Conversion Of Private Limited Company To LLP

How to get FSSAI License

Due to their numerous benefits, LLP companies are very common, as they are said to combine the business structures of both a company and a partnership. LLP has a reputation for combining flexible partnerships with company benefits. The LLP, or Limited Liability Partnership, is nothing but a legal body that offers limited liability to partners. The LLPs are capable of making LLP agreements and owning property in their own names, which is why many companies convert conversion of Private companies into LLPs. In this article, we shall see how the conversion of a private company to an LLP works and the steps and procedures to be followed for a successful Pvt. Ltd. to LLP conversion.

In the year 2008, the LLP Act introduced a brand-new, simple method for managing businesses with less compliance, which also lowered costs and was said to offer financial advantages to people starting their own businesses, small businesses, etc. It is not easy to run a business without hassles and in a cost-effective way. Here is what one needs to do to convert a private company to an LLP one.

Documents needed for the conversion of Private Company into LLP

Below mentioned documents are mandatory for the conversion of the private limited company to an LLP:

  • A form of consent from both parties, that is the company shareholders and the firm that has decided to go forward with the conversion of the company to an LLP. This form has a predefined format that is to be used.
  • Form 2 – incorporation document
  • Form 3 of declaration and application of merger of LLP
  • A no objection or a clearance certificate by tax authorities
  • The liabilities and assets of the firm willing to convert from Pvt Ltd to LLP
  • Details and statements of all the secured creditors along with their consent
  • Approval from other countries, if required
  • Authorisation to Declare
  • Additional documents, if required. 

Having all of the above, how do you know that your company is eligible for conversion of private ltd to an LLP?

A private limited to LLP conversion is possible when:

  • The said company has zero interest in security assets, at the point of application
  • The company has no other designated partners other than its shareholders. 

The cost for Conversion of a Private Limited Company to LLP

The costs incurred to undergo the conversion of a private company to an LLP are as follows:

  • LLP conversion limited to Rs. 1,00,000- Rs. 500
  • LLP that has a contribution range of Rs. 1,00,000 to Rs. 5,00,000- Rs. 2000
  • LLP that has a contribution range of Rs. 5,00,000 to 10,00,000- Rs. 4000
  • LLP that has a contribution that shoots Rs. 10,00,000- Rs. 5000

Obtaining the Registration Certificate

The next step is to inform your registrar about the conversion of your private company to an LLP; this has to be done within a period of 15 days from the day of conversion by submitting Form 14. After the necessary procedures are completed, the registrar will then issue your registration certificate. If properties are being registered in the company's name, the LLP must inform the relevant officials of the conversion details and provide them with the LLP's information.

Taxes associated with the conversion of a private company to an LLP

Under the IT Act, the conversion of a private company to an LLP will not attract capital gains tax under the following conditions:

  • All liabilities and assets of the private company increase or enhance the liabilities and assets of the LLP.
  • All of the company’s shareholders are compatible with the LLP partners. 
  • The profit sharing and capital ratio of partners are in comparable ratio to the ownership stake in the company. 
  • Other than the profit sharing or capital addition, the stakeholders in the private company do not get any other advantage or benefit both direct or indirect. 
  • The aggregate gross and turnover in any one of the three years preceding the date of conversion, does not surpass 60 lakhs. 
  • The entire asset value as it appears in the company's books of accounts or accounts of the company for any of the last three years is not above Rs. 5 crores. 

The Impact Of Conversion Of Private Company into LLP

Below are some of the effects faced on the conversion of a private limited company to an LLP:

  • It will be assumed that the private company has been dissolved in all terms.
  • The private limited company's name will be struck from the Registrar of Companies' list.
  • All of the private limited company's assets, rights, properties, privileges, interests, obligations and liabilities will be passed on to the LLP upon successful conversion. 
  • The current contracts, obligations, agreements and liabilities or the ongoing employment is unaffected by Pvt ltd to LLP conversion. 
  • The LLP will not immediately inherit any permits or licenses that were primarily granted to the Pvt Ltd Company, those that were in effect before the conversion. Therefore, the promoters would typically need to acquire a new FSSAI registration or GST registration.

The process followed for Private Limited to LLP Conversion

After reviewing if all of the above is in order, here is how the conversion of a private limited company to an LLP takes place:

Step 1- Call for a board meeting:

A board meeting will be necessary to discuss the conversion plan. The board must accept the conversion of the private limited company into an LLP and any director's application for the name of the LLP.

Step 2- Call for a General Meeting:

In this meeting, the board resolution to convert a private limited company to an LLP will be passed. 

