transfer of shares is possible.

In companies, it is essential that during the stage of incorporation, the minimum capital contribution is Rs. 1,00,000 in the case of private companies and Rs. 5,00,000 in the case of public companies. Whereas, in the case of LLP, there is no minimum capital requirement for incorporating a limited partnership.

According to the Companies Act, 2013 companies are bound by the obligation of maintaining  a statutory record. There is no such obligation or requirement of maintenance of statutory records. Moreover, at the end of financial periods, it is compulsory to conduct audits. Whereas LLPs have to conduct audits only if their contribution exceeds 40 lakhs or their contribution is above 25 lakhs.

Other benefits in the Income tax include no payment of taxes like dividend distribution tax, MAT tax and income tax which is due to interests and remuneration payable to partners as salary payable to directors.

Cost to be incurred in case the company gets converted into an LLP

In case if a company gets converted into an LLP, then following are the cost that the company shall have to bear:

  1. If any of the conditions mentioned under (i) to (vi) of clause (xiiib) of section 47 are not met then the Unabsorbed Depreciation and Accumulated Loss will not be carried over;
  2. Payment of stamp duty, if any, in case of transfer of immovable assets;
  3. Cost related to transfer of brand name, patent, trademark;
  4. Cost of formation of LLP;
  5. Since LLPs do not have a concept of MAT, therefore, the amount of the credit of MAT will have to be given up. The succeeding LLP shall not be entitled to hold the preceding company’s credit of MAT.

Points to be ensured before getting converted into LLP

  1. The company that wishes to be converted into an LLP shall have its shareholders as its partners and no one else.
  2. Income tax returns have to be up to date as per the provisions of Income Tax Act, 1961
  3. Every designated partner shall have to obtain a DIN from the Central Government.
  4. Since all the forms that need to be filled up for the purpose of establishing an LLP are to be filled electronically, it becomes impossible to sign them manually. In such a case, the designated partners are required to obtain a Digital Signature Certificate from government recognised DSAs
  5. There should be no proceeding against the company in any court or tribunal;
  6. In cases where the company has certain creditors, then obtaining an NOC from all unsecured creditors;
  7. Subsistence of any conviction, rule or order by a court or tribunal should be checked.

Process of Conversion of a Company into an LLP

Following are the steps that need to be followed for converting a company into LLP:

  1. Obtain DIN – DIN acronyms for Director Identification number. Earlier instead of DIN, DPIN was to be obtained. Nowadays DIN is required to be obtained by those designated partners who do not possess one.
  2. Board Meeting – The second step for conversion of a company into LLP is that a meeting of all board of directors is to be called for. In the meeting, a resolution for the conversion of the company into LLP is to be passed. Apart from this, another resolution that needs to be passed is for authorising any director to apply for the name of LLP. After passing of such a resolution, an application for name availability is to be filled i.e. e-form LLP- 1 with the Registrar of Companies. Along with such application, the board resolution regarding conversion also needs to be attached.
  3. After submission of such an application, the approval certificate needs to be obtained from the Registrar of Companies.
  4. Drafting the LLP agreement – An LLP agreement needs to be drafted. A basis contents in each LLP agreement contain Name of the LLP, Name of the partners and designated partners, form of contribution, profit sharing ratio, rights, duties and liability of each of the partners, proposed business activity that the partners would carry on and the rules that the shall govern the LLP. All these details need to be filled in e-form 3 within 30 days of incorporation. It is desirable that all the partners sign this agreement in order to avoid disputes.
  5. Filling of Incorporation Documents – For the purposes of incorporation, e-form 2 is to be filled up by attaching documents like proof of address of registered office of LLP, subscription sheet signed by the partners, notice of consent and appointment of designated partners along with their personal details and the detail of LLP.
  6. Filling of application for Conversion ­– E-Form 18 needs to be filled with the registrar of companies. Following attachments need to be put with this form:
  • Statement of shareholders.
  • Incorporation Documents & Subscribers Statements in Form 2 filed electronically.
  • Statement of Assets and Liabilities of the company duly certified as true and correct by the auditor.
  • List of all the Secured creditors along with their consent to the conversion.
  • Approval of the governing council (In case of professional private limited companies)
  • NOC from Income Tax authorities and Copy of acknowledgement of latest income tax return.
  • Approval from any other body/authority as may be required.
  • Particulars of pending proceedings from any court/Tribunal etc
  1. After filling of all the above documents and approval of the same from the registrar and ministry, the registrar would issue a certificate of registration in form no. 19 for the conversion. This certificate shall be the conclusive evidence of conversion into LLP.
  2. Filling of e-form 14 ­– After receiving the certificate of conversion, within 15 days of the date of registration, the partners need to intimate the registrar of companies about the acceptance. The attachments to be made with e- form 14 are a copy of the certificate of incorporation of formation of LLP and copy of incorporation.

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