CONVERSION OF PRIVATE LIMITED COMPANY TO LLP

In this article, I will explore the provisions pertaining to the conversion of Private Limited companies into Limited Liability Partnership. Drawing from my recent experience of successfully converting a Private Company into a Limited Liability Partnership, this write-up will provide both theoretical insights and practical guidance on this conversion process.

The conversion of a Private Limited Company into a Limited Liability Partnership (LLP) is governed by the Limited Liability Partnership Act of 2008. This act, specifically Section 56, Section 58, and Schedule III, outlines the provisions and procedures for carrying out the conversion process from a Private Company to the LLP.

Under Section 56 to be read with the Schedule III and applicable rules only private company shall be converted into LLP because as per Schedule III Para I Company means private limited company. Moreover, it is crucial to comprehend the concept of conversion. The conversion here means a transfer of the property, assets, interest, rights, privileges, liabilities, obligation, and the undertaking of the private company to the LLP as per this schedule. So the conversion here doesn’t only means change in the nomenclature of the organization but also transfer of all its assets and liabilities.

ELIGIBILITY FOR CONVERSION OF PRIVATE COMPANIES INTO LIMITED LIABILITY PARTNERSHIP

The question here is, ?which company can convert, and how they may convert themselves into LLP

WHICH COMPANY MAY CONVERT?

The only following company shall be eligible for conversion:

1. There shall be no subsisting security interest on the assets of the company or in force at the time of making the application. That means it may be present before making such an application for conversion. However, such security interest shall not be in force at the time of making the application.?

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“Security interest” in not defined under schedule III or LLP Act, 2008 per se. Even under the Companies Act, 2013 word security interest is not defined. However, the word “Charge” is defined under the Companies Act, under Section 2 clause 16.

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“The Charge under Companies Act, 2013 means an interest or lien created on the property or assets of a company or any of its undertaking or both as security and includes a mortgage.”

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The charge and security interest cannot be used interchangeably since security interest is much wider concept than charge.

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The security interest is defined under the Section 2(1)(zf) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002

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“security interest” means right, title and interest of any kind whatsoever upon property, created in favour of any secured creditor and includes any mortgage, charge, hypothecation, assignment other than those specified in section 31.

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Section 31 provides the condition under which SARFAESI Act, 2002 is not applicable.

1. The LLP shall have only shareholders of the converting company as partners.

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It is worth mentioning that the LLP Act of 2008 does not explicitly address the prospective partnership structure, capital contribution by those partners, and profit-sharing ratio among those partners. Nonetheless, the Income Tax Act establishes certain constraints that we will delve into in this article.

HOW COMPANY CONVERT?

The company undergoes the conversion process into an LLP by adhering to the procedures outlined in the Third Schedule of the LLP Act, 2008, as specified in Paragraph 2 of the Third Schedule, in conjunction with Rule 32 and 39 of the LLP Rules, 2009.

The third paragraph of the Third Schedule of the LLP Act, 2008 outlines the general procedural aspects and is primarily directive in nature. It specifies two documents that must be filed for the conversion of a company into an LLP.

a.?????The shareholders statement in such form and in such manner along with such fees as may be prescribed. Such statement and form shall have the following particulars.

·???????Name and Registration Number of the Company

·???????Date of Incorporation of the company.

b.?????Incorporation documents and statement referred to in section 11 such as subscriber sheet etc.

The maximum part of the procedure to convert the Private Limited Company to the LLP in provided under the Rule 39.

PROCEDURE TO CONVERT THE COMPANY INTO THE LLP

1.?????The process of conversion from company to LLP starts with the; passing of the Board Resolution for the name reservation. However, before initiating the process of conversion, the company must ensure the following points:

a.?????No eForms should be pending for payment or processing.

b.?????The company must have filed at least one Financials (AOC-4) and Annual Return MGT-7/7A.

c.?????The Company shall not be Section 8 Company.

d.?????The company must have share-capital

2.?????The first step is the reservation of the name.?For the reservation of name, We have to file form RUN LLP. We must attach the Board Resolution approving the reservation of the LLP name for the conversion of the company into the LLP with Form RUN LLP.

3.?????Filing of eForm Fillip, eForm 9, and Form 18:?After the reservation of name, the company shall file a conversion form that is eForm 18 along with an incorporation form that is FiLLiP and consent of the Designated Partners in eForm 9.

4.?????In MCA Version 3, we have to start filling the FiLLiP form after selecting the radio button conversion of Private Company into LLP. The FiLLiP form needs to be filed in the same manner as we file it for the incorporation of the LLP. We need to attach the following documents with the FiLLiP form:

·???????ID proof and Address Proof of the Partners.

·???????Registered Office Proof along with NOC

·???????Subscribers sheet

Form 9 is filed under Section 7, Rule 7, and other appliable provisions of the LLP Act, 2008. In MCA Version 3, Form 9 is pre-filled and does not require any kind of entry in the same.

Form 18 is filled after FiLLIP and Form 9. In Form 18, we have to provide different type of details such as if any case is pending, total assets, total financial assets, and total revenue etc.