Step 3- Filing of Form:

Within 30 days of the general meeting's adoption of decisions, submit Form MGT-14. The required attachments for E-form 14 are

  • Copy of COI of LLP
  • Copy of incorporation paperwork filed to ROC in E-Form filling

Step 4- Attach Required Documents:

A copy of the board's decisions, members' resolutions, and general meeting notices are to be attached

Step 5- Apply for Name:

The business must submit Form RUN-LLP of the LLP to reserve its name and obtain a Certificate of Name Approval from ROC.

Step 6- Filling of credentials with ROC

The form filling is as follows:

  • Filing of all secured creditors along with their consent
  • Address proof of LLP registered office such as an MTNL or Light Bill, no lesser than 2-month-old.
  • Information about the LLPs or businesses in which the partner or appointed partner is an associate or a director (if applicable)
  • Owner's approval for the registered office location
  • Copies of the board's and members' decisions, as well as notice

Step 7- Filling for the Conversion:

File an electronic form; From-18 with ROC, alongside the below-mentioned:

  • Latest IT Returns
  • Shareholders declaration
  • A balanced account prepared in accordance with Schedule III, an audit report, a profit and loss statement, and notes (as of date) that are not more than 30 days old are also required.
  • Drafting of all the secured creditors along with their consent

Step 8

Obtain the Registration Certificate of Conversion.

Step 9

The LLP Agreement, which was executed at the time of formation, must be specified in electronic Form 3 within 30 days of the Certificate of Registration.

Step 10- Draft the agreement for LLP

The contents of draft agreement are

  • LLP name
  • Name of designated partners/shareholders
  • Contribution form
  • Ratio of Profit Sharing
  • A partners Rights & Duty
  • Business Proposal
  • Rules that govern the LLP

Step 11- LLP Form 3 Filing

The following documents are required, along with information about the LLP Agreement and any modifications made thereto:

  • Stamp duty on the LLP Agreement (1% of the payment.)

The benefits gained by the conversion of private limited companies to LLPs under Income Tax: 

Here are some of the IT benefits gained

  • DDT Savings
  • MAT Savings
  • Savings on income taxes owing to interest and compensation paid to directors from partners as salary

Before, Financial bill that was passed in the year 2010, there have been a lot of misconceptions and a lack of transparency about converting a private limited company to an LLP. During 2010, the Ministry of Finance addressed issues pertaining to the above, and the amendments for these conversions took effect over the years 2011-2012. Once the Finance Ministry addressed the issues, the conversion of private limited companies to an LLP has been carried forward by many without any hassles. 

Frequently Asked Questions

What is the timeline for the conversion of a private company to an LLP?

The time taken for conversion of a private company to an LLP can range on an average between 1 to 2 months. That is because there are 3 sets of approval needed from government entities. The first is for confirmation of the name, the second approval is for incorporation and conversion. This approval is for LLP Agreement. So depending on the government authorities and the formalities therein, the timeline can vary. 

Does LLP avoid double taxation?

Yes. LLPs avoid double taxation that applies to a few corporate entities. Profits arising from partnerships are taxed on the partners' personal tax returns. 

What is the GST exemption limit for LLP?

The threshold for GST registration in India is set at an annual turnover of Rs. 40 lakhs or greater for businesses. Those businesses in special category states have a threshold of Rs. 20 lakhs. If the turnover for LLP is below the mentioned threshold, GST registration may not be needed.  

What is the minimum capital in LLP?

An LLP can be made with as minimal an amount as possible, as there is no minimum capital requirement. Also, the capital contribution can be intangible property, movable, tangible or immobile property.  

What is the income tax rate on LLP?

A flat 30% income tax rate is levied on LLPs and Partnership firms. A 2% Education Cess and 1% SHEC also need to be paid along with income tax.

Can I charge 0% GST when my turnover is less than 20 lakhs?

Yes. GST is applied only when the annual aggregated turnover exceeds 20 lakhs. In 11 special category states, it is Rs 10 lakhs. 

How can I avoid tax on my LLP in India?

Some of the tips for avoiding tax on LLP are: 

  • Paying remuneration to partners by making them employees as they work towards the execution of decisions. 
  • The purchase of Fixed assets is considered capital assets in Balance sheets, so it appears on the asset side and not in profit and loss. This can be claimed as a depreciation of assets and is tax exempted.
  • Pay advance tax 
  • File ITR before or within the due date
  • Donation under Income Tax 80 G

Is TDS mandatory for LLP?

No. It is not mandatory for LLP to deduct TDS under the U/S 194C of the Income tax act.