Conversion of Private Limited Company to Limited Liability Partnership (LLP)

Wouldn’t you like to be in a situation where you enjoy the best of both worlds? Yes, you would. Who doesn’t? Similar is LLP (Limited Liability Partnership). Limited Liability Partnerships are popular due to the multiple advantages as they are a mixture of both Company and Partnership firms. This is a preferred business model because they are an alternative to the corporate business vehicle, which provides the benefits of limited liability, while also allowing its members the flexibility to organize their internal management on the basis of a mutually agreed agreement, as in a partnership firm.

Private Limited Company: Business entities that shareholders privately own are known as private limited companies. It is a legal structure commonly chosen by small to medium-sized businesses. In a private limited company, the liability of shareholders is limited to their share capital contribution, which means their assets are safeguarded in case of any liabilities or debts incurred by the company. This limited liability provides financial security to the shareholders.

Limited liability Partnership: A Limited Liability Partnership (LLP) is a unique business form that combines limited liability with partnership flexibility. It offers a separate legal existence, continuity despite changes in partners, and limited liability for individual partners. Partners are protected from joint liability for the actions of other partners. The rights and duties of partners are governed by an agreement. An LLP is often seen as a hybrid between a company and a partnership. It provides an attractive option for those seeking limited liability protection and partnership characteristics in a streamlined business structure.

BENEFITS OF CONVERTING FROM PLC TO LLP

A LLP enjoys multiple benefits over a Private company:

• Greater opportunity for autonomy/self-governance
• An LLP must conform to compliance requirements less strictly than other entities.
• There is no limitation of partners a LLP can have.
• The law does not specify a minimum number of partner meetings.
• An LLP is subject to simple rules for the upkeep of statutory records.
• Exemption from certain taxes:
  ○ An LLP is not subject to Minimum Alternate Tax (MAT).
  ○ An LLP’s profits are exempt from the Dividend Distribution Tax (DDT)
• An LLP is not required to conduct the audit.

PROCESS TO CONVERT A PRIVATE LIMITED COMPANY TO A LLP

Board Meeting: Hold a board meeting to discuss and approve the conversion to an LLP. Pass the necessary board resolutions, including approving the conversion and authorizing a designated partner to complete the conversion process.

Obtain DIN and DSC: If the designated partner doesn't already have a Director Identification Number (DIN) or a Digital Signature Certificate (DSC), they need to obtain them. DIN is a unique identification number for directors, and a DSC is required for filing electronic documents with the government.

Name Reservation: Check the availability of the desired name for the LLP and reserve it with the Registrar of Companies (ROC). This step is important to ensure the name is not already in use by another entity.

Filing of Incorporation Form with Required Documents: File e-Form FiLLiP with ROC along with following Attachments -

• Address proof of the registered office of LLP. (for eg.: utility bill, NOC and proof of ownership)
• The subscription sheets
• Consent to act as a designated partners and partners
• Identity and Resident proofs of designated partners and partners
• Detail of LLP(s) and/ or company(s) in which partner/ designated partner is a director/ designated partner.

File Conversion Application: Prepare and file the necessary documents with the RoC. The documents typically include Form 18 (Application and Statement for Conversion of a Private Company into an LLP) and Form 2 (Incorporation Document and Subscriber's Statement). Along with these forms, you will need to submit other supporting documents, such as the LLP agreement, a statement of assets and liabilities, and the board resolution approving the conversion.

Publication of Notice: Publish a public notice in at least one English and one vernacular newspaper circulating in the district where the registered office of the company is located. The notice should announce the intent to convert the company to an LLP, inviting any objections or claims from stakeholders within 21 days.

Consent from Creditors and Shareholders: Obtain written consent from creditors and shareholders for the proposed conversion. They need to sign and provide their consent to the LLP agreement.

Obtain ROC Approval: After filing the conversion application, the ROC will review the documents and may request any additional information or clarification. Once satisfied, the ROC will issue a Certificate of Registration, approving the conversion to an LLP.

Update Statutory Registrations: Make necessary changes to various statutory registrations and licenses, such as PAN, TAN, GST, and other relevant registrations. Update the bank accounts, stationary, and other documents with the new LLP details.

Wind Up Private Limited Company: Once the LLP registration is approved, wind up the operations of the private limited company. Close its bank accounts, transfer assets and liabilities to the LLP, and complete any pending formalities.

Commence Operations as an LLP: Start operating as an LLP with the newly registered LLP agreement and comply with the reporting, compliance, and taxation requirements applicable to LLPs.

DOCUMENTS REQUIRED FOR PLC TO LLP CONVERSION

• Board Resolution
• Consent of Shareholders
• LLP Agreement
• Statement of Assets and Liabilities
• Form 18
• Form 2
• NOC from Creditors
• NOC from Regulatory Authorities
• Proof of Address
• Identity and Address Proof
• DIN and DSC
• Public Notice

POST CONVERSION COMPLIANCES

Update Registrations and Licenses: Update all relevant registrations and licenses with the new LLP details. This includes PAN (Permanent Account Number), TAN (Tax Deduction and Collection Account Number), GST (Goods and Services Tax), professional tax, and any other applicable registrations.