In Form 18 we must attach all the required attachment such as

·???????Financial drawn as per schedule III and signed by the Directors of the Company and Auditor of the Company and same shall not be older than 15 days.

·???????List of Secured Creditor and their consent. If the company does not have any secured creditor. It is advisable to furnish an affidavit of the same effect..

·??????In case the company is regulated by any specific body or authority, then approval from such authority or body is required.

·???????Company needs to file latest income tax return filed them.

·???????Auditor Certificate

·???????Additional documents that may be requested by the approving authority can be provided as optional attachments. These documents may include, but are not limited to: a Certificate from the Auditor certifying that the company is not an NBFC (Non-Banking Financial Company), the most recent Annual Return of the Company, ADT-1 form for the appointment of the Statutory Auditor of the Company, and an Ordinary Resolution or Board Resolution for the appointment of the Auditor.

POST CONVERSION COMPLIANCE AND INCOME TAX PROVISIONS

Once the Company is converted into an LLP.The Registrar of Companies shall issue the Certificate of Conversion in Form 19 under Rule 32(1) of the LLP Rules 2009 to be read with the Schedule III and LLP Act, 2008.

The LLP Shall file an initial LLP Agreement in Form 3 within 30 days of the conversion. Though, as per Rule 21, the LLP Agreement needs to be filed within 30 days of incorporation, incorporation means registration under the LLP Act, 2008 and includes conversion. ?

After Conversion, LLP and its Partners need to comply with the provisions of the LLP Act 2008 along with Schedule III and Rules made thereunder.

GLIMPSES OF INCOME TAX PROVISIONS?

We have to analyze income tax implications for conversion of a company to an LLP to achieve tax efficient conversion.

Section 45 of the Income Tax Act (‘IT Act’) provides that any profits or gains arising from the?transfer?of a?capital asset?shall be chargeable to tax under the head ‘Capital gains’.

Section 2(14) of the IT Act defines the term ‘capital asset’ to include property of any kind held by an assessee, whether or not connected with his business or profession. Therefore, in context of a company, following would qualify as capital assets:

Assets of the company which are being transitioned to the LLP

Shares held in the company by its shareholders.

Further, Section 2(47) of the IT Act defines ‘transfer’ in an inclusive manner, so as to include sale, exchange, relinquishment of the asset or extinguishment of any rights therein. Given the wide definition of ‘transfer’, a view is taken that conversion of company should be covered within the ambit of ‘transfer’ and accordingly, any profits or gains arising on conversion of a company to an LLP should be chargeable to tax as capital gains on two accounts:

Transfer of capital assets from company to LLP upon conversion; and

Transfer of a shares held in the company by a shareholder as a result of conversion of the company into an LLP

Furthermore, Section 48 of the IT Act provides the mode of computation of capital gains, wherein full value of consideration received/accrued pursuant to transfer is reduced by the cost of acquisition of the transferred asset to arrive at capital gains.

Accordingly, the gains derived on conversion of a company to an LLP may be subject to tax as per Section 45, computed in terms of Section 48 as follows:

EXEMPTION PROVIDED UNDER SECTION 47 FROM LEVY OF CAPITAL GAINS TAX

Section 47 (xiiib) of the IT Act provides an exemption from levy of capital gains tax on the abovementioned transfers pursuant to conversion of a company to LLP subject to fulfilment of below specified conditions:

a.) Transfer of all assets and liabilities: All the assets and liabilities of the company immediately before conversion become the assets and liabilities of LLP.

b.)?All shareholders to become partners in LLP: All the shareholders of the company immediately before conversion become the partners of LLP and their capital contribution and profit-sharing ratio in the LLP are in the same proportion as their shareholding in the company as on the date of conversion.

c.) Consideration to shareholders: The shareholders of the company does not receive any consideration or benefit, other than by way of share in profit and capital contribution in LLP.

d.)?Profit sharing ratio of shareholders in LLP: The aggregate of the profit-sharing ratio of the shareholders of the company in LLP should not be less than 50% at any time during a period of 5 years from the date of conversion

This point is important to be read with LLP Act, 2008 Schedule III, LLP Act, 2008 does not prohibit the change in partnership structure. However, to enjoy the benefit of taxation one much notice that profit sharing ratio of the shareholder turned partner shall not be less than 50%.

e.)?Total sales, turnover or gross receipts in the business of the company: Must not exceed INR 60 lakhs in any of the 3 previous years preceding the previous year in which the conversion takes

f.)?Total value of the assets as appearing in the books of account of the company: Must not exceed INR 5 crores in any of the three previous years preceding the previous year in which the conversion takes

g.)?No amount to be paid to any partner out of accumulated profits?of the company as appearing on conversion date for a period of 3 years from the date of

Moreover, Section 47A of the IT Act provides that if any of the conditions mentioned above are not complied with, then the amount of gains arising from the transfer pursuant to conversion to LLP which?have not been charged to tax by virtue of fulfilment of above mentioned conditions, shall be deemed to be the gains chargeable to tax in the hands of the successor LLP or the shareholder of the predecessor company, as the case may be, for the previous year in which any of such condition is breached.

CS Nishant Mishra

Practising Company Secretary

Mobile:9899864768

E-Mail: [email protected]