Operating a Limited Liability Partnership form of business organization can be a hurdle as
another form of business organization offers better opportunities for the growth & expansion
of the business. Therefore, remarkable benefits offered by the other organizational structures
will attract shareholders. Thus, that would lead to the conversion of LLP into a Private
Limited Company.
Earlier it was not possible to convert an LLP into a private limited company. However, as
per section 366 of the Companies Act, 2013, any partnership firm or LLP, cooperative
society, or any other business entity which is incorporated under any other law and which has
two or more members can get themselves registered as an unlimited company or as a
company limited by shares or a company limited by guarantee.
Limited Liability Partnership registrations in India have risen by 55% during the Financial
Year 2014-15 and is to set to rise even further with rising awareness about LLP. Most of the
people opting for LLP registration are small businesses that do not foresee any requirement
for raising equity funds. However, some of the small businesses may at some point have a
requirement to convert to a private limited company due to various reasons. Therefore, in this
article, we look at the process for the conversion of LLP into a private limited company.
Process for conversion of Limited Liability Partnership into a private limited company:
-
1. Approval of Name
To get the name approved from the CRC, one needs to submit RUN (Reserve Unique Name)
form which is in prescribed e-format. Diverse items are to be filled in while submitting the
RUN form. Also, the name which is approved by the ROC is available for use only for
twenty days in case of a new company and sixty days in case of a change of name of an
existing company.
2. Securing DSC and DIN
Apply for the Digital Signature Certificate (DSC) and Director Identification Number
(DIN) for all the members of the LLP who after the conversion will be the directors of the
Private Limited Company, in case if they don’t have it.
A self- attested address proof, identity proof and one recent passport size color photo of the
applicant have to be provided along with the application. DIN can be obtained directly
through filing incorporation form on MCA portal.
3. Filing of Form URC – 1
Once, the CRC approves the name; form URC-1 has to be filed by the applicant. The
following are the list of documents which are to be submitted along with the form URC-1:
Required details like name, address, shares held by the shareholders are to be provided along
with the list of members.
Names, address, the DIN, passport number with an expiry date of all the respective directors
of the Private Limited Company has to be provided.
As per section 164 of the Companies Act, 2013, an affidavit has to be provided by all the
proposed first directors of the Private Limited Company stating that they are not disqualified
from being a director in a company. Also, all the necessary documents to be filed with the
ROC for the registration of the company should consist of such information that is complete
and correct and accurate to the best of their belief and knowledge.
A copy of the LLP agreement along with a list consisting of the names and addresses of
partners of LLP and a certificate of registration which is duly verified by 2 designated
partners of LLP has to be provided.
A statement to be provided by company which has the details of the nominal share capital of
the firm and the number of shares into which it is separated, the number of shares taken and
the amount paid for every share and the name of the firm with the addition of word private
limited.
A no-objection certificate from all the creditors is to be provided. A duly certified statement
of accounts of the company by the auditor which must not be of 6 days preceding the date of
application and copy of the newspaper advertisement is to be provided by company.
Pros of Private Limited Company over LLP
I. LLPs do not have the concept of members. Hence, all the owners of an LLP would be a
designated Partner in the LLP. This structure is not appropriate for Venture Capitalists and
Private Equity Investors – who do not wish to actively participate in the management of the
Company. Hence, equity holders will only invest in a Private Limited Company. Therefore, if
the owners have plans for expanding the business by raising equity capital, then the entity
must be registered as a private limited company.
II. Foreign Direct Investment (FDI) in a private limited company is under the automatic
route whereas FDI in Limited Liability Partnership is under the approval route. Therefore,
businesses that have foreign or NRI promoters opt for the incorporation of a private limited
company.
III. Tax credit in respect of tax paid on deemed income relating to certain companies (i.e.
MAT credit U/S 115 AA).
IV. The penalty for non-compliance or late filing of documents with the Ministry of
Corporate Affairs is most of the time higher for an LLP as a flat fee of Rs.100 per day is
charged when the non-compliance continues with no cap on the liability. Therefore, LLPs
could incur a huge penalty or fines from MCA due to non-compliance.
Cons of Private Limited Company: -
I. Private limited companies have a limit on Number of shareholders whereas an LLP
there is no such restriction.
II. The audit is not required for an Limited Liability Partnership annual sales turnover is
less than Rs.40 lakhs and the LLP has a capital contribution of fewer than Rs.25 lakhs.
Whereas for a Private Limited Company, an audit is mandatory irrespective of sales turnover
or capital of the company.
III. In LLP, there is no such concept of Board Meetings or Annual General Meetings. So
annual compliance is comparatively lesser.
IV. Minimum Alternate Tax U/S 115 JB of Income Tax Act, 1961 is not applicable.
V. There is no need for compliances related to meetings and maintenance of huge statutory
records.
Conclusion
Probably the biggest reason for an LLP to convert itself into a Private Limited company is the
capital gain. Also, the LLP converted into a Private Limited company will have many options
to raise capital for the expansion of its business.