Bank Account Changes: Inform the bank about the conversion and update the bank account details to reflect the LLP name and other changes.

Stationery and Documents: Update all official stationery, documents, invoices, letterheads, and other materials to reflect the new LLP name and registration details.

Tax Registrations: Apply for a new Permanent Account Number (PAN) and Tax Deduction and Collection Account Number (TAN) for the LLP, if required. Update the tax registration details with the income tax department.

Compliance with LLP Act: Comply with the provisions of the Limited Liability Partnership Act or the equivalent legislation applicable in your jurisdiction. Ensure adherence to the requirements related to filing of annual returns, financial statements, and other documents with the Registrar of Companies (ROC) or relevant authorities.

Filing Annual Returns: File the Annual Return of the LLP within the specified timelines, providing details about the partners, capital structure, and other required information.

Filing Financial Statements: Prepare and file the financial statements of the LLP, including the Balance Sheet, Profit and Loss Account, and other required statements, as per the prescribed format and timelines.

Maintaining Statutory Registers: Maintain and update the statutory registers of the LLP, such as the register of partners, register of charges, register of investments, etc., as required by the LLP Act or applicable regulations.

Compliance with Taxation Laws: Comply with the taxation laws applicable to LLPs, including timely payment of income tax, filing of income tax returns, and any other tax obligations.

Compliance with Regulatory Authorities: Fulfill any specific compliance requirements imposed by regulatory authorities relevant to your industry or sector.

Partnership Changes: In case of any changes in the partnership structure, such as admission or retirement of partners, update the LLP agreement and notify the Registrar of Companies accordingly.

FREQUENTLY ASKED QUESTION (FAQs)

Q. Why would a company choose to convert from Private to LLP?
Ans. There can be several reasons for choosing to convert from a Private to an LLP. Some common reasons include wanting to take advantage of the benefits offered by LLPs, such as limited liability for partners, flexibility in management, and ease of compliance. Additionally, LLPs may be more suitable for certain professions or business models.

Q. What are the key differences between a Private and an LLP?
Ans. The main differences between a Private and an LLP include the liability of the partners/members and the management structure. In a Private, shareholders have limited liability, and the company is managed by directors. In an LLP, partners have limited liability, and the partners themselves are involved in the management of the business.

Q. Is it necessary to change the company's name during the conversion?
Ans. In some jurisdictions, it may be mandatory to change the name of the company during the conversion process to reflect the new status as an LLP. However, this requirement can vary depending on local regulations. It's important to check the specific rules in your jurisdiction to determine if a name change is necessary.

Q. What happens to the shares in the Private during the conversion to LLP?
Ans. In an LLP, there are no shares like in a Private. Instead, the ownership is represented by partnership interests. During the conversion, the shareholders of the Private usually become partners of the LLP and their shareholding is converted into partnership interests according to the LLP agreement.

Q. Can the conversion from Private to LLP affect contracts and agreements of the company?
Ans.The conversion process may have implications on contracts and agreements entered into by the Private. It's important to review the terms and conditions of existing contracts and agreements to determine if any consents or approvals are required for the conversion. It's advisable to seek legal advice to ensure compliance with contractual obligations.

Q.Do I need to inform my existing clients, suppliers, and partners about the conversion?
Ans.Yes, it's generally recommended to inform your existing clients, suppliers, and partners about the conversion from Private to LLP. This helps maintain transparency and ensures a smooth transition. Notify them in advance, update your company's name and details in official communication, and provide any necessary documentation to reflect the change.

Q.Are there any tax implications in converting from Private to LLP?
Ans.Tax implications can vary depending on the tax laws of your country. It's advisable to consult with a tax professional or accountant to understand the specific tax consequences of the conversion. In some cases, there may be tax exemptions or reliefs available for the conversion, while in others, there may be tax liabilities associated with the process.

Q.How long does the conversion process take?
Ans.The time required for the conversion process can vary based on the jurisdiction and the efficiency of the government authority or registrar. Generally, it can take several weeks to a few months to complete the entire process. Delays can occur due to factors such as document processing, verification, and government backlog.

Q. Can any Private be converted into an LLP?
Ans.The eligibility for conversion from a Private to an LLP can vary depending on the jurisdiction. Typically, companies that are compliant with the necessary regulations, have the approval of shareholders/members, and fulfill specific criteria can be eligible for conversion. It's important to check the laws and regulations of your country to determine eligibility.

Q.Can a foreign Private company convert into an LLP?
Ans.The eligibility for conversion of a foreign Private company into an LLP can depend on the laws and regulations of the specific country where the conversion is sought. In many jurisdictions, conversion rules apply primarily to domestic companies. It's advisable to consult with legal professionals familiar with the regulations of both the home country and the target country for guidance.